Re Deputy Commissioner of Taxation of the Commonwealth of Australia v John W Blackman [1992] FCA 21; (1992) Atc 4061, (1992) 22 Atr 895 (3 February 1992)

FEDERAL COURT OF AUSTRALIA

Re: DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: JOHN W. BLACKMAN
No. V G33 of 1991
FED No. 13

[1992] FCA 21; (1992) ATC 4061, (1992) 22 ATR 895

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson J.(1)

HEARING

MELBOURNE
3:2:1992

Counsel for the Applicant : Mr B.J. Shaw QC and Mr G.J. Davies

Solicitors for the Applicant : Australian Government Solicitor

Counsel for the Respondent : Mr P.K. Searle

Solicitors for the Respondent: Mills Oakley McKay

ORDER

The appeal be allowed.

The decision of the Administrative Appeals Tribunal made on 18 January 1991 in proceeding numbered VT88/600 be set aside.

The case be remitted to the Administrative Appeals Tribunal to be determined according to law.

It be within the discretion of the said Tribunal whether to receive further evidence.

The applicant's costs of the appeal be paid by the respondent.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Appeal from a decision of the Administrative Appeals Tribunal in review of a decision by the applicant on an objection against an income tax assessment.

2. The respondent has been for more than 20 years what the learned Deputy President who constituted the Administrative Appeals Tribunal aptly described as a radio and television personality. In 1976 the respondent and his wife caused to be incorporated a company, John Blackman Pty. Ltd., of which they have at all material times been the only shareholders and the only directors. To this company $125,000 was paid in May 1986, by a company trading as Radio 3AK. John Blackman Pty. Ltd. had since 1980 been the trustee of a trust called "The Blackman Family Trust", of which the respondent and members of his family were beneficiaries, and had also been performing, since a time shortly after its incorporation, what the Tribunal found to have been an agreement with the respondent that it should "manage and control" the respondent's services as a radio and television performer. In performance of that agreement John Blackman Pty. Ltd. had contracted with 3AW Broadcasting Co. Pty. Ltd. to provide to the latter company the respondent's services as a radio performer, and until 30 April 1986 the respondent did perform those services. The Tribunal found that in May 1986 those two companies and the respondent made an agreement by which 3AW Broadcasting Pty. Ltd. released John Blackman Pty. Ltd. and the respondent from all their obligations under the contract between the two companies for the provision of the respondent's services, and which provided for payment by John Blackman Pty. Ltd. to 3AW Broadcasting Co. Pty. Ltd. of certain sums of money. In April 1986 a conversation between the respondent and one White, a representative of Radio 3AK, had constituted an agreement that the respondent's services as a radio broadcaster would be withdrawn from 3AW Broadcasting Co. Pty. Ltd. and provided to Radio 3AK. That agreement was subsequently converted into a more detailed agreement between Radio 3AK and John Blackman Pty. Ltd., constituted by conversations between White and one Disney, who represented John Blackman Pty. Ltd. in the negotiation of the agreement. White died before the hearing of the Tribunal's review, and Disney was not called to give evidence, although he was available. The payment of the sum of $125,000 by Radio 3AK to John Blackman Pty. Ltd. was made in performance of a term of that more detailed agreement. In June or July 1986 the respondent commenced to provide his services to Radio 3AK.

3. The Commissioner in assessment included the $125,000 in the respondent's assessable income of the year of income ended 30 June 1986. The Tribunal concluded, contrary to submissions by counsel for the Commissioner, that John Blackman Pty. Ltd. did not receive the $125,000 "as agent for or representative of the (respondent) or otherwise on his behalf", but as "the principal in the agreement with (Radio 3AK) for the provision of (the respondent's) services". The reasons for the decision of the Tribunal then proceed thus:

"20. The money paid to (John Blackman Pty. Ltd.) cannot, therefore be
included in (the respondent's) assessable income unless either
section 260 or Part IVA of the Act is applicable. Section 260 applies
only to contracts, agreements and arrangements made or entered into
before 28 May 1981 (see section 260(2)); Part IVA applies only in
respect of schemes entered into or carried out after 27 May 1981 (see
section 177D(1)).
21. So far as section 260 is concerned Mr Shaw submitted that in May
1986 there was an arrangement which had been entered into before 28 May
1981 which had the purpose or effect of altering the incidence of income
tax and of relieving the applicant of his liability to pay income tax
and which was, therefore, absolutely void as against the Commissioner.
That arrangement, he submitted, came about as the result of the
incorporation of (John Blackman Pty. Ltd.) the establishment of (the
Blackman Family Trust) and the agreement between (the respondent) and
(John Blackman Pty. Ltd.) that (John Blackman Pty. Ltd.) should control
and manage the provision of (the respondent's) services as a radio or
television performer.
22. The (respondent) gave evidence that he was advised by his
accountant to set up (John Blackman Pty. Ltd.) and to establish (the
Blackman Family Trust). He said that he had intended to enter into
contracts elsewhere than in radio and television and had been advised
that he should take steps to obtain limited liability. It was for that
purpose that (John Blackman Pty. Ltd.) had been incorporated; it had not
been incorporated for the purpose of gaining relief from taxation. He
admitted that from the time (John Blackman Pty. Ltd.) was incorporated
contracts for the provision of his services had been made by (John
Blackman Pty. Ltd.). So far as (the Blackman Family Trust) was
concerned, he said that it was established because of the precarious
nature of a career as a radio and television performer; at times the
income from it might be considerable but at other times it might be very
small. That evidence accords with what is publicly known of the effect
of the vagaries and inconstancy of public taste on the earning capacity
of such performers. The (respondent) said the family trust was
established so that in the good years there could be distribution to
members of his family, which would set them up to withstand the bad

