|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Income Tax - Deduction - Whether partnership incurred a loss - depreciation - meaning of "use for the purpose of gaining or producing assessable income" in s. 54 Income Tax Assessment Act 1936.Income Tax - Tax Avoidance - s. 260 Income Tax Assessment Act 1936 - the "choice" principle - rule of construction "generalia specialibus non derogant".
Practice and Procedure - Jurisdiction - Whether an appeal lies from the Supreme Court of Victoria pursuant to s. 200 Income Tax Assessment Act 1936 - when does the right to appeal "vest" in an appellant - meaning of "an appeal under this Part" in sub-s. 199(1).
Income Tax Assessment Act 1936: ss. 54-59AA, 61, 92, 196, 197, 199, 200, 260. Act No. 23 of 1989 - sub-s. 4(3)
Taxation Boards of Review (Transfer of Jurisdiction) Act 1986: s. 88
HEARING
SYDNEY Counsel and Solicitors Mr S E K Hulme QC and Mr W J for Appellant:
Martin instructed by Rivers
Dickinson Stirling & Munz
Counsel and Solicitors Mr J M Batt QC and Mrs A for Respondent:
Moshinsky instructed by the
Australian Government Solicitor
ORDER
The appeal be dismissed.The appellant pay the costs of the respondent of the appeal.Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
DECISION
I have read the reasons for judgment of Neaves J. and Hill J. in draft and agree generally with them and with the orders which they propose; though on the question whether an appeal lies in this case from the Supreme Court to this Court I agree with the reasons of Hill J. I propose to add some observations of my own on the "choice principle" as it is critical to the application of s. 260 of the Income Tax Assessment Act 1936 ("the Act").2. Much has been written by the High Court and this Court on the "choice principle". I see no point in analysing each of the relevant High Court cases from W.P. Keighery Pty. Limited v Federal Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66 through Mullens v Federal Commissioner of Taxation (1976) 135 CLR 291 and Cridland v The Commissioner of Taxation [1977] HCA 61; (1977) 140 CLR 330 to The Commissioner of Taxation v Gulland [1985] HCA 83; (1985) 160 CLR 55. In Gulland the cases were closely analysed by the Justices of the High Court. Judges of the Federal Court have since applied Gulland in cases which include F. & C. Donebus Pty. Limited v Federal Commissioner of Taxation (1988) ATC 4582 and Davis v Federal Commissioner of Taxation (1989) 89 ATC 4377.
3. What I shall endeavour to do is to gather the strands together as I perceive them and see where the "choice principle" stands today. This principle is an attempt to reconcile the general provisions of s. 260 with numerous specific and particular provisions of the Act, reliance upon which by a taxpayer may alter the incidence of income tax or defeat or avoid a liability to income tax which would otherwise arise. Section 260, a general provision, is therefore read down to enable the specific and particular provisions of the Act relating to assessable income or giving rise to allowable deductions to operate. The "choice principle" is an example of the application to the Act of the rule of statutory construction Generalia Specialibus Non Derogant. It is of particular importance with respect to the sections of the Act which allow deductions and is usually one of last resort in the sense that all other necessary elements of s. 260 apply in a particular case to otherwise avoid an arrangement against the Commissioner, but the taxpayer escapes the application of the section by successfully calling the "choice principle" in aid.
4. If the taxpayer does no more than is specifically permitted by the relevant section of the Act there is no room for the operation of s. 260. It is where the taxpayer does more than this that problems arise, especially where the taxpayer is a party to a contrived or manufactured arrangement for a purpose of avoiding tax and which has no basis in ordinary business or family affairs.
5. The circumstances of each case, when considered in the light of the specific section of the Act with which the case is concerned, will determine whether s. 260 applies.
6. Resort to the "choice principle" is denied by s. 260 where a situation is devised to gain the advantage of a particular section of the Act which has no sensible or practical basis or justification in a business or family sense, and where resort to the section is for the purpose or purposes which include the purpose of conferring a tax benefit upon the taxpayer such that it is a misuse of the section or of the benefits which it is designed to confer on those who legitimately resort to it. If in all the circumstances the use of the specific or particular provision of the Act warrants the description of an "abuse" of it (see McLean v Federal Commissioner of Taxation (1986) 86 ATC 4288 per Tadgell J. at 4309; and Donebus per Wilcox J. at 4595), s. 260 will apply. In the end it is a question of interpretation of the specific provision of the Act and the facts of the case.
7. It is a pity that the courts moved from the principles expounded by the
High Court in Jaques v The Federal Commissioner of Taxation
[1923] HCA 70; (1924) 34 CLR 328
especially per Isaacs J. at 359 and 360 where his Honour considered s. 53 of
the Income Tax Assessment Act 1915 (the forerunner of
s. 260 of the Act) and
said this:
"The ingenious but necessarily artificial processThose observations of Isaacs J. seem to me to be as wise and correct today as they were at the time they were made.
of arriving in this case, by means of legal
doctrines intended to facilitate commercial
transactions without burdensome formalities, at a
certain legal situation in ordinary cases carries
its special purpose as well as its effect on its
face. There is hardly needed the express
admission that exists, that it was with the design
of securing a deduction for income tax. It is not
at all on the same footing as an ordinary purchase
of shares in an existing company, even with the
accompanying object of satisfying the requirements
of the law as to payment of calls. In that case
the enterprise exists, and offers the opportunity
of investment. There the investor is doing
nothing more than the Legislature contemplated the
taxpayer might legitimately do, or even be induced
to do, and none the less that besides the risk of
capital the advantage of a deduction in relation
to income tax was part of the inducement.
But here ... the combined arrangement entered into
by the three companies and the shareholders in the
old company ... was simply to manufacture a
situation to get the better of the Income Tax Act.
It in no way altered the income of the taxpayer or
changed its ownership. It was in no true sense a
business operation. But, by first deliberately
preparing the ground for the misuse of legal
expedients recogized as equivalents for payment,
and then by such misuse, a factitious liability to
pay a call and a factitious payment of the call
ensued, but throughout, from conception to
completion, except for a similar object of
escaping stamp duty, with the express and sole
purpose of lessening the statutory liability of
the taxpayer."
Before the Court are two appeals by Gordon Alexander Pettigrew ("the taxpayer") against orders made by the Supreme Court of Victoria (Murphy J.) on 16 May and 21 June 1989 respectively in proceedings in that Court by way of appeal from a decision of a Taxation Board of Review given on 22 June 1984 upon a reference to it of a decision of the Commissioner of Taxation ("the Commissioner") disallowing an objection by the taxpayer against an assessment to income tax in respect of the year of income ended 30 June 1978. The Board of Review upheld the Commissioner's decision and confirmed the assessment. The Supreme Court dismissed the taxpayer's appeal.
2. The substantive issue before this Court is whether the taxpayer is entitled, in respect of the relevant year of income, to a deduction under sub-s.92(2) of the Income Tax Assessment Act 1936 (Cth) ("the Act"), as in force at the relevant time, of his individual interest in a loss claimed to have been incurred in that year by a partnership of which he was a member.
3. During the relevant year of income the taxpayer derived assessable income
by way of salary and allowances as an employee of a
company (which, it should
be said, was in no way concerned with the events which give rise to the issue
between the parties) and
by way of rent from certain income producing
property. He claimed to be entitled to deduct an amount representing his
individual
interest (2.548%) of the loss amounting to $868,025 shown in the
return of income in respect of the year ended 30 June 1978 of a
partnership
called "Chop Hire". The documents accompanying that return disclosed that the
commencing date of the partnership was
22 June 1978. They also disclosed that
the amount of $868,025 had been arrived at in the following manner:
Net loss as per accounts $106,025The amount of $106,025 resulted from bringing to account income of $4,000, described as "Lease Fees" and representing hiring charges in respect of certain helicopters, and expenses, being accountancy fees of $25 and depreciation of $110,000. The sum of $110,000 represented the amount of the depreciation allowance calculated in accordance with ss.54 and 56 of the Act, the partnership having elected, under sub-s.56(1)(b), that the depreciation allowable be the percentage fixed by or under s.55 of the cost of the units of property on which depreciation was claimed. That property consisted of four helicopters, the cost of which was said to be $880,000. The amount of $762,000 was calculated in accordance with ss.59 and 59AA as follows:
Loss on disposal of plant 762,000
$868,025
Purchase price of plant $880,0004. The relevant events begin with the taxpayer being concerned to obtain relief from his liability for income tax in respect of the year of income in question. He set out to achieve this result by obtaining a deduction in circumstances where there was a minimal chance that there would be what he referred to as a "commercial loss". To this end he approached his tax agent who advised him that through a scheme involving the conduct by a partnership of a commercial enterprise operating helicopters there would be a substantial tax deduction which would be apportioned to the partners and that there was unlikely to be any commercial loss for which the partners would be liable. On 9 June 1978 the taxpayer, who was about to go overseas, gave a power of attorney to a solicitor authorising him to sign the necessary documents and pay over the requisite moneys to enable the taxpayer to participate in the scheme. The solicitor subsequently, that is to say on or before 22 June 1978, signed on the taxpayer's behalf, and all at the same time, two partnership agreements and an agreement under which the second partnership was dissolved.
