col JUDGMENT No.. 4344, 88> IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) N.S.W. G281 of 1988 GENERAL DIVISION ) ON APPEAL FROM THE TAXATION APPEALS DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: F. & C. DONEBUS PTY LIMITED Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: DAVIES, WILCOX AND PINCUS JJ. CORRIGENDA Amendment to the Reasons of Pincus J. in the Full Court judgment delivered on 10 August 1988: Page 4, para.1, line 3, replace "other" with "or her". Angele fuente Associate to Mr Justice Pincus 29 August 1988 R ~ 2 SEP 1988 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY we pete eee ee Pa a Tod - a —3 JUDGMENT No. 4247. 28_ CATCHWORDS INCOME TAX - Appeal from the Administrative Appeals Tribunal - company sought deduction under s.59(1) of the Income Tax Assessment Act - transaction involving purchase of a refrigerator at grossly inflated price - meaning of "for the purpose of producing assessable income" - whether s.260 of the Income Tax Assessment Act is applicable to the transaction - whether transaction a sham Income Tax Assessment Act 1936 (Cth) s.54, 5.59, s.260 Commissioner of Taxation v. Gulland; Watson v. Commissioner of Taxation; and Pincus v. Commissioner of Taxation (1985) T60 C.L.R. 55. Oakey Abattoir Pty Limited v. Commissioner of Taxation (1984) 35 A.L.R. 291. F. & C. DONEBUS PTY LIMITED v. COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA No. G28l of 1988 Davies, Wilcox and Pincus JJ. 10 August 1988 Sydney e wae ae eee wept are enna = wee ae IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G281 of 1988 ) ) GENERAL DIVISION CORAM: DATE: PLACE: On appeal from the Taxation Appeals Division of the Administrative Appeals Tribunal BETWEEN: F. & C. DONEBUS PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Davies, Wilcox and Pincus JJ. 10 August 1988 Sydney MINUTES OF ORDER THE COURT ORDERS THAT: NOTE: The application be dismissed with costs. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G281 of 1988 ) : ) GENERAL DIVISION CORAM: DATE: PLACE: Davies J.: On appeal from the Taxation Appeals Division of the Administrative Appeals Tribunal BETWEEN: F. & C. DONEBUS PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Davies, Wilcox and Pincus JJ. 10 August 1988 Sydney REASONS FOR JUDGMENT This is an appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") given on 5 February 1988 which affirmed a decision of the respondent on an objection lodged by the applicant, F. & C. Donebus Pty Limited ("the Company"), with respect to its income for the year ended 30 June 1979. The company had sought a deduction under s.59(1) of the Income Tax Assessment Act 1936 (Cth)("the Act"). Relevant provisions of the Act then read:- a a St me tr ns ce r oan ene acters eran = Fr een ae ——— "54(1) 59(1) 62(1) 260. 2. Depreciation during the year of income of any property, being plant, or articles owned by a taxpayer and used by him during that year for the purpose of produding assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction. Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction. Where the use of any property by the taxpayer has been only partly for the purpose of producing assessable income, only such part of the deduction otherwise allowable under section fifty-four or section fifty-nine of this Act in respect of that property as in the opinion of the Commissioner is proper shall be an allowable deduction. In this Division, 'depreciated value' of any unit of property at any time means the cost of the unit to the person who owns or owned the property at that time less the total amount of depreciation (if any) allowed or allowable in respect of that unit in assessments of the income of that person, for any period prior to that time, under this Act or any previous law of the Commonwealth. Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly - (a) altering the incidence of any income tax; (b) relieving any person from liability to pay any income tax or make any return; aa 3. (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or (d) preventing the operation of this Act in any respect, be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose." Two members of the Tribunal, Deputy President C.J. Bannon, Q.C. and Mr G. Taylor ("the Majority Members"), considered that the transactions relied upon to give rise to the deduction sought were struck down by s.260 of the Act. The other member, Senior Member B.J. McMahon ("the Minority Member"), took the contrary view but considered that the use made by the Company of the depreciable plant was so minimal as not to qualify for use under s.54(1) of the Act and therefore to preclude a deduction of the loss on resale under s.59(1) of the Act. It was conceded by Mr D.H. Bloom Q.C., with whom Mr J.W. Durack of counsel appeared for the Company, that the subject transactions were initiated with a view to achieving a taxation deduction. The scheme sought to take advantage of limitations in the legislation as it stood before the amendments effected by Act No. 149 of 1979. Mr C. Donebus and his wife, Mrs F. Donebus, were the directors and principal shareholders of the Company. They lived in a flat above a shop in which an associated company, Riverina Paint Supplies Pty Limited, of which presumably they were also directors and shareholders, carried on the business of supplying bore tee 4. paint and wallpaper and related products. At the rear of that shop were premises from which the Company carried on its business as a painting contractor. The intendment of the scheme was that the Company would purchase for a grossly inflated sum an article which had not previously been depreciated under the Act, would use that article to gain assessable income for the Company and would resell it after a short time for a substantial loss. See ss.54(1), 59(1) and 62(1) of the Act. However, as in the case of many schemes which seek by artificial means to create deductions, there were flaws in the execution, as I shall later mention. On 23 April 1979, Mrs Donebus sold to the Company a Kelvinator Pooderama refrigerator which she had had in her kitchen and which she had purchased sometime before for $30. The sale price to the Company was $100,000. On 23 April 1979, Mrs Donebus drew a bill of exchange on the Company for $100,000 expressed to be payable on demand. The bill of exchange was accepted by the Company. It was immediately endorsed by Mrs Donebus to the Company. At the same time, Mrs Donebus and the Company executed a loan agreement, also dated 23 April 1979, under which Mrs Donebus agreed to lend to the Company $100,000. The endorsement by Mrs Donebus of the bill of exchange in favour of the Company gave effect to the loan. It was a term of the loan agreement that the loan should be interest free and that the principal should be repaid at the expiration of 32 years. No actual money passed under these transactions but the 5. Company's books recorded an obligation to pay Mrs Donebus $100,000. As all the steps in the scheme had been pre-planned, the inference is that the agreement for the loan specified the effective manner in which the $100,000, the purchase price of the refrigerator, was to be paid. That being so, the purchase price was payable without interest at the expiration of 32 years. The starting point of a s.59 deduction is, of course, the cost to the taxpayer of the depreciable unit. See s.62({1). Section 62(1) refers to "the cost of the unit" and does not refer to price, as does the term "cost price" in s.31(1) or the term "sale price" in s.59(3). Notwithstanding that s.62(3), inserted into the Act by Act No. 149 of 1979, now enables the Commissioner to formulate a cost of a unit of property purchased by a taxpayer from a person with whom the taxpayer was not dealing at arms-length, the word "cost" in s.62(1) should be given its ordinary meaning. The cost of a unit is the monetary value of ' the consideration given for the unit. Where the consideration is a monetary sum payable at the expiration of 32 years without interest, the cost of the unit is the present monetary value of the consideration so payable. Section 21 of the Act provides that where, upon any transaction, any consideration 1s paid or given otherwise