High Court of Australia Barwick C.J. Stephen, Mason, Jacobs and Aickin JJ. Cridland v Commissioner of Taxation (Cth) [1977] HCA 61 ORDER Appeals allowed with costs. Orders of the Supreme Court of New South Wales set aside and in lieu thereof order that the appeals to that Court be allowed with costs. Remit matters to the Commissioner to reassess in accordance with the reasons for judgment of this Court. Cur. adv. vult. The following written judgments were delivered:— Nov. 30 Barwick C.J. I have had the advantage of reading the reasons for judgment prepared in these appeals by my brother Mason. I agree entirely with those reasons and with the conclusion that the appeals be allowed. I find no need to add anything on my own behalf. Stephen J. I would allow these appeals for the reasons stated by Mason J., with which I am in full agreement. Mason J. In the Supreme Court of New South Wales, Mahoney J. dismissed the appellant's appeals against assessments to income tax for the years ended 30th June 1970, 1971 and 1972. The issue in the appeals was whether the appellant was entitled to the benefit of the averaging provisions contained in Div. 16 of Pt III of the Income Tax Assessment Act 1936, as amended ("the Act"). The appellant claimed the benefit of these provisions on the ground that he was an income beneficiary under certain trusts the trustee of which carried on the business of primary production. The appellant relied particularly on s. 157 (3) of the Act which provides: (3) For the purposes only of determining whether a person is carrying on a business of primary production, a beneficiary in a trust estate shall, to the extent to which he is presently entitled to the income or part of the income of that estate, be deemed to be carrying on the business carried on by the trustees of the estate which produces that income. His Honour held that s. 260 of the Act applied so as to deny to the appellant the benefit of the averaging provisions on the ground that the appellant was party to an arrangement which had both the purpose and the effect of altering the incidence of income tax, or which would have that effect if it operated according to its terms. The principal issue in the appeals to this Court is whether the primary judge was correct in so deciding. A second question arises because the Commissioner submitted that in relation to the assessment for the year ended 30th June 1970 the appellant was not an income beneficiary of the relevant trust, the No. 2 trust, in the previous year because the assignment to him of his unit did not comply with the terms of the trust relating to the vesting of the unit and was otherwise ineffective to vest an income unit in him. According to the undisputed findings of the primary judge, Mr. D. P. O'Shea, a Brisbane accountant versed in the arts of tax minimization, who was anxious to engage in primary production through companies controlled by himself and his family, hit upon a plan which would advantage him and his companies and minimize the income tax payable by those who joined in the plan. This plan involved the acquisition of land by an O'Shea company and the creation of a trust or trusts by which the trustee would be authorized to carry on the business of primary production. The moneys required were to be lent by way of the O'Shea companies. On the termination of the trusts their assets would pass to the O'Shea interests. The trusts were to be so drawn and the business so conducted that the income derived from it would be available for distribution to persons who were interested in obtaining the benefit of the averaging provisions and who would be willing to pay for that benefit. To attract persons to become income beneficiaries pamphlets were distributed among university students in New South Wales, Queensland and Victoria. More than 5,000 university students became registered under the No. 1 trust. A number of trusts were established in execution of the plan. The appellant became registered as an income beneficiary under the No. 2 trust and under the No. 4 trust. The No. 2 trust was constituted by a deed dated 13th January 1969, a sum of $1,000 being paid to the trustee, Glenrich Ranch Pty. Ltd., by the settlor to be held and applied in accordance with the trusts constituted in the deed. The trusts were to endure for twenty-one years and on their expiration the assets were to be held in trust for D. P. O'Shea (cl. 2 (a)). The right to receive income was divided into 5,000 units which were to be allotted in the first instance to Helen Audrey Meredith 4,999 units and Neville Keith Meredith one unit. The rights of income beneficiaries were expressed to be assignable by an instrument in approved form (cll. 2 (c) and 4 (d)) but the trustee was only required to account to an income beneficiary registered at any particular date and was not required to be concerned with equities or other interests of other persons (cl. 2 (c)). The registration of an income beneficiary could not be effected unless and until he satisfied the trustee that he had donated a sum of not less than one dollar to an institution, fund or body as defined by s. 78 of the Act or which had been approved by a students' representative council of a university (cl. 4 (f)). The trustee had the right to distribute to the income beneficiaries the whole or any part of the trust or to retain and accumulate the whole or any part of the income of the trust (cl. 5 (a)). In the event that the trustee decided to distribute the income, it had a discretion to distribute the income between any one or more of the income beneficiaries and in such shares as it in its absolute and uncontrolled discretion might think fit (cl. 5 (b)). The No. 4 trust was constituted by a deed dated 16th January 1970. Glenrich Ranch Pty. Ltd. was again constituted as the trustee and the settlor paid to it the sum of $100 to be held and applied upon the trusts set forth in the deed. The terms of the No. 4 trust were substantially similar to those of the No. 2 trust. However, there were some differences. The income units numbered 10,000 and the initial unit holders were to be Mr. R. M. O'Shea as to 4,972 