Less depreciation claimed
as per accounts 110,000
770,000
Less sale price as per agreement
dated 26 June 1978 (s.59AA) 8,000
$762,000
5. The first partnership agreement was that relating to the partnership to be
carried on under the name "Chop Hire". That agreement,
which bears the date 22
June 1978, was made between 18 individuals and one company. The agreement
recited that the partners desired
to carry on business in partnership hiring
out plant and equipment and to enter into partnership for that purpose. As
will appear,
the partnership did not operate a continuing business of hiring
out plant and equipment and the evidence shows quite clearly that
it was never
intended by the partners that it should do so. The partnership was to
commence upon the execution of the agreement
by the last of the partners to do
so (cl.22). The partnership was to continue until terminated by the agreement
of all the partners
or by any partner giving notice to the other partners of
his intention to determine the partnership (cll. 4, 21, 22). Such notice
might only be given after 28 June 1978 (cl. 21). A management committee of at
least three persons, none of whom was required to
be a partner, was
established (cl.11(a)). In fact, the members of the management committee were
the promoters of the scheme. The
ordinary business of the partnership was to
be under the control of the management committee which was to have full power
to make
all decisions of, or in any way related to, the partnership and the
partnership business and to bind the partners in all respects
subject to any
directions which might be given to it by all of the partners unanimously
(cl.11(d)). The power of the management committee
to enter into contracts of
purchase of plant or equipment was limited so that the total expenditure of
the partnership on plant and
equipment owned by it at any one time was not to
exceed $880,000 (cl.11(e)). Clause 16 provided:
"The Management Committee shall be entitled to6. On the day on which the Chop Hire partnership commenced, namely 22 June 1978, the management committee of the partnership passed resolutions to the effect that the partnership borrow from Morla Pty Limited ("Morla"), a company controlled by the promoters of the scheme, the sum of $868,550 pursuant to the terms of a tabled borrowing agreement the loan to be secured by a charge in favour of Morla, that the partnership purchase four helicopters from Vowell Air Services (Helicopters) Pty Limited ("Vowell"), a company carrying on a business of chartering helicopters throughout Australia, for $880,000 pursuant to the terms of a tabled sale agreement, that the partnership hire the four helicopters to Vowell pursuant to a tabled hiring agreement and that the partnership insure the helicopters for full cost.
borrow on behalf of the Partnership any moneys
required to purchase plant and equipment and
shall be entitled to charge the assets of the
Partnership or any of them as security for the
payment of any such loan provided that no such
loan agreement or charge shall be entered into
except with the consent of all the Partners
unless such loan is secured by a charge on
assets of the Partnership and the terms of the
loan provide that the Partnership and the
Partners shall not be personally liable for
repayment of the said loan and that the remedies
of the lender thereunder are limited to its
rights under the charge on those assets."
7. On 24 June 1978 various steps were taken in implementation of the scheme.
Those steps may be summarised as follows:
(a) Vowell loaned to Morla the sum of8. On 26 June 1978, the management committee of the Chop Hire partnership resolved that the hiring agreement made on 24 June 1978 with Vowell be determined pursuant to the agreement and that Vowell be notified thereof. An amount of $4,000 was payable by Vowell to the Chop Hire partnership in respect of the hiring for two days.
$868,000. The loan was not evidenced in
writing, no agreement was made regarding
interest and no interest was in fact paid.
(b) Morla lent $868,550 to the Chop Hire
partnership. The loan was evidenced by
an agreement and was secured by a
chattel mortgage. The effect of the
arrangements made was that neither the
partnership nor the partners were
personally liable to repay the loan or
to pay interest thereon.
(c) The Chop Hire partnership purchased four
helicopters from Vowell for the sum of
$880,000, an amount which represented
their bona fide market value.
(d) The Chop Hire partnership entered into
an agreement with Vowell whereby Vowell
hired the four helicopters for an
initial hire period of 1 day and
thereafter from day to day until the
hiring was terminated. Vowell agreed to
pay a hire charge of $2,000 per day.
There is a finding that the amount of
$2,000 was "a reasonable measure of the
then appropriate hiring fee for the
helicopters".
9. The second of the partnership agreements executed on behalf of the taxpayer on or before 22 June 1978 bears the date 26 June 1978. The parties to that agreement were the partners in the Chop Hire partnership, described as "the Previous Partners", and a company called Wonder Wobbler Pty Limited ("Wonder Wobbler"), described as "the Incoming Partner". The new partnership, which was to be carried on under the name "Rotor Lease" (cl.4), was to commence at the time when the last of the partners to execute the agreement did so (cll.1, 25, 26). Immediately upon the commencement of the new partnership, the four helicopters were to become the property of the new partnership. The agreement provided that the Previous Partners thereby transferred and contributed their undivided shares in the helicopters to the new partnership, the value of the helicopters for the purposes of the agreement being stated at $8,000 (cl.2). The agreement also established a management committee of at least three persons (cl.12) with powers similar to those conferred on the management committee of the Chop Hire partnership but providing that the total expenditure of the new partnership on plant and equipment owned by it at any one time was not to exceed the sum of $10,000. The committee in fact comprised the same three persons who constituted the management committee of the Chop Hire partnership. The agreement further provided (cl.24) that the Chop Hire partnership was to cease to carry on any business from the time the agreement took effect and was thereafter to be wound up.
10. Immediately after its acquisition of the helicopters on 26 June 1978, the Rotor Lease partnership leased them to Vowell at a daily hiring charge of $2,000. The hiring was, again, for an initial period of 1 day and thereafter from day to day until the hiring was terminated.
11. On 28 June 1978, an agreement made on that day between each of the partners in the Rotor Lease partnership came into effect. This was the third of the agreements executed on behalf of the taxpayer on or before 22 June 1978. By that agreement the Rotor Lease partnership was dissolved (cl.1). The agreement also provided (cl.5) for the transfer to Wonder Wobbler by the parties other than Wonder Wobbler of their respective undivided shares and all their interest in the four helicopters. The value of the helicopters for the purpose of the agreement was expressed to be $5,000. Wonder Wobbler acknowledged that the helicopters were subject to the charge in favour of Morla.
12. On the same day, 28 June 1978, Wonder Wobbler leased the helicopters to Vowell at a daily hiring charge of $2,000.
13. On 30 June 1978, Wonder Wobbler sold the four helicopters to Vowell for $880,000 and on the same day accounted to Morla in the sum of $870,263.30 representing the amount originally lent by Morla to the Chop Hire partnership ($868,550) plus interest ($1,713.30). On the same day Morla repaid the sum of $868,000 to Vowell. Thus, notwithstanding the changes in the ownership of the helicopters, they continued at all times and without interruption to be available to, and to be used by, Vowell in the course of its business activities.
14. I find it necessary to deal only with the contention by the taxpayer that the Supreme Court erred in holding that s.260 of the Act operated in the circumstances of this case to render void as against the Commissioner the contracts, agreements or arrangements on which the taxpayer relies to entitle him to a deduction in the relevant year of income of an amount equal to his proportionate share of the loss disclosed by the return of the Chop Hire partnership. I shall assume - though, if the matter were res integra, I would have considerable doubt as to the correctness of that assumption - that, s.260 apart, the taxpayer would be entitled to the deduction claimed.
15. The findings of fact accepted by the Supreme Court clearly show that the arrangement to which the taxpayer was a party exhibits all the indicia necessary to support the conclusion that it had the purpose and effect of defeating, evading or avoiding a liability imposed on the taxpayer by the Act (s.260(c)). The terms of the arrangement and the overt acts by which it was carried into effect demonstrate that what was done is not capable of explanation by reference to ordinary business or family dealing. The steps to be taken were pre-arranged. The arrangement had no commercial reality. In no true sense was it a business operation. Indeed, it had no such purpose. Its sole purpose was to lessen the statutory liability which would otherwise fall on each of the partners, including the taxpayer, in the Chop Hire partnership.