than in cash, the money value of that consideration shall be deemed to have been paid or given. In the present case, $100,000 cash was not paid for the refrigerator on its acquisition. At most, the Company came under an obligation to pay $100,000 in 32 years time without interest. As Taylor J. said in McGain v. Federal ea spo serosy wre soe ne prone eee cy ees 6. Commissioner of Taxation (1965) 13 A.T.D. 556 at p.561:- "To my mind it is obvious that the value of a contractual right to the payment at some remote future time of a specific sum is not the specified sum itself; it is a lesser sum which can be commonly ascertained by the appliction of an appropriate discount rate." The cost of the refrigerator would not have been $100,000 but quite a small sum. Taking an interest rate of 10%, for example, the present value of $100,000, payable in 32 years without interest, is only a few thousand dollars. Moreover, as the obligation to pay any sum for the refrigerator was put off to so remote a time in the future and as the obligation was to Mrs Donebus, one of the two directors and principal shareholders of the Company, and might not be enforced, it would have been open to the Tribunal to hold that the acquisition of the refrigerator cost the company nothing. The Tribunal did not discuss this aspect of the matter. It appears to have assumed that the cost of the refrigerator to the Company was $100,000. But the nominal purchase price of the refrigerator was not its cost. The concluding point of the scheme was the sale price of the depreciable article. The refrigerator was sold by the Company to Mr Donebus on 25 June 1979 for $100. That was the consideration receivable and no question arises with respect to it. It had been intended that, in the meantime, the refrigerator would be leased by the Company to Frawood Nominees wa 7. Pty Ltd, a company controlled by Mr A.J. Crowl, the accountant for Mr and Mrs Donebus and for the Company. On 24 April 1979, a lease of the refrigerator to Frawood Nominees Pty Ltd for three years at $10 per annum was executed by the Company and by Frawood Nominees Pty Ltd. The $10 payment for the first year was in fact paid, but after the close of the year of income. The scheme had intended this to be a use by the Company of the refrigerator for the purpose of producing assessable income. Mr Crowl, however, did not have space for the refrigerator. He accordingly asked the Company to keep it and neither he nor Frawood Nominees Pty Ltd ever took possession of it. The Majority Members held that the arrangement with respect to the lease of the refrigerator was a sham and they turned their attention to another use to which the refrigerator was put. Their conclusion was undoubtedly correct on the evidence before the Tribunal. It follows that the scheme as such failed, for an important element of it, the lease of the refrigerator to produce assessable income, was void and of no effect. The refrigerator was moved in April 1979 from Mrs Donebus' kitchen down to the premises in which the Company carried on its business as a painting contractor. It was there connected to the electricity and was available for use until the Company moved to other premises in 1981. Some employees used the refrigerator to store their drinks and lunches therein. Mr Donebus gave this evidence:- "... And how did F. and C. Donebus Pty Limited use the fridge?---Well, like I said before, was a big workshop and normally the boys kept their - and they pick up pew es cope reser ge t te serge foe ee ~- ee kee ee 8. their Proprietary Limited cards, they go to work but they leave - they used to leave their drinks there or their lunches and they were coming back at lunch time. THE D.PRESIDENT: Is it still there, Mr Donebus?-~-The workshop is. No, the fridge?—--Well, we left that workshop in 81. We moved to a bigger premises -~- Yes?---and we left the fridge there." Mrs Donebus gave this evidence:- "The refrigerator, after the so-called sale, remained on the company's premises?---Yes, it did. And was used by employees of the company?---Correct. At no cost to them?~--No. When you say 'no', you agree with me?---Correct, sorry." The meaning of the term "for the purpose of producing assessable income" has been enunciated in cases such as Ronpibon Tin NL and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 C.L.R. 47 at pp.56-58, Amalgamated Zinc (de Bavay's) Ltd v. Federal Commissioner of Taxation (1935) 54 C.L.R. 295 at pp.303-4, 309, 310 and W. Nevill & Co. Ltd v. Federal Commissioner of Taxation (1937) 56 C.L.R. 290 at pp.300-1, 305-6, 308. As was said in Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation, in the passage cited above, expenditure or use is not for the purpose of gaining assessable income unless it is incidental and relevant to that end. Likewise, in Robert G. Nall Ltd v. Federal Commissioner of Taxation (1937) 57 C.L.R. 695 at pp.711-712, Dixon J. said:- "But, in matters of income tax, purpose is an elusive and indefinite criterion. The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person. peer ee 9. ... when it 1S said that gaining or producing assessable ancome must be the purpose of the expenditure if its deduction is to be allowed, no more can be meant than that the circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income." In the present case, there was no clear evidence that the refrigerator was used to produce or to promote the production of income, as would have been the case had the lease transaction with Frawood Nominees Pty Ltd not been a sham or had the refrigerator had been acquired and installed as a necessary or useful employee amenity to improve the working conditions of employees and therefore, to promote output, loyalty and the like. Indeed, there was little evidence upon which the Tribunal could have concluded that the Company used the refrigerator for the purpose of its business or trade, let alone for the purpose of producing assessable income. The refrigerator was purchased as the subject of a taxation scheme. A taxation deduction may add to profits but its gaining is not the gaining of assessable income. The refrigerator was resold after 2 months, as the scheme intended. It remained in the Company's premises and the evidence was that it was used from time to time by the Company's staff. Did this evidence support a conclusion that the refrigerator was installed for use in and to promote the Company's business or otherwise for the purpose of producing assessable income? The Minority Member pointed out that the principle of de minimis applies in this area of the law as in any other. He considered that "The purpose of the applicant in using the 10. property was not for producing assessable income. If any income were generated by the circumstances, 1t was quite incidental, casual or fortuitous." Such a finding, 1£ it had been made by the Tribunal, would have precluded a conclusion that the cefrigerator was used by the company for the purpose of producing assessable income. The Majority Members did not examine this aspect of the matter in any depth and they did not refer to s.61 of the Act which provides for apportionment. The following passages appear from their reasons:-— "The refrigerator, after the sale to the taxpayer, was moved into its premises, and was used by its employees to store lunches and drinks. Mr Bloom made it clear that he was relying on this as use by the taxpayer and the case was fought on that basis. The respondent did not argue that this was outside the scope of the particulars of objection. We accept that this was a use by the taxpayer company during the relevant financial year. Therefore the facts warrant a finding that the taxpayer company bought the refrigerator for $100,000 in April 1979, used 1t in its business, and sold it on 25 June 1979 for $100. ... We have had the advantage of reading draft reasons for decision prepared by Senior Member McMahon, and in view of our conclusion, there is no need to deal with his view that the use made of the refrigerator by the taxpayer was so minimal as not to entitle the taxpayer to a deduction. The use was certainly small and it was fortuitous that the employees were able to store their lunches in the