Peate v Commissioner of Taxation (Cth) [1964] HCA 84

High Court of Australia Menzies J. McTiernan, Kitto, Taylor, Windeyer, and Owen JJ. Peate v Commissioner of Taxation (Cth)

ORDER Order in each appeal: Appeal dismissed with costs.

Cur. adv. vult.

1962, Dec. 12 Menzies J . delivered the following judgment:—

It is perhaps inevitable in an acquisitive society that taxation is regarded as a burden from which those who are subject to it will seek to escape by any lawful means that may be found. This is generally called tax avoidance and it is successful if by reason of what is done what is potentially taxable is put outside the effective operation of the revenue laws. Furthermore, in the absence of a special law a genuine transaction does not lose its legal effect because it was carried out to avoid, limit or postpone tax. It is the recognition of this that accounts for the legislature casting its net wide to frustrate the attempts of those confronted with tax liabilities to get round the law. As often as a particular loophole is closed through which it has been discovered that revenue is lost, another is likely to be found, so that as long as it confines itself to stopping gaps the legislature is always a step behind reluctant taxpayers and their ingenious advisers. It is not, therefore, surprising that Parliament has sometimes sought to anticipate tax avoidance by general laws rendering ineffectual against the Commissioner arrangements which are not shams but are entered into to avoid taxation obligations that would otherwise in due course be incurred. Such a law is s. 260 of the Income Tax and Social Services Contribution Assessment Act, to which fuller reference will have to be made later.

A further observation of a general character is relevant. As the law stands, taxpayers who are in business as employers or employees have found it easier than those who are not to reap advantages from some of the deductions from assessable income that are allowed in the calculation of taxable income upon which tax is assessed. The establishment and maintenance of superannuation schemes is a good instance of this. So is the provision of a wide variety of amenities from which employees obtain non-taxable benefits while the cost is in a large measure deductible from the employer's assessable income. These are often called fringe benefits. Holiday pay is again something which those who do not get it envy those who do. Such benefits, real enough as they are in ordinary circumstances, would, however, obviously be of far greater value if it could be so arranged that they should accrue to taxpayers who would in substance employ themselves in the sense that their salaries, amenities, superannuation payments, etc. would come from their own earnings. Cases such as Lee v. Lee's Air Farming Ltd. [1] illustrate how incorporation may be used to effectuate what can be loosely described as self-employment. So long as the employer and the employee are separate, economically as well as legally, the cost of benefits to employees (such, for instance, as holiday pay and superannuation payments) must, after allowing for the value of tax deductibility, be borne by the employer but if a person were, in effect, to provide himself with such benefits and obtain taxation deductions in his role of a self-employer, the resulting tax saving would simply be money in the taxpayer's pocket. A further refinement would, however, bring even greater advantages to a family man who, it is established, cannot achieve taxation immunity by the simple expedient of assigning his earnings to his wife and family: Parkins v. Warwick [1] . If, for instance, it were possible for a man to re-arrange his affairs so as to work for his wife and his family as he previously worked for himself with the consequence that the return which his work produced, instead of being his own income and taxable as such, would be divisible between him—as salary—and his wife and family as his employers and that his holiday pay, superannuation payments and other benefits would be tax deductions from the income which his work produced, how much more would be left in the hands of the family group after each of them had paid tax on what came to his or her hands! To achieve such a result where a man has been working in partnership with others and wishes to continue to work with those who were his partners in much the same way except fiscally would, however, necessitate the exercise of some ingenuity, not to say boldness, particularly in the case of men subject to both professional and statutory controls, e.g. lawyers or doctors.