16. For the taxpayer, however, it was contended that there was no room for the operation of s.260 in the instant case because to apply the section would negative the operation of certain specific and particular provisions of the Act. The specific and particular provisions of the Act on which the taxpayer relied were ss.56(1) and 59AA(1), the former giving to a taxpayer an election whether to have allowable depreciation calculated on diminishing value or on prime cost and the latter enabling the parties to an agreement, in the circumstances mentioned, to specify in the agreement, as the value of the property for the purposes of that agreement, an amount which was to be treated as the consideration receivable in respect of the disposal of the depreciated property.
17. It may be accepted that, if all that was involved in this case was the question whether s.260 could operate to permit the Commissioner to assess the tax liability of the partners, including the taxpayer, of the Chop Hire partnership on a basis which disregarded any advantage thought to arise from the choices that were in fact made under ss.56(1) and 59AA(1), the taxpayer would be entitled to succeed. It would, however, be necessary, in order to arrive at that conclusion, to treat the partnership agreement dated 22 June 1978 as subsisting and fully effective for fiscal purposes. It is at this point that the taxpayer's contention breaks down. For, in the circumstances of the present case, what s.260 enables the Commissioner to treat as void for fiscal purposes includes the partnership agreement itself, that agreement being an integral and essential part of the wider arrangement to which the taxpayer was a party and which had the purpose and effect of avoiding a tax liability which would otherwise have fallen upon him. Once the partnership agreement is to be treated as void as against the Commissioner, there is, for income tax purposes, no partnership loss of which the taxpayer can claim an aliquot share. In other words, the case is not properly to be characterised as one in which the taxpayer has done no more than seek to take advantage of an opportunity which the Act provides to reduce the amount of his tax.
18. For these reasons the appeals should, in my opinion, be dismissed with costs.
19. I should not, however, part with the case without expressing my doubt whether an appeal lies in this case from the Supreme Court to this Court. With due respect to those who take a contrary view, I am unable to accept that the reference in s.199(1), in the form which that sub-section took as a result of the enactment of s.88 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth), to "A Supreme Court hearing an appeal under this Part", that is to say Part V of Division III of the Act, is to be read as including a reference to a Supreme Court hearing an appeal (so called) to that Court under s.196(1) - a provision repealed by the Act of 1986 - from a decision of a Taxation Board of Review. The Act of 1986, as its short title suggests, transferred to the Administrative Appeals Tribunal the functions formerly exercised by the Taxation Boards of Review and resulted in appeals from decisions of the Administrative Appeals Tribunal in taxation matters coming to this Court and not to the Supreme Courts. In my opinion, the reference in s.199(1) to "an appeal under this Part", in the context in which that reference appeared after the amendments made in 1986, was clearly a reference to, and only to, cases in which the Commissioner had, at the request of a taxpayer, referred a decision on an objection directly to a Supreme Court under s.189 (see sub-ss.(1) and (3)). However, as the other members of the Court are of opinion that the appeal is competent and as it is unlikely that the question, which arises because of the legislative changes that were made during the long delay which occurred between the time when the taxpayer instituted his appeal to the Supreme Court (18 July 1984) and the time when the appeal was heard and determined by that Court, will arise in other cases, I shall not pursue the matter further.
Jurisdiction of the Court
The appellant, Gordon Alexander Pettigrew, appeals against a judgment of the
Supreme Court of Victoria (Murphy J) disallowing an
appeal brought to that
Court against the decision of the Taxation Board of Review No 3 given on 22
June 1984.
2. In issue is a claim for a deduction pursuant to s.92 of the Income Tax Assessment Act 1936 as amended ("the Act") in the year of income ended 30 June 1978 based upon the appellant's membership of a partnership known as the "Chop Hire Partnership". At the time the appellant requested that the Commissioner's decision on the objection against the assessment be referred to the Taxation Board of Review and at the time the appellant instituted his appeal to the Supreme Court of Victoria an appeal lay as of right to the Supreme Court of a State (provided a question of law was involved) from a decision of the Taxation Board of Review (s.196(1)) and if that appeal was unsuccessful a further appeal could be brought, by leave, to this Court (s.196(5)).
3. The appellant's appeal to the Supreme Court of Victoria was instituted by Notice of Appeal dated 18 July 1984. By the time however that the appeal came to the Supreme Court for hearing and a fortiori by the time the appeal had been decided adversely to the appellant by Murphy J on 16 May 1989 there had been substantial amendments to the appeal provisions of the Act.
4. Under the law as it stood immediately prior to 1 July 1986 the Act
provided by s.196:
"(1) The Commissioner or the taxpayer may appeal5. Section 196(5) provided:
to a Supreme Court from any decision of the Board
that involves a question of law."
"The Commissioner or the taxpayer may appeal6. Sections 197, 199 and s.200 provided:
against a decision of a Supreme Court on an appeal
or reference under this section -
(a) by leave of the Federal Court of Australia, to
that Court; or
(b) by special leave of the High Court, to that
Court."
"197 Where, at the request of the taxpayer, the7. These provisions inter alia were part of a legislative scheme in which the Act distinguished between references on the one hand, which were heard by Boards of Review and appeals which proceeded to the Supreme Court at first instance, a taxpayer having to elect within 60 days of his objection being disallowed and notice of that disallowance being given whether to request the Commissioner to refer the objection to the Board or treat it as an appeal to be heard by the Supreme Court. Section 197 of the Act as then in force referred to the appeal to the Supreme Court to be heard by that Court as a matter in its original jurisdiction so that it is clear that s.199 and s.200 as then in force had no application to an appeal sought to be brought under s.196(5).
Commissioner has treated his objection as an appeal
and forwarded it to a Supreme Court, the appeal
shall be heard by a single Judge of the Court.
199(1) The Supreme Court hearing an appeal under
s.197 may make such order as it thinks fit, and may
by such order confirm, reduce, increase or vary the
assessment.
(2) An appeal does not lie from an order
referred to in subsection (1) except as provided in
section 200."
"200 The Commissioner or the taxpayer may appeal
against an order referred to in s.199 -
(a) to the Federal Court of Australia; or
(b) with special leave of the High Court, to that
Court."
8. Section 196 was repealed by Act No 48 of 1986 as from 1 July 1986 and
s.199(1) was amended to take effect from that date so as to read:
"199(1) A Supreme Court hearing an appeal under9. It was argued in Thorpe Nominees Pty Ltd v. Federal Commissioner of Taxation [1988] FCA 118; (1988) 80 ALR 81 that after these amendments no appeal lay at all from a decision of the Supreme Court of New South Wales where a taxpayer had prior to 1 July 1986 elected that his objection be referred to a Board of Review and the Board had decided that reference prior to 1 July 1986. In that case the Board had decided the reference on 6 September 1985 and a decision had been given by the Supreme Court of New South Wales on 27 March 1987. Bowen CJ held that, as a result of the amendments to s.199, the reference in s.199(1) to "an appeal under this Part" comprehended all "appeals" to which Part V of the Act referred, that is to say, appeals to the Supreme Court whether following a hearing by a Board of Review or sent to that court directly following the disallowance of an objection so that s.200 provided then for an appeal to the Federal Court not with leave as had been the case under s.196(5)(a) but with no necessity for leave being obtained.
this Part may make such order in relation to the
decision to which the appeal relates as it thinks
fit, including an order confirming or varying the
decision."
10. It is clear from a perusal of his Honour's reasons that the Chief Justice was influenced in reaching that result both by the view that it was reasonable to suppose that Parliament did not intend to extinguish entirely the right of appeal to a second court which previously existed whether with or without leave as well as by the language of s.199 and s.200 with the reference to appeals under Part V. With respect I would agree with his Honour's conclusion as to the result in facts such as arose in Thorpe's case.
11. There is however a difference in the present case. By Act No 23 of 1987
assented to on 26 May 1987 effective 1 September 1987, s.200 was repealed.
Notwithstanding this repeal, s.4(5) of the
1987 Act provided that subject to
sub-s.3 not presently relevant the provisions of the Income Tax Assessment Act
repealed continued to apply to:
"(a) a decision on an objection, or an objection ,12. By the time the present case was decided by the Supreme Court of Victoria s.200 therefore had been repealed so that unless a pre-existing right to appeal to this Court existed, or was secured by the transitional provisions of s.4(5), the appellant's right of appeal had been extinguished. I should say that the respondent did not seek to argue that the appeal was incompetent. However this Court in exercising the judicial power of the Commonwealth must be satisfied that it has jurisdiction before proceeding to exercise it.
that was forwarded to a Supreme Court before
the commencement day; and
(b) an order made by the Supreme Court in relation
to the decision or objection,
as if the repeal had not been made."