refrigerator when the taxpayer needed a tax deduction." On the whole, I think that the Majority, who had formed a view adverse to the company on the application of s.260 of the Act, considered that they did not need to deal with and did not form a concluded view on this aspect of the matter. They did not ee we ree li. expressly find that the refrigerator was used by the Company for the purpose of producing assessable income. The Majority said that the use of the refrigerator was small and fortuitous. I do not read the Majority as saying that a small, fortuitous use is a use for the purpose of producing assessable income which justifies the allowance of a total loss under s.59 for which apportionment under s.61 need not be considered. In my opinion, this aspect of the case should he considered before a view is formed as to the application of s.260. What was accepted by the Majority was that there had been a use by the Company of the refrigerator in the business of the Company. That being so, it was proper to consider whether the refrigerator was used by the Company for the purpose of producing assessable income, whether, if so, that was the only use to which the refrigerator was put, what was the cost to the Company of the refrigerator and what was the consideration received on disposal. Attention should be given to s.61 of the Act which provides for apportionment. The evidence before the Tribunal was not only that the refrigerator was used by employees for their lunches and drinks but also that the refrigerator was used by the Company as the subject of the sham lease. Section 61 stipulates that, where the use of property is used by the taxpayer only partly for the purpose of producing assessable income, only such part of a deduction under s.54 or s.59 shall be allowed as is in the opinion of the Commissioner proper. This section gives adequate power to determine a proper deduction for such use, if any, as was made by the Company of the refrigerator for the purpose of producing its assessable income. 12. I turn now to submissions that were put by Mr G.K. Downes Q.C., with whom Mr D.B. McGovern appeared for the Commissioner. Mr Downes made a formal submission that the doctrine of fiscal nullity applied notwithstanding that it has been held in Oakey Abattoir Pty Ltd v. Commissioner of Taxation (1984) 84 A.T.C. 4718 and Federal Commissioner of Taxation v. John (1987) 87 A.T.C. 4709 that the doctrine does not so apply. This Court is bound by those decisions. Even if that were not the case, I would not see the doctrine of fiscal nullity playing any part in this matter. I£ by reason of the transaction the Company ended up in the same financial position as that from which it started, there would be no deduction under s.59, not because of the application of the doctrine of fiscal nullity, but because there was no loss as between the cost and the sale price. Mr Downes also relied upon the doctrine of sham. He referred to Snook v. London & West Riding Investments Ltd [1967] 2 Q.B. 782. The doctrine has recently been discussed by Lockhart, Beaumont and Foster JJ. in Sharrment Pty Ltd & Ors v. Official Trustee in Bankruptcy (NSW G348 of 1987 delivered 3 June 1987). See also Oakey Abattoir v. Federal Commissioner of Taxation, cited above, at pp.4724-5. The Majority Members correctly, in my opinion, applied the principle to strike down the transaction of lease between the company and Frawood Nominees Pty Ltd. In that respect, the documentation was a mere facade. Frawood Nominees never intended to lease the refrigerator for three years and never intended to take possession of it. This 13. was clear not only from what occurred but also from the evidence of Mr Crowl. All members of the Tribunal also correctly, in my opinion, rejected the submission as to sham with respect to the remainder of the transaction. The refrigerator was moved from the kitchen of Mrs Donebus to the Company's premises. It was there connected and used in the incidental manner I have already described. There 1S no reason to doubt that property passed from Mrs Donebus to the Company on or about 23 April 1979 and from the Company to Mr Donebus on or about 25 June 1979. It was the intent of the scheme that that would happen and Mr and Mrs Donebus understood and intended that it would occur. The passing of property in this manner was not in any way inconsistent with the facts as they are known. There is no reason to consider the payment of the sale price of $100 by Mr Donebus or the invoice between Mrs Donebus and the Company of 23 April 1979 and the loan agreement of the same date as being shams. Certainly, the Company did not intend to pay cash of $100,000 and Mrs Donebus did not expect to receive $100,000 in cash. Nevertheless, the Company's accounts for the year recorded the Company's indebtedness to Mrs Donebus. The doctrine of sham strikes down that which was put up as a mere facade, not intended to have legal consequences but to cloak the true transaction. In the present case, the documents of the parties (other than the lease) were intended to achieve their stated purpose. Mr Downes also relied upon s.260 of the Act and on this point his view was adopted by the Majority Members but rejected 14, by the Minority Member. The Majority said:- "However, we are unable to accept that there is no room for the operation of s.260 of the Act to avoid the arrangement as against the respondent. If this review had occurred within a reasonable time of the assessment being raised, it is likely that the taxpayer's argument would have succeeded. However, in the meantime, the High Court has decided Gulland v. Federal Commissioner of Taxation 85 ATC 4765 and the Federal Court has decided in Oakey Abattoir v Federal Commissioner of Taxation 84 ATC 4718 at 4729, 4730 to strike down circuitous and artificial arrangements the sole purpose of which is to avoid liability to tax, notwithstanding the choice principle. We consider we should apply the view expressed in the latter case and decide that the arrangement outlined is void as against the respondent under s.260 of the Act, as it then stood." The Majority there laid emphasis upon the circuity and artificiality of the arrangements made and they relied principally upon the decision in Oakey Abattoir Pty Ltd v. Commissioner of Taxation, cited above. However, the Oakey Abattoir case considered a scheme to avoid tax on undistributed profits. Such schemes may attract the operation of s.260. See Bell v. Federal Commissioner of Taxation (1953) 87 C.L.R. 548, Newton v. Federal Commissioner of Taxation (1958) 98 C.L.R. 1, Hancock v. Federal Commissioner of Taxation (1961) 108 C.L.R. 258, Mayfield v. Federal Commissioner of Taxation (No 1) (1961) 108 C.L.R. 303, Mayfield v. Federal Commissioner of Taxation (No 1) (1961) 108 C.L.R. 323 and Ellers Motor Sales Pty Ltd & Ors. v. Federal Commissioner of Taxation (1969) 44 A.L.J.R. 1. In the Oakey Abattoir case, Fox, Fisher and Beaumont JJ., applying well established principles, said at p.4730:- we ee cor biwees pee meee ere . Hi 7 ~ 7 15. "Given its complexity, 1ts artificiality, its circular operation and its sole purpose of avoiding liability to tax, the arrangement in this case goes well beyond mere entry into a transaction such as a university student buying units in a trust. In our view, sec.260(1)(c) is applicable to such an arrangement." The present scheme as originally proposed was not particularly complex or circuitous and was artificial only in the sense that it was not at arms-length, was not based upon commercial reality and had no object over the achievement of a deduction under s.59. Those matters are not necessarily sufficient of themselves to attract the application of s.260 to transactions designed to achieve one of the deductions provided specifically by the Act. As Dawson J. said, in Commissioner of Taxation v. Gulland; Watson v. Commissioner of Taxation; and Pincus v. Commissioner of Taxation (1985) 160 C.L.R. 55 at p.110:- "Section 260 1s not explicitly directed at contrived arrangements or arrangements which are out of the ordinary, but the fact that an arrangement is of that nature is a circumstance which, when the purpose or effect of the arrangement is to do any of those things which are referred to in para.