units and a large number of selected individuals who were to hold one unit each. It was also provided that the beneficiaries should be those persons registered in the books of the trust (cl. 4 (a)). No person was to be registered in the books of the trust as an income beneficiary unless and until the trustee was satisfied that the transfer of the unit in question had been made to him (cl. 4 (f)). The provision as to the payment of income to income beneficiaries was differently expressed in cl. 5. It provided that the registered holder of each income unit should be entitled to be paid in each income year a one ten-thousandth part of the net annual income of the trust. Mahoney J. observed that it was not altogether clear what advantage Mr. D. P. O'Shea and his associates sought to obtain from the plan. It does not seem to have been thought that the sum of one dollar to be paid by persons acquiring a unit under the No. 2 trust would result in any benefit to the O'Shea interests. In fact the sum was seldom collected. To overcome this gap in the execution of the plan Mr. O'Shea and his associates paid $500 to a body of the kind mentioned in s. 78 to cover those persons who failed to make such a payment. In the pamphlets mention was made of the payment by subscribers of an annual fee which was calculated after the first year by reference to the amount of tax saved. However, it was pointed out in the pamphlets that there was no means by which the fee could be legally recovered and that the promoters were relying on the honesty of the beneficiaries. Needless to say no fees have been paid. In the early part of 1969 the Glenrich company as trustee set in motion preparations for the carrying on of the business of a primary producer. In June 1969 the appellant applied for an income unit in the No. 2 trust. He stated that he joined the trust so as to be able to average his income for tax purposes. He agreed that he did not expect to receive any substantial sum by way of income from the trust. He did not pay the sum of one dollar or any other sum in connexion with his application. Following receipt of his application Mr. R. M. O'Shea purported to transfer an income unit in the No. 2 trust to the appellant. It is not in dispute that Mr. O'Shea held an income unit in the trust and that the appellant was entered as a registered holder of the unit in the books of the trust. Later in June 1969 the appellant received one dollar from the trustee and it is not disputed that this payment is to be regarded as a distribution of income by the trustee from the business of primary production which it carried on. In January 1970 the No. 4 trust was established and at about this time the No. 2 trust ceased to operate. In June 1970 the taxpayer received from the trustee of the No. 4 trust the sum of one dollar and it is not disputed that this represented a distribution of income by the trustee from the business of primary production which it carried on. In July 1971 a further distribution of this kind was made by the trustee of the No. 4 trust. Although the very restricted operation conceded to s. 260 by the course of judicial decision and the generality of the language in which the section is expressed stand in high contrast, the construction of the section is now settled. It is therefore a source of some surprise that it continues to be relied upon when its defects and deficiencies have been apparent for so long. More than twenty years ago Kitto J. said in Federal Commissioner of Taxation v. Newton [31] : "Section 260 is a difficult provision, inherited from earlier legislation, and long overdue for reform by someone who will take the trouble to analyse his ideas and define his intentions with precision before putting pen to paper." This message, despite its clarity, seems not to have reached its intended destination. 1. (1956) 96 C.L.R. 577, at p. 596. It was recently decided in Mullens v. Federal Commissioner of Taxation [32] that even if a transaction has been entered into for the purpose of diminishing a taxpayer's liability to tax by securing to the taxpayer a benefit or advantage conferred by a specific provision of the Income Tax Assessment Act, e.g. an allowable deduction, which but for the transaction would not have accrued to the taxpayer, the transaction will not be caught by s. 260 if it satisfies the provision in question. 1. (1976) 135 C.L.R. 290. Barwick C.J. said [1] : The Court has made it quite plain in several decisions that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act. W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [2] and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [3] amply demonstrate this and are, in my opinion, very relevant to the resolution of this case. Later, the Chief Justice said [4] : there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provisions of the Act. In the same case Stephen J. said [5] : The principle in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [6] is not to be confined to cases where the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose; it was there held that merely because the taxpayer chose, quite deliberately, the alternative most advantageous to it from a tax standpoint it did not thereby attract s. 260. So, too, if no question arises of a choice between two courses of conduct but, instead, the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct; the adoption of that course does not establish any purpose or effect such as is described in s. 260. 1. (1976) 135 C.L.R., at p. 298. 2. (1957) 100 C.L.R. 66. 3. (1971) 127 C.L.R. 62. 4. (1976) 135 C.L.R., at p. 302. 5. (1976) 135 C.L.R., at p. 318. 