13. The appellant referred to the decision of the Privy Council in The Colonial Sugar Refining Company Ltd v. Irving (1905) AC 369. That case concerned s.39(2) of the Judiciary Act 1903 which removed the right to appeal from the Supreme Court of a State to the Privy Council where the Supreme Court was exercising federal jurisdiction. It was held, the Judiciary Act not being retrospective by express enactment or by necessary implication, that a right vested in the appellants at the date of the commencement of that Act was not interfered with. There of course was no express provision making the repeal of s.200 retrospective and certainly there is no suggestion of any necessary implication in the present circumstances.
14. But the question is then raised at what point of time can it be said that the right to appeal is "vested" in an appellant. Is it, in circumstances such as the present, the moment of time an appellant institutes proceedings in the court (here the Victorian Supreme Court) from which his right to appeal appears to have been abolished or does the right to appeal only become vested when that Court has decided adversely to him so that the question of appealing arises? To this problem the Colonial Sugar case also appears to supply an answer. On the facts of that case the proceedings were instituted in the Supreme Court of Queensland on 25 October 1902 but not decided until 4 September 1903. The Judiciary Act received the Royal Assent on 25 August 1903. Thus it must follow that the appeal right that is vested becomes vested at the time of the commencement of the proceedings, in the present case in the Supreme Court of Victoria i.e. in 1984.
15. As at that time the right of appeal was that which was conferred by s.196 and which required leave to appeal before the appeal could be brought to this Court. However while the right was vested, s.196 was, as I have already observed, repealed and following the view expressed by the Chief Justice in Thorpe's case there was conferred upon an appellant a more favourable right, namely, to appeal as of right to this Court. Where a more favourable right of appeal is conferred than that taken away there seems to me no reason to regard the less favourable right as entrenched; rather it is superseded by the new and more favourable right. Thus from 1 July 1986 there was vested in the appellant a right to appeal to this Court without leave which right was not taken away with the repeal of s.200 in 1987. It follows in my view that the appeal is competent. A similar conclusion would follow from s.4(5) of the 1987 Act which clearly was intended to treat s.200 as not repealed in respect of all cases pending at that time. While the language of s.4(5) was more apt to preserve those sections repealed which related to a taxpayer treating his objection as an appeal and requesting that it be forwarded to a Supreme Court (see s.187(1)(b)) rather than to those sections which concern the request of the applicant to refer the Commissioner's decision on the objection to a Board of Review for review (see s.187(1)(a)) its language is not so intractable as to require a conclusion that a right of appeal vested in the appellant as at "the commencement date" was abolished.
16. I should say that, had I been of the opinion that Thorpe's case was not
correctly decided, it would have followed from The Colonial
Sugar Refining
Company Ltd v. Irving (supra) that there was vested in the appellant as and
from 1984 a right under s.196 of the Act, as it then stood, to appeal to this
Court with leave, which right was not abrogated and I would have granted leave
thereby bringing
about the same result.
The Facts
17. At the hearing before Murphy J the parties contented themselves with tendering the transcript of evidence of the proceeding before the Taxation Board of Review and the exhibits that had been tendered in that Tribunal. No other evidence was adduced. No question of credit was said to arise and, as a result, it is perhaps not surprising in those circumstances that a submission made by the respondent to the Supreme Court that the transactions entered into by the appellant and others were in law a sham, was not upheld. That submission was not repeated before us.
18. Murphy J adopted the findings of fact made by Dr Beck in the Taxation Board of Review and as a result contented himself with a somewhat short summary of what might be called the essence of the arrangements entered into by the appellant. It is however necessary here to set out in slightly more detail the arrangements entered into by the appellant to enable a proper understanding of them.
19. It was frankly conceded, if any concession were necessary, that the sole motivation of the appellant in entering into the arrangements that he did was the avoidance of tax. There was no other commercial advantage to be gained as an examination of the arrangement makes quite clear. The scheme as entered into and carried out was preordained. The taxpayer signed three documents at the outset, two partnership agreements and an agreement for the dissolution of the second partnership being the only documents necessary on the part of a taxpayer to be signed to effect the arrangement. In fact these documents were signed by an attorney under power from the appellant but nothing turned upon that. Each of the three documents was entered into on the basis that it would become effective when the last person signed it or when a specified person signed it.
20. The scheme proposed and implemented was as follows:
Vowell Air Services (Helicopters) Pty Ltd ("Vowell") carried on a business
of chartering helicopters throughout Australia. On 24
June 1978 Vowell sold
four helicopters to a partnership given the name "Chop Hire", being a
partnership constituted by a partnership
agreement bearing the date 22 June
1978 and of which the appellant was a partner. The purchase price, $880,000,
was advanced to
the partnership by Morla Pty Ltd from funds provided to that
company by Vowell. The terms of that advance and associated security
were
such that the lenders had no recourse to the partners but were limited in
their rights to those provided in a deed of charge
over the helicopters. It
was found as a fact that the sum of $880,000 represented a commercial purchase
price for the helicopters.
21. The partnership agreement, which was in a form appropriate to an ordinary commercial partnership, provided for the establishment of a management committee which initially was to comprise three persons who were the individuals involved in the promotion of the scheme. The partnership agreement authorised the management committee to borrow, on behalf of the partnership moneys to purchase the partnership plant and equipment (i.e. the helicopters) but only on non-recourse terms. Any partner could terminate the partnership by notice but only after 28 June 1978.
22. By agreement bearing date 24 June 1978 the Chop Hire partnership hired out to Vowell the helicopters which it had purchased from that company for an initial hire period of one day and thereafter in accordance with the terms of that agreement from day to day at a rent of $2,000 per day. It was agreed that this figure represented a commercial hiring rate. The hire agreement provided a right in either party to terminate the hiring after the initial period of one day by notice taking effect immediately. Under this agreement Vowell paid the partnership $4,000 being rent for two days.
23. By the second partnership agreement dated 26 June 1978, being an
agreement to which all the partners in Chop Hire were parties
together with a
company, Wonder Wobbler Pty Ltd, associated with the promoters, it was recited
that the Chop Hire partners wished
to take into partnership with them Wonder
Wobbler Pty Ltd therein called "the new partner" and for that purpose to enter
into a new
partnership to be called "Rotor Lease" with Wonder Wobbler Pty Ltd.
This agreement in addition to regulating the terms of the new
partnership
provided in clause 2 as follows:
"Immediately upon the commencement of the New24. The plant in question was defined as the four helicopters.
Partnership the said Plant shall become the
property of the New Partnership to be used as
assets in the business thereof and the Previous
Partners hereby transfer and contribute their
undivided shares in the said Plant to the New
Partnership and the value of the said Plant for the
purposes of this Agreement is $8,000."
25. The agreement of 26 June 1978 contained as well an acknowledgement that the "new partners" being both the Chop Hire partners and the incoming partner, Wonder Wobbler Pty Ltd, acknowledged that they were aware that the plant in question was subject to the equitable charge to secure the loan from Morla Pty Ltd. In substance, therefore, the figure of $8,000 referred to in clause 2 was the equity of the Chop Hire partners in the helicopters subject to the charge. The agreement provided that once it came into effect the Chop Hire partnership would thereafter be wound up. The Rotor Lease partnership was able to be terminated by any partner by notice at any time after 30 June 1978. In fact however the dissolution of the Rotor Lease partnership occurred by agreement bearing date 28 June 1978.
26. By the agreement for dissolution it was provided that the helicopters
were not to be sold but:
"...the parties hereto other than the continuing27. The continuing party was Wonder Wobbler Pty Ltd. It accordingly also took the plant subject to the charge.
party hereby transfer to and vest in the continuing
party their respective undivided shares and all
their interest in the said Plant to the intent that
the continuing party hereby becomes the absolute
owner of the said Plant and the said Plant shall
vest in the continuing party immediately after the
time when this agreement takes effect and the value
of the said Plant for the purposes of this
Agreement is the amount of $5,000."
28. It appears that the hiring agreement of 24 June 1978 between Vowell and
Chop Hire was determined on 26 June and a new agreement
was entered into on
that day between Vowell and Rotor Lease on the same terms pursuant to which
Vowell paid Rotor Lease $4,000 for
two days hire. That agreement in turn was
terminated on 28 June 1978. Ultimately, the ownership of the helicopters
returned to
Vowell which had uninterruptedly the possession and use of them in
its business throughout the period covered by the various agreements.
The Statutory Provisions
29. To understand the hoped for tax benefits which the arrangement was expected to achieve it is necessary to summarise the depreciation provisions of the Act (relevantly ss.54-59AA) as they stood at the time.