{a) to (d), may indicate that as a matter of construction the arrangement is one for the avoidance of tax to which s. 260 is intended to apply." The scheme, as planned, seems no more artificial or complex than the transactions considered in cases such as Patcorp Investments Ltd and Others v. Federal Commissioner of Taxation (1976) 140 C.L.R. 247, Mullens and Others v. Federal Commissioner of Taxation (1976) 135 C.L.R. 290 and Cridland v. Federal Commissioner of Taxation (1977) 140 C.L.R. 330. But, in any event, it is not that scheme that has to be considered, for the scheme was not implemented, the lease being a sham. The application of s.260 has to be considered in relation to other wpecee eae ee ee ee 16. events that occurred including, on the Majority's finding, an actual use of the refrigerator in the business of the Company. The Majority Members emphasised "the sole purpose" of the transaction. But a motive itself, whether sole, dominant, substantial or significant, is not relevant. As Gibbs C.J. said in the Gulland; Watson and Pincus Trilogy, cited above, at p.65:- "The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect." See also Newton & Ors v. Federal Commissioner of Taxation (1958) 98 C.L.R. 1, at p.8. Moreover, if the obtaining of a tax deduction were the sole purpose of the use of the refrigerator, s.260 would not need to be considered. The Act makes provision for the assessment of income, for the allowance of deductions, for the averaging of income, for the imposition of tax upon taxable income, for the grant of rebates of tax and for like matters. For a taxpayer to take advantage of a provision of the Act is not to avoid the consequences that the Act intends. Necessarily, the more specific the Act has been in the expression of the Act's intent, the less room there is to import principles of a general character, including the provisions of s.260. In the Gulland; Watson and Pincus Trilogy, cited above, Gibbs C.J., with whom Wilson J. agreed, said at p.66-67:- acre ocu moore . 45 17. "TAs Stephen J. further said in Mullens v. Federal Commissioner of Taxation (1976) 135 C.L.R., at p.319: 'Section 260 of the Act, in performing its task of 'protecting the general provisions of the Act', cannot be allowed to negative the Act's specific and particular provisions ...' These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant.'" At p.107, Dawson J., with whom Wilson J. also agreed, said:- "An extreme view of the principle laid down by these cases would, however, tend to deprive s.260 of any Practical effect. On the other hand, to apply the words of the section literally would give it an operation which the rest of the Act shows it was not intended to have. It was this dilemma which led Fullagar J. to remark in Federal Commissioner of Taxation v. Newton, at p.646, that s.260 has been regarded as a difficult section. But the problem is, as I have already remarked, one of reconciling s.260 with the rest of the Act and so 1s a problem of construction. It is a matter of construing the Act as a whole to determine where the incidence of tax was intended to fall. Only by this means might it be discovered whether or not a particular transaction falls within s.260." Moreover, if the Company used the refrigerator in its business for the purpose of producing assessable income, its use did not alter an existing circumstance, the nature of the structure by which the taxpayer earned its income, or give rise to any deduction from which the nature of that structure would have precluded the taxpayer. As Dawson J. said in the Gulland; Watson and Pincus Trilogy at p.1iil:- "It should also be pointed out that the authorities draw a distinction between an arrangement which modifies an antecedent transaction or situation and one which merely orders a taxpayer's affairs in relation to income froma mew source or in relation to a deduction from which the previous transaction or situation did not preclude him. In the former case, but not the latter, s.260 may have an application for there may be an alteration of the incidence of income tax, etc. See Mullen's case (1976) 135 C.L.R., at p.302 per Barwick C.J. and Cridland's case (1977) 140 C.L.R., at pp.338, 339 per Mason J. But the distinction can be of no assistance in this case ec eee a ee 7 : 18. where, if there was no antecedent transaction, there was an antecedent situation consisting of the taxpayer's practice of his profession in a particular manner. The arrangement changed that situation and did so in order to alter the incidence of income tax. The change, however, gave rise to no new source of income nor did it give rise to any deduction from which the very nature of the previous situation did not preclude the taxpayer: cf. Europa Oil (N.Z.) Ltd. (No. 2) v. Inland Revenue Commissioner [1976] 1 W.L.R. at p.475." I accept that there are circumstances where s.260 will operate so as to strike down the whole or a part of events that otherwise give rise to the allowance of a deduction under the Act. However, if the refrigerator was not used in the Company's business for the purpose of producing assessable income, then the Company would not be entitled to a deduction and there would be no room for the application of s.260 to any part of the events that occurred. And if the refrigerator was used by the Company in part at least in its business for the purpose of producing assessable income and a determination was made under s.61 as toa proper deduction having regard to circumstances of that use, it may be questioned whether s.260 would apply to override the deduction for which the Act makes specific provision. If it were found that a deduction was proper having regard to the terms of s.59 and s.61 and to the use of the refrigerator in the Company's business for the purpose of producing assessable income, what contract, agreement or arrangement should be avoided by s.260? See, eg., Cecil Bros Pty Ltd v. Federal Commissioner of Taxation (1964) 111 C.L.R. 430 at pp.438, 438-439; Federal Commissioner of Taxation v. Janmor Nominees Pty Ltd (1987) 75 A.L.R. 15 and Federal Commissioner of Taxation v. Lau (1984) 57 A.L.R. 107. I form no final view on this aspect of the matter. The facts necessary for its consideration have not yet been found by the ° ane pers 19. Tribunal. This Court can deal only with points of law and must arrive at its decision upon the facts as found by the Tribunal. Waterford v. The Commonwealth of Australia (1987) 61 A.L.J.R. 350 at 359, per Brennan J.. Though the application of s.260 is a point of law, nevertheless, insofar as the application of s.260 depends upon matters of fact, it is essential that those facts be found by the Tribunal, which is the judge of the facts, before the point of law be considered by this Court. Federal Commissioner of Taxation v. Brixius (1987) 87 A.T.C. 4963. Mr Downes submitted that the matter should not be remitted for rehearing, for the applicant could not be successful. But this approach ignores the point that there are factual issues to be determined. Did the Company install the refrigerator? If so, did it do so to promote its business by providing a useful employee amenity? If so, what was the cost of the refrigerator to the Company? Was the refrigerator used by the Company wholly or partly for the purpose of producing assessable income? If that use was a part use only, what is the proper deduction to be allowed in respect thereof. On matters such as these the operation of s.59 depends. Such matters are relevant also to the operation of s.260. In the absence of findings on these factual issues, it is premature, in my opinion, to hold, as a matter of law, that s.260 strikes down the whole or any particular aspect of the transactions under consideration. 