6. (1957) 100 C.L.R. 66. The primary judge, whose judgment was delivered on 13th May 1976, did not have the benefit of this Court's decision in the Mullens Case [7] , which was handed down subsequently on 9th September 1976. His Honour decided this case by reference to what he described as the "choice principle" for which he treated the Keighery Case [6] as authority. There the Court decided that s. 260 has no application to a case in which the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose, as for example, in the case of a company whether it should be constituted as a private or non-private company with the different taxation consequences appropriate to each class of company. His Honour went on to say that s. 157 does not present to a taxpayer an alternative in the sense in which that term was used in the Keighery Case because in his opinion the section is merely a machinery provision and does not constitute an element in the prescription of two different and alternative bases of taxation between which the taxpayer is free to choose. 1. (1976) 135 C.L.R. 290. 2. (1957) 100 C.L.R. 66. The decision in the Mullens Case and the passages from the judgments to which I have referred show that the principle which underlies the Keighery Case is not as narrow as the primary judge supposed it to be. It is not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage. The distinction drawn by Lord Denning in Newton v. Federal Commissioner of Taxation [8] , between arrangements implemented in a particular way so as to avoid tax and transactions capable of explanation by reference to ordinary business or family dealing has not been regarded as the expression of a universal or exclusive criterion of operation of s. 260. Lord Denning's observations were applied neither in the Mullens Case [7] nor in the subsequent case of Slutzkin v. Federal Commissioner of Taxation [9] . 1. (1958) 98 C.L.R. 1, at p. 8 [1958] A.C. 450, at p. 466. 2. (1976) 135 C.L.R. 290. 3. (1977) 138 C.L.R. 164. The Newton Case [8] and Ellers Motor Sales Pty. Ltd. v. Federal Commissioner of Taxation [10] were cases in which it was held that the moneys received by the taxpayers were or were deemed to be dividends, the impugned transactions being designed to endow the moneys received with a different character and failing in this purpose by reason of the destructive operation of s. 260. The conclusion that the receipts were dividends must be treated as a finding of fact or as resting on the use of s. 260 as a charging provision, for the receipts would not have been liable to tax under the ordinary provisions of the Act unless they could be characterized as dividends. 1. (1958) 98 C.L.R. 1, at p. 8 [1958] A.C. 450, at p. 466. 2. (1969) 121 C.L.R. 665; (1972) 128 C.L.R. 602. Two points may be made. The first is that the observations of Lord Denning to which I have referred were made in a case in which the Privy Council and this Court appear to have thought that the impugned transactions were cloaking payments which were otherwise income because they were dividends or because they had that character by virtue of s. 260, once the transactions were annihilated. The second is that s. 260 is not a charging provision, as Lord Diplock has had occasion to note more recently in speaking for the Judicial Committee in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [12] . 1. [1976] 1 W.L.R. 464, at p. 475; [1976] 1 All E.R. 503, at p. 511. The transactions into which the appellant entered in the present case by acquiring income units in the trust funds in question were not, I should have thought, transactions ordinarily entered into by university students. Nor could they be accounted as ordinary family or business dealings. They were explicable only by reference to a desire to attract the averaging provisions of the statute and the taxation advantage which they conferred. But these considerations cannot, in light of the recent authorities, prevail over the circumstance that the appellant has entered into transactions to which the specific provisions of the Act apply, thereby producing the legal consequences which they express. Accordingly, it is my view that s. 260 has no application to this case. The respondent's second submission is that the appellant was not an income beneficiary of the No. 2 trust in respect of the 1969 year and that he was therefore not entitled to the benefit of the averaging provisions for the succeeding year. Though it is conceded that the appellant was registered as an income beneficiary in the No. 2 trust it is argued that he was registered in breach of the provisions of the trust deed in that the assignment to him of the income unit of D. P. O'Shea was ineffective because it was not an assignment of a proprietary interest but of a mere expectancy and because cl. 4 (f) of the trust deed forbade registration as an income beneficiary unless and until the person concerned satisfied the trustee that he had donated a sum of not less than one dollar to a s. 78 institution. The primary judge stated that he was not satisfied as a matter of fact that the appellant had paid this sum. The interest of the object of a discretionary trust is something more than a mere spes (Gartside v. Inland Revenue Commissioners [13] ). But this is by the way. For a sufficient answer to the respondent's contention is to be found in the circumstance that by the terms of the trust deed the trustee was required only to account to those persons who were registered as income beneficiaries (cl. 2 (c)) and that the trustee was authorized to distribute the income, in the event that he decided to distribute income instead of accumulating it, to the registered income beneficiaries and not to other persons. Non-compliance with the requirements of the trust deed antecedent to registration might give rise to some equitable claim to relief against a person who had been irregularly registered as an income beneficiary, at least at the suit of a transferor, but it could not affect the power of the trustee to pay income to a person whose name appeared in the register of income beneficiaries at the relevant time. If there be a non-compliance or an irregularity which could ground a claim to equitable relief in the present case, it is not a matter on which the respondent can rely in order to sustain his assessment. 1. [1968] A.C. 553, at p. 618. In the result I would allow the appeals. Jacobs J. I agree that the appeals should be allowed. I do not wish to add anything to the reasons for judgment prepared by Mason J. with which I agree. Aickin J. I agree with the reasons and the conclusion expressed in the judgment of my brother Mason.