30. By force of s.54 of the Act depreciation calculated in accordance with
s.56 on a prime cost or diminishing value method is allowable in respect of:
"Any property being plant or articles owned by a31. It was held in Federal Commissioner of Taxation v. Cook (1980) 80 ATC 4093 by Wallace J of the Supreme Court of Western Australia that the depreciation provisions as then in force and in particular s.54 operated to allow a full year's depreciation, even where the item of plant was purchased on the last day of the year of income. There was no apportionment as to time. This it was held followed at least where the prime cost method was used from the language of ss.55 and 56 which provided relevantly:
taxpayer and used by him during that year for the
purpose of producing assessable income."
"55(1) In the first calculation of the32. It may be observed that s.56(1A) was introduced by Act No 149 of 1979 to require apportionment so that the result found to follow in Cook's case and contended for in the present case no longer follows. The Commissioner did not suggest that Cook's case was wrongly decided.
depreciation to be allowed in respect of any unit
of property, an estimate shall be made by the
Commissioner of the effective life of the unit
assuming that it is maintained in reasonably good
order and condition, and the annual depreciation
per centum shall be fixed accordingly."
"56(1) Subject to this section, the depreciation
allowable under this Act in respect of a unit of
property in relation to a year of income is - ...
(b) at the option of the taxpayer, to be exercised
in accordance with section 56A, the percentage
fixed by or under section 55, or under the
previous Act, of the cost of that unit."
33. Where a taxpayer disposes of depreciated property and that property is
lost or destroyed and the amount that the Act defines as the "consideration
payable in respect of the disposal, loss or destruction" is greater or less
than the written down value
of the plant an amount will be included in
assessable income as a balancing charge or an allowable deduction will be
allowable as
the case may be under s.59(2) and (1) respectively. Section 59(3)
as in force at the relevant time defined the consideration receivable
in
respect of the disposal, loss or destruction as follows:
"...the consideration receivable in respect of the34. Section 59 was, it was held in Rose v. Federal Commissioner of Taxation [1951] HCA 68; (1951) 84 CLR 118, inapplicable to a case where a taxpayer instead of disposing of the item of plant disposed of an interest in it by making his sons equal partners with himself in his business and the assets thereof. The legislature reacted by enacting s.59AA which section provided in the year of income here involved relevantly as follows:
disposal, loss or destruction means -
(a) in the case of a sale of the property - the
sale price less the expenses of the sale of
the property;
(b) in the case of loss or destruction of the
property - the amount or value received or
receivable under a policy of insurance or
otherwise in respect of the loss or
destruction;
(c) in the case where the property is sold with
other assets and no separate value is
allocated to the property - the amount
determined by the Commissioner;
(d) in the case where property is disposed of
otherwise than by sale - the value, if any, of
the property at the date of disposal."
"59AA(1) Subject to this section, where, for any35. In addition to the hoped for advantage of a full year's deduction for depreciation in respect of the two days of ownership of the helicopters which was, in the hands of the partnership a modest claim of $110,000 there was, by force of s.59AA when read together with s.59 a much larger deduction calculated as follows:
reason, including -
(a) the formation or dissolution of a partnership;
or
(b) a variation in the constitution of a
partnership, or in the interests of the
partners,
a change has occurred in the ownership of, or in
the interests of persons in, property in respect of
which depreciation has been allowed or is allowable
under this Act or the previous Act, and the person,
or one or more of the persons, who owned the
property before the change has or have an interest
in the property after the change, the provisions of
this Act relating to depreciation apply as if the
person or persons who owned the property before the
change had, on the day on which the change
occurred, disposed of the whole of the property to
the person, or all the persons, by whom the
property is owned after the change for a
consideration equal to the amount specified in the
agreement in consequence of which the change
occurred as the value of the property for the
purposes of that agreement, or, if there is no such
agreement or no amount is so specified, an amount
determined by the Commissioner."
Purchase Price $880,000The Proceedings Below
less depreciation claimed $110,000
$770,000
Consideration determined
under s.59AA $8,000
Claimed deduction $762,000
36. The appellant's share of the net partnership loss returned in the Chop Hire Partnership was $22,177. It was this loss said to arise under s.92 of the Act which was disallowed by the Commissioner whose decision was confirmed by the No 3 Board of Review comprising Mr Hogan, Dr Gerber and Mr Beck. The Board was of the view that s.260 of the Act had no application to disallow the deductions claimed in the partnership return relying upon the decision of the High Court in Mullens v. Federal Commissioner of Taxation [1976] HCA 47; (1975-6) 135 CLR 290; Slutzkin v. Federal Commissioner of Taxation [1977] HCA 9; (1977) 140 CLR 314; and Cridland v. Federal Commissioner of Taxation [1977] HCA 61; (1977) 140 CLR 330. Further the Board held that the deductions were, but for the so called doctrine of fiscal nullity, available to the appellant. However it held, based on the well known chain of authority in the House of Lords commencing with W T Ramsay Ltd v. Inland Revenue Commissioners [1981] UKHL 1; (1982) AC 300 and proceeding to Furniss v. Dawson [1983] UKHL 4; (1984) AC 474 that the preordained transactions had no fiscal effect.
37. The appeal to the Supreme Court followed upon the decision of the High Court in John v. Federal Commissioner of Taxation [1989] HCA 5; (1989) 89 ATC 4101 where it was definitively held that the principle of fiscal nullity had no application in Australia to the Income Tax Assessment Act thereby confirming what this Court had previously decided in Oakey Abattoir Pty Ltd v. Federal Commissioner of Taxation (1984) 84 ATC 4718. Accordingly, before that Court the Commissioner argued, inter alia, that the transactions were a sham, or alternatively that no deduction for depreciation was allowed or allowable in calculating the net partnership loss of the partnership under s.92 with the consequence that s.59AA had no application or alternatively that the arrangements suggested to give rise to the deductions were void as against the Commissioner under s.260.
38. Murphy J was, as I have already indicated, of the opinion that there was no sham and a submission to this effect was not made before us. Further his Honour could see no reason why, but for s.260, the deductions should be disallowed. His Honour however applied s.260 indicating that he felt bound so to do having regard to the decision of the full Court of this Court in Donebus v. Federal Commissioner of Taxation (1988) 88 ATC 4582. However his Honour added some criticism of Donebus expressing the view that what was there said as to the ratio of Federal Commissioner of Taxation v. Gulland [1985] HCA 83; (1985) 160 CLR 55 was too widely expressed.
39. There were a number of technical arguments additionally advanced before
his Honour as to the validity of certain steps in the
scheme that his Honour
found adversely to the respondent and these arguments were not pursued before
us. Hence in this Court there
were only two issues, namely:
(a) Whether in calculating the net loss of the40. It is convenient to consider these issues in this logical order, having regard to the prerequisite to the operation of s.260, namely, that the arrangement entered into by the appellant had the effect of altering the incidence of tax or avoiding the appellant's liability to tax within the meaning given by these words in paragraphs (a) and (c) of s.260.
applicant under s.92 of the Act depreciation was
allowable to the partnership. Any suggestion that
depreciation had been allowed, as was suggested by
Murphy J, was disavowed.
(b) If so, whether s.260 operated to permit the
Commissioner to treat the steps taken by the
appellant, or some of them, as void.
41. Having regard to the language of s.54 of the Act depreciation of an item of plant or an article of a like kind is only available as a deduction if the item was used in the year of income or held ready for use for the purpose of gaining or producing assessable income.
42. Where the words "the purpose" are used they may, depending upon the
context, mean "the dominant purpose" or "the sole purpose".
Thus in the
context of s.26(a) of the Act, now repealed, which included in assessable
income the profit arising inter alia from the sale of property acquired "for
the purpose"
of profit making by sale, it was held that the words "the
purpose" meant dominant rather than sole purpose: Pascoe v. Federal
Commissioner
of Taxation (1956) 11 ATD 108 and cf. Premier Automatic Ticket
Issuers Ltd v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR 268 at 298. In
the context of s.54, when read on its own, the words "the purpose" mean the
sole purpose rather than the predominant
purpose. So much was held by
McTiernan J in Federal Commissioner of Taxation v. Anderson (1956) 11 ATD 115
when his Honour said at p 118:
"Only property which is used solely for business is43. Where however property is used for a business purpose as well as a non-business purpose s.61 alleviates the hardship that such a construction of s.54 suggests, by providing that only such part of the deduction otherwise allowable under s.54 or s.59 in respect of the item of property, as in the opinion of the Commissioner is proper, is an allowable deduction. The way in which s.61 operates was described by McTiernan J in Anderson as follows (p 118):
within the total operation of either s.54 or s.59."