20. In my opinion, the decision under appeal should be set aside and the matter remitted to the Administrative Appeals Tribunal to be heard and decided again with or without the hearing of further evidence. The respondent should pay the costs of the appeal. I certify that this and the 19 preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Davies. ~— Associate: PONS Date: 10 ugu 1988 Counsel for the applicant: Mr D.H. Bloom Q.C. with Mr J.W. Durack Solicitors for the applicant: J.W. Walker & D.K.L. Raphael Counsel for the respondent: Mr G.K. Downes Q.C. with Mr D.B. McGovern Solicitor for the respondent: Australian Government Solicitor Date of hearing: 10 June 1988 ot ow pee r Be ar er we we ee IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NSW G.281 of 1988 ) GENERAL DIVISION ) ON APPEAL FROM THE TAXATION APPEALS DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: F & C DONEBUS PTY LIMITED Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: DAVIES, WILCOX and PINCUS JJ PLACE: SYDNEY DATE: 10 AUGUST 1988 REASONS FOR JUDGMENT WILCOX J: I have had the advantage of reading the reasons for judgment of Davies J. I need not repeat either the facts or the statutory provisions set out by his Honour. As it seems to me, two questions arise for our determination: firstly, whether s.260 of the Income Tax Assessment Act 1936 is capable of application to the subject Be ey ter + transaction; and, secondly, if so, whether the findings of fact made by the majority of the Administrative Appeals Tribunal are sufficient to support the decision to apply the section. The critical features of the arrangement made between the applicant and its two directors, Mr and Mrs Donebus, was that the applicant should acquire from Mrs Donebus for $100,000 a refrigerator which she had purchased some time earlier for $30, that the refrigerator should be used by the applicant in its business for a brief period and that it should be resold by the applicant to Mr Donebus for $100; thus yielding to the applicant a loss of $99,900. As was expressly conceded, the sole motivation behind the transaction was to secure a taxation deduction to which the applicant would not otherwise have been entitled. More importantly, bearing in mind that s.260 is concerned with objective purpose and effect, the arrangement is explicable only as an exercise in tax avoidance. The payment by a company of $100,000 for a refrigerator worth $30 makes no commercial sense. This remains true even if, as part of the overall arrangement, it has previously been agreed that the payment of $100,000 will immediately be loaned back to the company free of interest for 32 years; thus reducing the true cost of the refrigerator to the company to "only" a few thousand dollars. There is no doubt that the present case falls within the literal application of s.260. The case clearly involves an arrangement which "has or purports to have the purpose or wpe St Daa tellialent ncaa al catered een crt effect of ... defeating, evading or avoiding any ... liability imposed on any person" by the Income Tax Assessment Act. However, equally, there is no doubt, upon the authorities, that not all transactions which fall within the literal application of s.260 are caught by that section. As the High Court of Australia has explained upon several occasions, to apply s.260 to every case in which a taxpayer has so ordered its affairs as to create one of the situations referred to in paras.(a) to (d) of s.260 would be, effectively, to eliminate from the Act numerous special provisions, the adoption of which by a taxpayer may alter the incidence of income tax or defeat or avoid a liability to tax which would otherwise arise. The general provisions of s.260 cannot be allowed to derogate from those special provisions. Arising from these considerations, the High Court has recognized a principle, often called "the choice principle", which states that, despite s.260 but within certain limits, a taxpayer may so order its affairs as to take advantage of a special provision within the Act, notwithstanding that, in so doing, income will be diverted from the taxpayer to another person or some additional deduction will become available to the taxpayer. The main problem about s.260 has been to define the limits to which the choice principle is subject. Of particular importance in the present case is the question whether the choice principle is confined to transactions which have some basis 1n commercial reality or in family dealing, or whether it extends to any transaction, however bizarre and neo arc nee meg ee ee devoid of non-tax justification, which purports to come within the literal wording of one of the special provisions in the Act. Upon this question this Court must look for guidance in the pronouncements of the High Court. Unhappily, in significant respects, the various decisions of the High Court are not possible to reconcile. Each party can point to statements made in the High Court at some stage which would justify the determination in favour of that party of the question of principle which arises in the present case. Under these circumstances, it seems to me that little is to be gained by my going through the decisions upon s.260 and extracting passages in the reasons for judgment in particular cases which seem to support the argument of one side or the other. In its most recent consideration of the section, in Commissioner of Taxation v Gulland, Watson v Commissioner of Taxation and Pincus v Commissioner of Taxation (1985) 160 CLR 55 (henceforth "Gulland"), the High Court itself reviewed its earlier decisions and set out the relevant principles. In so doing, the members of the Court expressly affirmed some aspects of the earlier cases. To the extent that they did so, or that they made statements consistent with earlier decisions, those earlier decisions must be regarded as continuing to be good law. To the extent that, either expressly or impliedly, Gulland departs from the course of earlier decisions, those earlier decisions can no longer be regarded as correct. pe ee eee Gulland was heard by a bench consisting of Gibbs CJ, Wilson, Brennan, Deane and Dawson JJ. Deane J dissented. Notwithstanding his distaste for some of the decisions made by the Court during the 1970s -- especially Commissioner of Taxation v Casuarina Pty Limited (1971) 127 CLR 62, Mullens v Commissioner of Taxation (1976) 135 CLR 290, Slutzkin v Commissioner of Taxation (1977) 140 CLR 314 and Cridland v Commissioner of Taxation (1977) 140 CLR 330 -- Deane J took the view that they controlled the result in Gulland. The Court was, as it were, hoist on its own petard of error. However, the other members of the Court did not see the matter in the same way. They thought that, in its twilight phase -- s.260 having been amended in 1981 so as to apply only to transactions made on or before 27 May 1981 ~-- the section still had work to do. Those Justices considered 1t possible, without expressly over-ruling any of the earlier decisions, to hold that s.260 applied so as to strike down -- for tax purposes -- the relevant transactions in each of the three cases. Separate reasons were delivered by each of Gibbs CJ, Brennan and Dawson JJ. Wilson J agreed with both Gibbs CJ and Dawson J. It is necessary to analyse each of the majority judgments. Gibbs CJ commenced his examination of the authorities by referring, at p.66, to the advice of the Judicial Committee of the Privy Council in Newton v Commissioner of Taxation (1958) 98 CLR 1, in which Lord Denning, at p.8, suggested what Gibbs CJ called "a practical test for deciding whether an arrangement is one to which the section applies: similarities to Gulland. "In order to bring the arrangement within the section you must be able to predicate -- by looking at the overt acts by which 1t was implemented -- that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section." Gibbs CJ commented: "The question, according to this test, is whether the arrangement, on its face, must necessarily be labelled as a means to avoid tax. That test 1s a useful one, and it has often been applied, but it does not provide a guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s.260 is attracted." The Chief Justice referred to authority and quoted the words of Stephen J in Mullens at p.319: "Section 260 of the Act, in performing its task of 'protecting the general provisions of the Act', cannot be allowed to negative the Act's specific and particular provisions ... ." Gibbs CJ went on to deal with Peate v Commissioner of Taxation (1964) 111 CLR 443; (1966) 116 CLR 38. That case was there particularly relevant, because