"In the case of a unit of property, used only44. While at first sight what was said by Mason J, as the present Chief Justice then was, in Federal Commissioner of Taxation v. Faichney (1972) 72 ATC 4245, 4250, 3 ATR 435, 440 might appear inconsistent with Anderson's case, what his Honour there said was not confined to s.54 but sought to explain the combined effect of s.54 and s.61. In Faichney Mason J considered the question of the allowance of depreciation on a desk, curtains and the like used by a lecturer in his home for work purposes. The Commissioner had argued that for s.54(1) to apply the use must be a significant use. His Honour said:
partly for business purposes and therefore within
s.61 and outside both s.54 and s.59, the first step
in the exercise of the discretion under s.61, is
the calculation of depreciation upon the hypothesis
that contrary to the fact the unit was used wholly
for business purposes and is within s.54 and
consequently s.59 ... The figure produced by a
calculation made on that basis is intended by s.61
to be the standard by which the discretion is to be
exercised.
The discretion is to allow such part as is proper
of the deduction which would have been allowed if
the property had been used only for producing
assessable income. ... the deduction is
discretionary. It is a statutory discretion to be
exercised in accordance with the Act, reasonably
and upon considerations that are relevant to the
purposes of the Act."
"It is necessary to bear in mind that sec.6145. It follows, having regard to the wording of s.59 of the Act, that for the appellant to succeed in showing that depreciation was allowable under the Act he must show that there was a use by the partnership of the helicopters for the purpose of producing assessable income. If he succeeds in showing such a use and further in showing that there was no other use in the time of ownership of the helicopters by the partnership, he succeeds (except for s.260). If he fails in showing any use at all of the helicopters no depreciation at all will be allowable and none having been allowed by the Commissioner the claim under s.59 fails in limine. If the appellant merely succeeds in showing that there was a use for the purpose of producing assessable income but that that use was not the sole use, the matter must be sent back to the Commissioner to exercise his discretion under s.61 in accordance with law, although it is perhaps faintly arguable that the reasons given by the Commissioner for disallowing the objection contained in the Regulation 35(1) statement may suggest that the Commissioner had considered the possibility of exercise of discretion under s.61 and had exercised it in such a way that no part of the deduction was attributable to the use of the helicopters to gain assessable income.
contemplates that use of an article for the purpose
of producing assessable income may constitute part
only of its use and that in this event the taxpayer
shall receive only such part of the deduction
otherwise allowable as in the opinion of the
Commissioner is proper. There is therefore no room
for implying that the use of which sec.54(1) speaks
is the predominant use. It is enough if the
taxpayer can show that there is a use for the
specified purpose, in which event it is for the
Commissioner under sec.61 to decide what proportion
that use bears to the total use."
46. For the Commissioner it was argued that in reality the only use of the helicopters was for the purpose of obtaining a deduction and that any use of the helicopters to produce assessable income was a de minimus use. For the appellant it was submitted that the Commissioner's submission confused purpose and motive; that the parties clearly had the subjective motivation of "using" the helicopters to gain a tax deduction but that this fact did not require or permit the conclusion that the partnership had not used the helicopters to produce assessable income. Counsel pointed to the $4,000 as being the assessable income produced by the use of the helicopters.
47. In Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation
[1980] FCA 150; (1980) 80 ATC 4542 (11 ATR 276) Brennan J in the context of s.51(1) of the Act
discussed the concepts of motive, object and purpose. His Honour said at p
4544 (11 ATR 279):
"Motive means ... the reason why a taxpayer decides48. In contrast to s.51(1) however the purpose of which s.54 speaks is the purpose of the use to which the plant or other article is put in the year of income. In so providing, s.54 produces a quite different regime to that applicable in s.51(1). It is clear that in the latter section purpose is not a criterion of deductibility, although as the High Court pointed out in John v. Commissioner of Taxation [1989] HCA 5; (1989) 63 ALJR 166, at 169 it will not necessarily be irrelevant. Given the different concepts invoked by s.54 as compared to s.51(1) it is unnecessary to consider whether what was said in cases such as Anderson v. Federal Commissioner of Taxation (1989) 89 ATC 4982 at 4900-4991 per Wilcox J; Federal Commissioner of Taxation v. Gwynvill Properties Pty Ltd (1986) 13 FCR 138 at 157 per Jackson J; Federal Commissioner of Taxation v. Just Jeans Pty Ltd [1987] FCA 266; (1987) 18 ATR 775 (87 ATC 4373) per Woodward, Neaves and Wilcox JJ at 788 can fairly be reconciled with the decision of the High Court in John's case.
to incur the expenditure. Purpose may be either a
subjective purpose - the taxpayer's purpose - where
it means the object which the taxpayer intends to
achieve by incurring the expenditure; or it may be
an objective purpose, meaning the object which the
incurring of the expenditure is apt to achieve.
Both motive and subjective purpose are states of
mind and they are to be distinguished from
objective purpose, which is an attribute of a
transaction. An objective purpose is attributed to
a transaction by reference to all the known
circumstances; whereas subjective purpose and
motive, being states of mind, are susceptible of
proof not by inference alone but also by direct
evidence, for a state of mind may be proved by the
testimony of him whose state of mind is relevant to
a fact in issue."
49. Section 54 is not concerned with motive. If an item of plant be used by a partnership for the purpose of producing assessable income it will matter not for the purpose of s.54 that the partners who so used it joined together, motivated to obtain a tax deduction. As such, subjective purpose will not be irrelevant to the issue under s.54. In the ordinary case, the purpose which s.54 requires will be determined by reference to the use to which the item of plant is put. If the item is, for example, a tractor employed in a farming business, the requisite purpose will be ascertained from the purpose of the business itself. Where the item is put out for hire, the circumstances of the hire and the terms of hire will determine whether the purpose of the hire being the only use of the goods will be for the production of assessable income. But an item may properly be said to be used for the purpose of producing assessable income if it is held by a taxpayer carrying on a business of hiring such articles waiting to be taken on hire by a prospective customer. There the nature of the activity of the taxpayer taken with the subjective purpose of the taxpayer that that business activity will continue provides evidence of the purpose of which the section speaks.
50. It is of course clear that a taxpayer uses an item which is put out to hire notwithstanding that some other person may also have use and possession of that item. Cf. Tourapark Pty Ltd v. Federal Commissioner of Taxation [1982] HCA 18; (1982) 149 CLR 176 and Hamilton Island Enterprises Pty Ltd v. Federal Commissioner of Taxation (1982) 82 ATC 4302 (13 ATR 220), a case itself dealing with helicopters.
51. It was a necessary ingredient of the scheme which the parties entered into and carried out that Vowell pay the partnership $4,000 and it is now conceded that the hiring arrangement was not a sham. Hence it must be concluded that the sum of $4,000 was paid for the use of the helicopters for two days in accordance with the arrangement. This being so it could hardly be said that the obtaining of the $4,000 was merely incidental to some other activity or should be ignored as de minimus as submitted by the Commissioner. Hence if the sum of $4,000 was in truth assessable income it must follow that there was a use at the least, being a use having as its purpose the gaining of assessable income.
52. The Commissioner rather conceded that the $4,000 was assessable income. I am not convinced that that concession was rightly made. While on its face the payment of a sum of money for the use of items of equipment would be assessable income the circumstances that the equipment was the subject of a preordained agreement involving purchase, hiring for a period of two days for $4,000 and disposal to a new partnership subject to a charge may well in the circumstances of the present case permit the conclusion that the amount of $4,000 was a capital rather than an income receipt. There was no continuous activity of leasing out helicopters of which a two day hiring was but an incident nor was the hiring arrangement really capable of being seen as an end in itself of the partnership. It was but a step in the agreed arrangement of purchase, hire and disposal of the helicopters that was to occur over the space of six days. To treat the hiring fee as income involves seeing the hiring activity as an end in itself divorced from the other element of the scheme.
53. However, once the concession is made that the $4,000 was assessable income and the hiring activity is recognised as essential to the arrangements entered into, the conclusion must be inevitable that the helicopters were used by the partnership for the purpose of gaining or producing assessable income.
54. While I think that it is somewhat simplistic to say on the facts of the present case that the use of the helicopters to hire them out was the sole use to which they were put, there is much to be said for the view that there was a use made of them by the partnership in disposing of the helicopters so as to complete the preordained arrangement. Once however, there is some income producing use, the discretion under s.61 only operates to apportion the depreciation between the income producing use (deductible) and the non-income producing use (non-deductible). Section 61 does not operate in my view to permit the Commissioner to disallow the whole of the depreciation otherwise allowable under s.54. Hence for the purpose of s.59 there would be some depreciation available. To determine the extent of that depreciation it would be necessary, subject to the operation of s.260, to remit the assessment to the Commissioner to exercise his discretion under s.61. So far as the combined effect of s.59 and s.59AA is concerned however, the quantum of depreciation is irrelevant. The deduction will be available to the partnership, subject to s.260, so long as some depreciation is allowable, even if only $1.
55. I turn now to consider the effect of s.260.
The Operation of Section 260
56. Section 260 at the relevant time was in the following terms:
"Every contract, agreement, or arrangement made or57. In Davis v. Federal Commissioner of Taxation (1989) 89 ATC 4377 at 4400-4402 I set out the general principles which have been established for the operation of s.260 and I do not now repeat them. As I there pointed out the difficulties of construction of s.260 derive from the need to place the section in a proper perspective vis-a-vis the other sections of the Act. It is a difficulty made no easier by the rather vague language with which the various paragraphs of the section are expressed.
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;
(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."
58. There is no difficulty on the facts in finding that there is an arrangement to which the taxpayer is a party. That arrangement consisted of the entry by him into a partnership and the various steps thereafter taken culminating in the disposal by him of an interest in the helicopters thus bringing into operation s.59AA and s.59 and through s.92 a deduction for the net partnership loss.
59. If the proper test to adopt be that enunciated by Lord Denning in Newton
v. Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) 98 CLR 1 there is no doubt that the
present case falls within the section. It will be recalled that Lord Denning
said at p 8:
"In order to bring the arrangement within the60. The appellant, however, calls in aid the so called "choice" principle as expounded in cases commencing with Keighery Pty Ltd v. Federal Commissioner of Taxation [1957] HCA 2; (1956-7) 100 CLR 66, and proceeding through Mullens v. Federal Commissioner of Taxation [1976] HCA 47; (1975-6) 135 CLR 290; Cridland v. Federal Commissioner of Taxation [1977] HCA 61; (1977) 140 CLR 330 and reaffirmed in Gulland v. Federal Commissioner of Taxation [1985] HCA 83; (1985) 160 CLR 55 and so it was said by the appellant in John v. Federal Commissioner of Taxation [1989] HCA 5; (1989) 63 ALJR 166. This principle, where it operates, is, it was submitted, an exception to the Lord Denning "predication" test set out above.
section you must be able to predicate - by looking
at the overt acts by which it 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."
61. The principle is well illustrated in the first of these cases, Keighery. In that case the appellant company acquired shares in Aquila Steel Company Proprietary Limited from its two shareholders, Mr and Mrs Keighery and allotted redeemable preference shares to twenty persons, which carried rights to vote but which could be redeemed at the option of the company except in a period shortly before and shortly after the end of the year of income. The allotment enabled the appellant company to satisfy the test of a "public company" in the year of income. After the allotment was completed the company received a dividend from Aquila Steel Company Proprietary Limited. Since the appellant was a public company it was not required to declare a dividend to its shareholders or pay the then "additional" Division 7 tax as would have been the case had it been a private company.
62. In holding s.260 inapplicable the majority judgment of Dixon CJ, Kitto
and Taylor JJ pointed out that the allotment of the shares had no commercial
purpose. Their Honours continued at pp 92-3:
"Whatever difficulties there may be in interpreting63. It was held that the policy of Division 7 of the Act was to present a choice to a company between incurring the liability to additional tax and taking measures to enlarge the number of members capable of controlling its affairs. Thus: "To chose the latter course cannot be to defeat, evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act. For that simple reason the attempt must fail and the Commissioner cannot rely upon s.260 in order to treat as void any more extensive set of facts, for an attempt to do so could not stop short of including the incorporation of the appellant company itself." (p 94) (emphasis added)
s.260, one thing at least is clear: the section
intends only to protect the general provisions of
the Act from frustration, and not to deny to
taxpayers any right of choice between alternatives
which the Act itself lays open to them. It is
therefore important to consider whether the result
of treating the section as applying in a case such
as the present would be to render ineffectual an
attempt to defeat etc. a liability imposed by the
Act or to render ineffectual an attempt to give a
company an advantage which the Act intended that it
might be given."
64. It is important to understand what the majority of the High Court actually said in Keighery. First it was necessary to construe the Act to see whether the policy of the provisions of the Act was such as to confer upon the taxpayer a choice in the relevant sense. The step necessary to that choice (in Keighery it was the allotment of shares) could not then be struck down. However, in Keighery, the Court could see a wider transaction which was entered into, namely the incorporation of the company and its interposition between the Keigherys and Aquila Steel Proprietary Limited, but to strike down that broader transaction would not, as the words emphasised indicate, be useful to the Commissioner for he would have been left without a taxpayer to tax.
65. In Mullens the choice which the Act conferred was the subscription for shares in a petroleum exploration company which subscription produced a deduction under s.77A. The scheme to which the taxpayer was a party involved his becoming the equitable owner of shares in a petroleum exploration company by the subscription for shares in the company and the sale, pursuant to an option agreement given prior to the subscription of the shares. It was held that s.260 was not applicable.
66. It can readily be accepted that s.260 could not avoid the subscription for the shares, as such, for that was the choice which the Act conferred. The only other steps in the scheme were the grant of the option to C and the sale back to C but those steps even if capable of being avoided under s.260 would not have operated to avoid the deduction.
67. In upholding the taxpayer's appeal Barwick CJ said at p 302:
"As I have already pointed out, there will be no68. His Honour thereafter referred to the earlier decision of the High Court in Jaques v. Federal Commissioner of Taxation [1923] HCA 70; (1924) 34 CLR 328 as an example of a case to which s.260 would apply because in that case there was an antecedent transaction or situation which, when the s.260 arrangement was struck down, disclosed a non entitlement to a deduction. I shall return to that case subsequently. Stephen J who, together with Barwick CJ, formed the majority of the Court also relied upon the choice doctrine as his Honour said at p 318-9:
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."
"if s.260 is to be applied its plain effect will be69. The last of the earlier line of cases was Cridland where the only arrangement entered into by the taxpayer, a university student, was to apply for a unit of entitlement in two unit trusts carrying on a primary production business. The Act in s.157(3) permitted a beneficiary in such a trust to average his income to determine the tax payable. It was held that s.157(3) was a section which allowed to a taxpayer a choice and accordingly that the arrangement could not be struck down by s.260. The judgment of the court comprising Barwick CJ, Stephen, Mason, Jacobs and Aickin JJ was delivered by Mason J, as his Honour then was. That judgment at p 339 referred to Keighery and Mullens and pointed out that s.260 was not activated merely because a taxpayer entered into a transaction deliberately with a view to gaining an advantage for which the Act makes specific provision. It emphasised that Lord Denning's predication test could not be seen as the expression of a universal or exclusive criterion of the operation of s.260.
to render ineffectual the attempt to give the
Mullens group advantages which the Act does, in my
view, manifestly intend them to have."
70. The choice doctrine was discussed and perhaps narrowed in Gulland. Certainly all members of the High Court who formed the majority in Gulland were of the view that the Act did not permit a taxpayer to choose to be employed by the trustee of a trust in such a way as to cause his personal exertion income as a doctor to be ultimately split with his family as beneficiaries of a trust.
71. There has been some discussion as to whether the judgments of Gibbs CJ and Brennan J on the one hand and Dawson J on the other are capable of reconciliation and, having regard to the assent of Wilson J to the judgment of both Gibbs CJ and Dawson J, which of the judgments should be seen as the majority judgment. It is not necessary in this case to attempt to answer these questions although it may well be, as I suggested in Davis v. Federal Commissioner of Taxation (1989) 89 ATC 4377, that the difference between the judgments is but a matter of emphasis.
72. Gibbs CJ pointed out at pp 66-7 that the cases such as Keighery, Mullens
and Cridland applied the principle of construction expressed
in the maxim
generalia specialibus non derogant. The predication test as enunciated in
Newton was, according to his Honour to be
therefore read subject to the
qualification that an arrangement not capable of explanation by reference to
ordinary dealing and which
on its facts is obviously designed to reduce tax
may:
"nevertheless do no more than take advantage of an73. Brennan J likewise at pp 77-9 recognised that a limitation on the application of s.260 was justified by the rule of construction "generalia specialibus non derogant". His Honour recognised that a taxpayer might choose to organise his affairs in such a way as to take advantage of "tax benefits" provided by the "specific and particular" provisions of the Act and that this "choice principle" operates "only to the extent necessary to give effect to a 'specific provision' of the Act". (emphasis added)
opportunity to reduce tax which the Act itself
provides".