of its factual note, firstly, that, as Gibbs CJ pointed out, Peate applied But it is presently material to reo the test suggested in Newton; secondly, that, in applying that test, the question was asked "whether the overt acts that were done under the plan are fairly explicable without an anference being drawn that tax~avoidance is a purpose of the arrangement as a whole"; and, finally, that, at p.70, Gibbs CJ rejected the submission that Peate had been over-ruled by Mullens, Slutzkin and Cridland. His Honour went further, commenting that these cases were not inconsistent with Newton "but showed that the general rule enunciated ... in that case is displaced when the purpose of the arrangement in question is to make use of a tax advantage for which the Act provides". According to this approach the relevant question is whether, assuming a purpose of avoiding tax, the method adopted is merely to make use of a tax advantage for which the Act provides. I will return to this question later. However, before leaving the judgment of Gibbs CJ, it 1s relevant to note his Honour's comment at p.73: "there is nothing in s.260 that supports the view that that section can apply only when there has been an antecedent transaction between the parties. An arrangement will, for example, be within the section if it alters the incidence of income tax in a case in which the only relevant antecedent circumstance is that the taxpayer is 1n receipt of income". A similar situation must apply where the relevant antecedent circumstance is that the taxpayer is not entitled to a particular deduction. In his reasons for judgment Brennan J referred to many of the cases mentioned by Gibbs CJ. At p.78 he quoted the statement of Mason J in Cridland: " ...[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." Brennan J went on, at p.79: "As this enunciation of the principle recognizes, the choice principle operates only to the extent necessary to give effect to a 'specific provision' of the Act. The choice principle gives expression to the scope of s.260 ascertained by reading down the words of the section in order to allow other and specific provisions of the Act to have their intended operation. The choice principle is inapplicable when the arrangement does not attract a tax benefit conferred by a specific provision but is an arrangement which, as in the present cases, seeks to divert income from one taxpayer to another." At p.81 his Honour added that "only those arrangements or parts of arrangements which depend upon specific provisions fall outside the scope of s.260". Adopting the test postulated by Brennan J, the question in the present case is whether the subject transaction takes advantage of a tax benefit conferred, upon their proper construction, by specific provisions of the Act, such as ss.54 and 59. Dawson J also discussed the early cases on s.260, and particularly Newton and Peate. At pp.109-110, after quoting a passage from the advice of the Judicial Committee in Peate, his Honour made a comment which gives an important clue to his approach to the section. "This passage emphasizes, I think, the artificial character of the arrangement as being the circumstance which brought it within the ambit of s.260. Its very complexity pointed to its contrived nature and took it beyond the range of transactions ordinarily encountered in the organization of affairs for business or personal reasons. It was, to use the phraseology of Isaacs J. in Jaques' Case (1924) 34 C.L.R.,at pp.359-360, a situation which was manufactured and did not represent a true business operation or reorganization of the taxpayer's affairs for personal reasons. With it might be contrasted the arrangement in Keighery's Case which, whilst its purpose was no less than in Peate's Case to avoid paying more tax than was necessary, did not need to be contrived but represented the mere exercise of a choice offered by the Act. It is, I think, a notion of this kind that Kitto J. had in mind in Peate's Case, when he said: '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.' Section 260 is not explicitly directed at contrived arrangements or arrangements which are out of the ordinary, but the fact that an arrangement is of that nature is a circumstance which, when the purpose or effect of the arrangement is to do any of those things which are referred to in pars.({a) to (d), may indicate that as a matter of construction the arrangement is one for the avoidance of tax to which s.260 is intended to apply. It may indicate that the choice or choices made by the taxpayer are not available by reason of the presence of s.260 in the Act, however much they may have been available in the absence of that section. It is in the end a matter of construction whether the section eee ae pene eee ee ee en ee ee ee er eee 10. applies in a particular case. It must be conceded that to say as much is not to lay down a test of any great precision, but the reconciliation of s.260 with the other provisions of the Income Tax Assessment Act 158 of 1ts very nature an exercise which may have to be performed whenever a contract, agreement or arrangement is impugned by reference to it. The result is to preclude the formation in advance of rules with any more exact application," The present case features a contrived arrangement, a transaction which is out of the ordinary; nonsensical, ina business sense. As I read the judgment of Dawson J, these features indicate that the transaction is one to which s.260 applies. It is true that it is possible to bring the transaction within the literal application of specific provisions of the Act, namely ss.54 and 59, but Dawson J did not regard that matter as conclusive. He thought that the whole of the relevant circumstances must be considered. It is noteworthy that, at p.113, before setting out his conclusion about Dr Gulland's case, Dawson J returned to the matters of lack of business purpose and artificiality before saying: "For these reasons, this 1s a case in which s.260 was intended to apply ...". The critical significance of artificiality and lack of business purpose is expressed more clearly 1n the judgment of Dawson J than it is in the judgments of Gibbs CJ and Brennan J. Nonetheless, it seems to me that each of their Honours adopted similar reasoning. I have already referred to the fact that Gibbs CJ resurrected, at least in a qualified manner, the Newton test; a test which ~- as Deane J showed at Se eres we reve li. pp.92-93 -- might have been thought to have been buried by Mullens and Cridland. The resurrection seems to me to be significant; the whole point of the Newton test was that it required the question to be asked: whether "the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax". It is true, as I have said, that Gibbs CJ added a qualification relating to cases in which the taxpayer does "no more than take advantage of an opportunity to reduce tax which the Act itself provides". But, read in their context, these words must be taken to refer to a situation which is fairly contemplated by the Act, a transaction which makes commercial or familial sense; even though the form it takes may be dictated by a desire to take advantage of an option conferred upon taxpayers by the Act. The test adopted by Brennan J leads to a similar result. His Honour read down s.260 only to the extent necessary "to allow other and specific provisions of the Act to have their intended operation". Once again one must consider whether the relevant transaction was one fairly contemplated by the specific provisions of the Act. For the above reasons, it seems to me that the majority in the Tribunal were correct in reading Gulland as a decision "to strike down circumstances and artificial arrangements the sole purpose of which is to avoid liability to tax, notwithstanding the choice principle". ere eee ee Se wo me pe, 12. The majority also relied upon the decision in Oakey Abattoir Pty Limited v Commissioner of Taxation (1984) 55 ALR 291. This case was decided by a Full Court of this Court (Fox, Fisher and Beaumont JJ) prior to the decision of the High Court 1n Gulland. The case is significant, for present purposes, because it was one in which a taxpayer purported