74. Dawson J recognised early in his Honour's judgment at p 106 that there
was a problem in the "reconciliation of s.260 with those
other provision of
the Act which provide the taxpayer with a choice." As his Honour said at p
107:
"It is a matter of construing the Act as a whole to75. His Honour then discussed the predication test and the difficulty of applying it in a case such as Keighery and continued at p 110:
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."
"Section 260 is not explicitly directed at76. Dawson J referred at p 109 to Jaques' case as an example of a case to which s.260 applied. It is therefore useful to examine that case, since it might be thought irreconcilable with the choice doctrine. In Jaques three companies had reached a concluded agreement for the reconstruction of one of them and its subsequent liquidation. Under that agreement the company to be liquidated would transfer assets to the other companies in exchange for shares in those companies. No tax advantage would have flowed from this arrangement. However the parties decided to substitute a new arrangement whereby the assets of the company in liquidation were to be transferred on a sale and shares in one of the companies which was a mining company were to be subscribed for by the taxpayer who obtained a deduction for calls on the shares. Cheques were exchanged to effect on the one hand payment of the price and on the other payment of the calls. It will be seen that it was an important ingredient of the scheme that the taxpayer obtain a deduction, being a deduction which as Mullens' case later showed clearly was a specific tax advantage which the Act conferred. Yet s.260 operated to strike down the arrangements and leave exposed the situation represented by the original arrangement to which no taxation advantage attached.
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 paragraphs (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 applies in a
particular case."
77. It will be observed that the scheme in Jaques' case involved considerably
more than the mere acquisition of and subscription
for shares. Describing it,
Isaacs J said (at p 360):
"...the combined arrangement entered into by the78. The Privy Council in Newton also referred to Jaques as an example of a case to which s.260 applied when at p 9 Lord Denning in delivering the reasons of the Board said:
three companies and the shareholders in the old
company - Mr Campbell acting in various and even
conflicting capacities as intermediary - was simply
to manufacture a situation to get the better of the
Income Tax Act. It in no way altered the income of
the taxpayer or changed its ownership. It was in
no true sense a business operation. But, by first
deliberately preparing the ground for the misuse of
legal expedients recognized as equivalents for
payment, and then by such misuse, a factitious
liability to pay a call and a factitious payment of
the call ensued, but throughout, from conception to
completion, except for a similar object of escaping
stamp duty, with the express and sole purpose of
lessening the statutory liability of the
taxpayers."
"But when one looks at the way the transactions79. The Full Court of this Court in Oakey Abattoir v. Federal Commissioner of Taxation (1984) 84 ATC 4718 applied Jaques' case and s.260 to strike down an artificial scheme involving circular payments by cheque, the purpose of which was to avoid undistributed profits tax under Division 7 of the Act by deliberately seeking to fall within s.82R, which has the effect that interest disallowed as a deduction on convertible notes was to be taken into account in determining whether there was an undistributed amount under s.103 of the Act as a dividend paid by the company. This was so, notwithstanding an argument for the taxpayer that s.82R conferred upon the taxpayer a choice. The question posed by Fox, Fisher and Beaumont JJ at 4729 was as follows:
were effected in Jaques v. Federal Commissioner of
Taxation... - the way cheques were exchanged for
like amounts and so forth - there can be no doubt
at all that the purpose and effect of that way of
doing things was to avoid tax."
"The question here is whether, by embarking upon80. Their Honours then continued:
these complex transactions, the taxpayer has
thereby purported to avoid liability to tax within
the meaning of s.260(1)(c), accepting, as Mullens
and Cridland decided, that a desire to avoid tax is
not itself sufficient to render s.260 applicable."
"If there were no more to the case than the payment81. With respect, the same can be said of the present case.
of interest on the notes, we would be disposed to
agree with the appellant... But we think that the
present case should be viewed with the wider
perspective that the payment of interest was merely
one step in a circuitous series of transactions
which bore 'ex facie the stamp of tax avoidance'
(Gulland v. Federal Commissioner of Taxation 84 ATC
4587 per Bowen C.J.). To borrow the language of
Bowen C.J. in Gulland (supra) this taxpayer did not
merely, as in Cridland, 'create a situation by
entry into a transaction' to attract particular tax
consequences. Given its complexity, its
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." (emphasis added)
82. The High Court refused special leave to appeal against the decision in Oakey Abattoir, the Chief Justice remarking that: "the Court sees no reason to doubt the correctness of the actual conclusion reached on the facts of the case."
83. Closer to the facts of the present case is the decision of the Full Court of this Court in F & C Donebus Pty Ltd v. Federal Commissioner of Taxation (1988) 19 ATR 1521. That case concerned an artificial scheme whereby the taxpayer purchased a refrigerator worth about $30 for $100,000 from a shareholder, the purchase price being payable at the end of 32 years as a result of a loan made to the taxpayer. Shortly afterwards, the refrigerator, having been used by employees to store lunches and drinks, was sold for $100 and a deduction claimed under s.59. The majority of the Court, Wilcox and Pincus JJ, found s.260 applied to disallow the claimed deduction and Oakey Abattoir was relied upon. Wilcox J referred to the case as one involving an "abuse" of specific provisions of the Act and Pincus J expressed the view that the choice principle was inapplicable to the circumstances of the case.
84. Although Davies J would have referred the matter back to the Administrative Appeals Tribunal to find further facts going inter alia to the issue whether depreciation was allowable at all under s.54 of the Act on the facts of the case, his Honour expressed the view at p 1530 that there were circumstances where s.260 would operate to disallow a deduction. It is however clear from a reading of his Honour's judgment that he had serious reservations whether the facts of that case were sufficiently complex, circular or artificial as to fall within the Oakey Abattoir principle and exclude the choice doctrine.
85. It was accepted that we should follow the decision of this Court in Donebus unless we were persuaded that something had thereafter happened which would cast doubt on the correctness of that decision. Counsel for the appellant pointed to the decision of the Full High Court in John's case [1989] HCA 5; (1989) 63 ALJR 166 as casting doubt on Donebus. With respect to this submission I can see nothing in John's case that in any way is relevant to a reconsideration of the ratio in Donebus.
86. In John the taxpayer had been a partner in a partnership designed to trade in shares and take advantage of the deduction thought to accrue to a trader in shares under s.51(1) from purchasing shares, receiving a bonus share dividend on those shares payable out of a share premium reserve (and as such non-taxable) and selling the shares. (cf. Curran v. Federal Commissioner of Taxation [1974] HCA 46; (1974) 131 CLR 409).
87. The High Court held that the shares in question were trading stock of the business carried on by the partnership and that in those circumstances s.260 could have no application to deny to the taxpayer a deduction for the cost of the shares.
88. Although the joint judgment of the court comprising Mason CJ, Wilson, Dawson, Toohey and Gaudron JJ referred, in discussing s.260, to the inapplicability of the section to deny "specific taxation advantages" which are "expressly permitted" that comment did not form part of the ratio of the case. Rather the reason why s.260 could have no application was that to disregard the issue and sale of the bonus shares as submitted by the Commissioner would not have revealed the taxable situation for which the Commissioner contended. There would need to have been a hypothetical reconstruction. Further, to disregard the original purchase would not permit the exclusion of the assessable income derived from the sale of the shares, a course not permitted by s.260. Finally, the Court was of the view that s.260 could not operate to disallow a deduction under s.51(1) for trading stock when the income from that trading stock formed part of assessable income.
89. Nothing in the judgment suggested that the court treated s.51(1) as a "special provision" of the Act within the meaning of the choice doctrine.
90. It is clear that the scheme in the present case is a great deal more complicated than that in Donebus. It would be a considerable oversimplification to see the present case as involving the mere exercise by the taxpayer and the partnership of which he was a member of a choice granted by the Act. There is no doubt that the insertion of a figure in the agreement contemplated by s.59AA is a choice which the Act confers so that a taxpayer, who in the circumstances to which s.59AA applies disposes of an interest in plant may exercise that choice without s.260 applying to him. But it does not follow that the whole arrangement to which the appellant was a party or to which he committed himself should be seen as the mere exercise of the choice under s.59AA. The arrangement went wider than that. When one considers the arrangement as a whole, commencing with the entry into partnership and the purchase of the helicopters and proceeding through the reconstruction of the partnership and sales of interests in the helicopters until the helicopters are ultimately sold back to their original owner, the scheme stands exposed as an arrangement having on its face the purpose of avoiding the liability of the appellant and those who entered into partnership with him to taxation in the sense of the liability in the relevant year to pay tax upon the taxable income defined by s.17. As such it is a case to which s.260 applies notwithstanding that an ingredient of the scheme involves the exercise of a choice (under s.59AA) which the Act confers upon a taxpayer.
91. Accordingly the appeals should be dismissed with costs.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/FCA/1990/49.html