to take advantage of a specific option conferred by the Act: the right given by s.82R(6) to have interest payments under a convertible note treated as a dividend for the purposes of calculating "the undistributed amount" under Div.7 of Part III of the Act. Notwithstanding this fact, the Court unanimously struck down the transaction. Referring to what had been said by Bowen CJ, in the Full Court in Gulland, and anticipating what I think is the correct reading of the High Court's decision 1n that case, the Court, in Oakey Abattoir, said at p.304: "If there were no more to the case than the payment of interest on the notes, we would be disposed to agree with the appellant that, in accordance with the reasoning in Cridland, the motives of the taxpayer are not sufficient to entitle the Commissioner to invoke s.260. But we think that the present case should be viewed with the wider perspective that the payment of interest was merely one step ina circuitous series of transactions which bore 'ex facie the stamp of tax avoidance' (Gulland v_ FC of T (1984) 55 ALR 65; 15 ATR 892. - To borrow the language of Bowen CJ in Gulland, supra, this taxpayer did not merely, as in Cridiand, 'create a situation by entry into a transaction' to attract particular tax consequences. Given its complexity, its artificiality, 1ts circular operation and its sole purpose of avoiding liability to tax, the arrangement in this case goes well beyond mere entry into a transaction such as a university student buying units in a trust. In our view, s.260(1)(c) is applicable to such an arrangement." 13. On 16 November 1984 the High Court (Gibbs CJ, Wilson and Brennan JJ) refused special leave to appeal against this decision. In announcing the Court's decision, the Chief Justice said that "the Court sees no reason to doubt the correctness of the actual conclusion reached on the facts of the case". Mention should be made of a further case, not referred to by the Tribunal: McLean v Commissioner of Taxation (1986) 86 ATC 4288. In that case a taxpayer claimed deductions pursuant to ss.36 and 36A of the Act in connection with share trading losses. Tadgell J, of the Victorian Supreme Court, held that the relevant transaction was void against the Commissioner, pursuant to s.260. In so doing, his Honour referred to Gulland and went on, at p.4309: "As w1ll now be evident, I regard the arrangements for the acquisition and disposal by Tactown of the unlisted shares as having had stamped on their face an indication that their sole purpose was to avoid tax; anda purported tax avoidance was their undoubted effect. Consistently with (Gulland), I conclude that any application of ss.36A, 36, 28 and 51 of the Act to the dealings by the partnership in the unlisted shares is irreconcilable with the existence and purpose of s.260. I cannot accept the submission that any of those provisions, properly construed, allows a taxpayer the opportunity to treat dealings dependent on these arrangements as though they give rise to deductible trading losses ... The requisite deeming relied on an impermissible use, amounting to an abuse, of ss.36A and 36." It seems to me that the reference to an "abuse" of specific provisions of the Act neatly summarizes the modern approach to the application of the choice principle to s.260, 14, as explained in Gulland and as illustrated by both Oakey Abattoir and McLean. The word "abuse" is an apt description of the present applicant's attempt to earn a deduction under ss.54 and 59 of $99,900 in connection with its refrigerator. I share the view of Davies J that there is no reason why, as a matter of principle, s.260 may not apply to the transactions giving rise to the present case. In relation to the second question, whether the Tribunal has made the findings of fact necessary to support the application of s.260, I respectfully part company with Davies J. It seems to me that, inherent in the reasons of the majority, 1s a finding that the subject transactions were "circuitous and artificial". Upon the primary facts, as found by the majority, this conclusion is irresistable. It is true that, by modern standards of tax avoidance ingenuity, the scheme was a simple one. But it was circuitous, in the sense that no money actually changed hands in the purchase of the refrigerator. And it was highly artificial. It is also true that the precise cost of the refrigerator was not calculated by the Tribunal, but I do not see that it was necessary for the Tribunal to do this before concluding that the purpose and effect of the transaction was to obtain a taxation deduction in a contrived and artificial manner. The determination of the cost of the transaction would not depend upon any further evidence or any finding of fact. The cost of the refrigerator 1s merely a matter of calculation, the amount being directly dependent upon the assumed interest rate over the period of may po tee est sone ape veer ree eo or, er 15. the loan. But any commercial interest rate would yield a cost Many times the true value of the refrigerator. Similarly, as it seems to me, there is little to be gained by attempting further to quantify the extent of the actual use of the refrigerator. The relevant question is the purpose and effect of the transaction. It is clear that this refrigerator was not purchased because of a perceived need to provide a facility for the employees of the applicant. The objective purpose of the transaction was to obtain a taxation advantage. And, except in the most incidental way, this was its sole effect. As was inevitable having regard to the uncontested primary facts, the majority held that the use of the refrigerator by the applicant was small and fortuitous. It appears to me that the Tribunal has made all of the findings of fact necessary to support its conclusion that s.260 has application to the relevant transactions. The Tribunal made no error in law in dismissing the appeal. The application ought to be dismissed, with costs. I certify this and the fourteen (14) preceding pages to be a true copy of the Reasons for Judgment of his Honour Justice Wilcox. Associate: on ek Date: 0 Aug 1988 Bory ome IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) N.S.W. G281 of 1988 GENERAL DIVISION ) ON APPEAL FROM THE TAXATION APPEALS DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: F. & C. DONEBUS PTY LIMITED Appellant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: DAVIES, WILCOX AND PINCUS JJ. DATE: 10 AUGUST 1988 REASONS FOR JUDGMENT PINCUS J.: The appellant taxpayer appeals from an Administrative Appeals Tribunal decision refusing it a deduction under the Income Tax Assessment Act 1936; the case concerns a depreciation scheme suggested by an accountant. He said to Mr Donebus, a director of the appellant: "The arrangement works like this. The company buys the fridge from your wife for say $100,000.00, then leases it to one of my companies and then later sells the fridge, say to you, for $100.00 or so and claims a tax deduction for the loss on the sale of the fridge." os Pl elie lial a oeeetenetal Soe a — All that was done. In April 1979, the appellant bought a refrigerator, worth about $30, for $100,000 and it resold the tefrigerator on 25 June 1979 for $100. The parties to these transactions were as the accountant suggested they should be, i.e., the vendor was Mrs Donebus, one of the prancipal shareholders of the appellant, and the purchaser was her husband Mr Donebus, the other principal shareholder. It is necessary to add little to this account of the facts. It should be mentioned, however, that the refrigerator was moved, about the time of its sale to the appellant, from its location in Mrs Donebus' kitchen downstairs to the appellant's premises, where employees used it to store drinks and lunches. It was that usage which was relied on by the appellant, to satisfy the depreciation provisions referred to below; there was a purported lease, but 1t may be ignored. The price was paid to the vendor by the appellant's accepting a bill of exchange, which she immediately indorsed to it. Her doing so was by way of carrying out an agreement (made on the same day as that on which the bill was accepted and indorsed) to lend the appellant the same sum, $100,000, on interest-free terms, the loan being repayable in the year 2012. The question 1s whether the appellant is entitled to deduct $100,000 minus $100, or some other amount, as depreciation. It was held below by a majority of the Tribunal that the respondent Commissioner was entitled to rely upon the provisions of s.260 of the Income Tax Assessment Act to annihilate what they ae a owes wee epee cee described as "the arrangement". Counsel for the appellant complained that the learned members did not identify what arrangement it was that was struck down. One would not have thought it necessary to ponder on that problem very long; it would seem clear that 1f s.260 applied, it would entitle the respondent to ignore the whole sequence of dealings. Here, the effect of annihilation, so often one which creates conceptual difficulties in applying s.260, presents no problem. Subject to one important qualification, there is no room for doubt about the application of s.260. As senior counsel for the respondent pointed out, 1£ the scheme worked, it would presumably have worked equally well if one added a few zeros to the figures (other than the true value of the refrigerator). Looking at the matter objectively, 1t is inconceivable that such transactions had any commercial or other non-fiscal purpose; their purpose must have been tax avoidance. Where business transactions make no conceivable commercial sense and have, if not caught by s.260, a considerable tax effect, they must prima facie be within that provision's scope. The qualification one must make is that, as was argued on behalf of the appellant, there 1s room for dispute as to the application of what has come to be known as the choice principle. Many business people try to arrange their affairs so as to minimize tax, if lawfully able to do so. It might even be unlawful, on the part of directors of a public company, not to attempt to exercise their functions so as to achieve that result for their company and thereby enhance returns to the shareholders. Section 260 cannot have been intended to make a business person, at the risk of having his other arrangements annihilated, proceed as 1f it were not one of his or her main concerns to incur no greater liabilities (including tax liabilities) than necessary. For example, if at a particular time it 1s desirable from the tax point of view to carry on business as one sort of company rather than another, the taxpayer company is free to choose, as W.P. Keighery Proprietary Limited v. Federal Commissioner of Taxation (1957) 100 C.L.R. 66 recognises. Experience shows, however, that uninhibited access to tax minimization schemes leads to some undesirable consequences: unfair distribution of the tax burden, the spending of an excessive amount of effort and money on such schemes, and a stream of specific anti-avoidance measures which unduly complicate the law. The difficulty in using the choice principle is to give such an application to the provisions of s.260 as reasonably to accommodate these conflicting considerations. Attempts, over many years, to reduce s.260 to precise terms have shown that there is no magic key, but reference to the choice principle has been a recurrent theme. Its expression commonly requires one to distinguish between provisions of the Act which are "specific" or "particular" and others which do not merit those adjectives. But in some cases, at least, 1n which s.260 has been applied in favour of the Commissioner, one can identify Ren apes etree epee 6 © provisions of the Act which would, were there no s.260, prescribe the tax consequences of what has been done. It cannot be enough to attract the operation of the choice principle that, however contrived and artificial the scheme, one can point to sections in the Act which comprehensively govern the arrangements made, if these arrangements are not struck down. Those considerations are relevant here. The Act contains provisions which would prescribe the tax consequences of such arrangements as are in issue, if they were effected so as to fall within them: ss.54(1), 59(1) and 62(1). They are set out in the reasons of Davies J., which I have had the advantage of reading. The effect of those provisions is that, if the refrigerator was used from April to June for the purpose of producing assessable income, then the appellant is entitled toa deduction, being the cost of the refrigerator to it less the $100 sale price. Mr Bloom Q.C. argued that the provisions fall within the choice principle. They appear to be no less specific than s.51. It has been said that s.260 cannot operate to defeat a deduction allowable under s.51: Federal Commissioner of Taxation v. Janmor Nominees Pty Ltd (as trustee of J. Redman Family Trust) (1987) 75 A.L.R. 15, following Federal Commissioner of Taxation v. Lau (1984) 57 A.L.R. 107, which in turn applied dicta in Cecil Bros. Pty Ltd v. The Commissioner of Taxation of the Commonwealth of Australia (1964) 111 C.L.R. 430. tor wenn H---4-— > The remarks made in the High Court in the Cecil Bros. case do not express a principle on which was based the view that $.260 could not operate to extinguish a deduction otherwise properly. allowable under s.51. It is reasonable to infer, however, that the result mentioned was thought to follow from the choice principle; see the argument at p.437 (last sentence). The scope of that principle, when most recently examined by the High Court, was not seen necessarily to be as wide as it might have been thought to be at other times in the history of exposition of s.260. It was expressed by Gibbs C.J. in Federal Commissioner of Taxation v. Gulland (1985) 160 C.L.R. 55 at p.66 as follows: ""... if the Act offers to the taxpayer a choice of alternative tax conseguences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s.260 is attracted". Brennan J. was inclined to speak of the principle as relating to "specific and particular" provisions of the Act (p.78) and Dawson J. introduced his discussion of some of the relevant cases by saying (p.105): "... S.260, on the one hand, clearly seeks to reduce the opportunities which a taxpayer has to avoid the payment of income tax whereas, on the other hand, those very opportunities may be provided by other provisions of the Income Tax Assessment Act which contemplate means by which a taxpayer may organize his affairs so as to incur a greater or lesser tax liability according to the decision which he makes". Wilson J. agreed (p.77) in substance with the reasons of Gibbs C.J. and Dawson J.. me tee pes pra None of these approaches would readily yield the result that the depreciation provisions evince an intention to take deductions claimed under them out of the reach of 5.260. It is not easy to see how one could describe them as offering "certain tax benefits to taxpayers who adopt a particular course of conduct" or contemplating "means by which a taxpayer may organize his affairs so as to incur a greater or lesser tax liability according to the decision which he makes". I can see nothing in the depreciation provisions which suggests with sufficient strength a legislative intention that they must always prevail over s.260. Their intention does not seem to be of the kind described by Gibbs C.J. or Dawson J., but rather simply to govern the mode of calculation of a particular sort of deduction allowable to those carrying on a business. One cannot pretend that the cases in which the choice principle was or might have been used are easily reconcilable, but the proper course appears to be to pay close attention to the most recent expressions of the principle in the High Court. On that basis, the better view is that the choice principle is inapplicable to the circumstances of the present case. The opinion of the majority of the Tribunal that s.260 operates so as to justify the respondent's assessment must be upheld. It follows that it is unnecessary to deal with any of the other points in the case; I agree with Wilcox J. that the appeal must be dismissed, and with costs. t certify that this and the (> preceding pages are a true copy of the reasons for Judgrrent herein of His Honour Mr, Justice Pincus , cettee Fain "Kesociate Dated 10-8 - 1995 sa F Ae sre .