years.

23. The income tax returns of (the Blackman Family Trust) for the years
before 1986 were not tendered in evidence but in the return for 1986 the
income was brought to account under two different heads, on the one hand
as `personal exertion income' of the (respondent) and on the other as
`trust income'. The resolution passed by the directors of (John
Blackman Pty. Ltd.) for the distribution of the income of the trust
provided that all the income deemed to be personal exertion income
attributed to the (respondent) was to be distributed to him. The
(respondent) gave evidence that that resolution was prepared by the
accountant of (John Blackman Pty. Ltd.); the directors passed it without
further consideration. If the amount which is the subject of the
dispute in these proceedings is deducted from the balance of the
distributed income, the remaining amount distributed to (the
respondent's wife and child) was less than $10,000 in total. The
(respondent's) accountants considered that the payment at issue was a
capital receipt and that the provisions of Part IIIA of the Act (which
make capital gains subject to taxation in certain circumstances) were
not applicable to it.
24. If the arrangement referred to by Mr Shaw had been entered into
for the purpose of diverting the (respondent's) income from his personal
exertions to members of his family, it might have been expected that the
accounts would not have been presented in the return in the manner in
which they were and that a resolution would have been passed to
distribute more of the income of the trust to (his wife and child) than
it was resolved to distribute. I regard the fact that the accounts were
presented as they were and that the distribution to (the wife and child)
did not include any amount which was unarguably attributable to income
from the provision of the (respondent's) personal service as cogent
evidence that the arrangements referred to by Mr Shaw were in 1986 and
by inference in previous years a proper and sensible means of ordering
affairs and were not entered into for any of the purposes referred to in
section 260 of the Act. Consequently, I find that section 260 does not
render those arrangements void as against the respondent."

4. The principal ground of appeal is concerned with the second of the three sentences in paragraph 24 of the Tribunal's reasons. Mr Shaw did not question, for the purposes of his submissions, that the form of the 1986 accounts (described in paragraph 23), and the exclusion of "any amount which was unarguably attributable to income from the provision of the (respondent's) personal service" from what was in respect of that year distributed to the respondent's wife and daughter, might constitute "evidence that the arrangements" made before 28 May 1981 and "referred to by Mr Shaw were in 1986 .... a proper and sensible means of ordering affairs and were not entered into for any of the purposes referred to in section 260 of the Act". Mr Shaw directed his attack upon the phrase "and by inference in previous years". The form of the 1986 accounts and the specified characteristics of the distributions in respect of that year could support an inference that the arrangements made before 28 May 1981 were in previous years of the description assigned to them (that is, "that the arrangements ... were ... a proper and sensible means of ordering affairs and were not entered into for any of the purposes referred to in section 260") only if that form and those characteristics were first inferred to have been the form of the accounts and the characteristics of the distributions respectively in respect of each of those previous years, in Mr Shaw's submission. Reference to that prior inference was what was intended by the phrase "and by inference" in the sentence, according to Mr Shaw. There had been, it was common ground, no evidence of either the form of the accounts or the characteristics of the distributions in respect of any previous year. But there had been what was described as a "concession" on that subject. The transcript of the hearing before the Tribunal records this during cross-examination of the respondent:

"Now, if I could just ask you some other questions, Mr Blackman. You
have told us in the course of what you were saying this morning, that
you were, in fact, working as an announcer with - either with radio or
TV - - - ?---That is true.
- - - since about 1969, and that it followed from the dates which you
later mentioned, that in those - the early part of the period, that is
to say the 70s was a period before either your family company was
established or the family trust was established?---That is right, yes.
And, your services, I assume, were contracted for so far as you were
concerned, in your own name at that time?---Prior to 1976?
Yes?---Yes, that is correct, sir.
And, then you were advised I suppose, or thought yourself that you might
set up a family company and a - later on a family trust, is that

right?---

I was advised to do so, sir, yes.
And, from what point of time were you contracting in respect of your
services in the name of the company rather in your own personal name?---
Well, as far as I can recollect, sir, from the date of incorporation of
my company.
Right. And, the purpose of that, was it not was in order, so it was
hoped, to bring some relief from the incidence of taxation, so far as
you were concerned?---No, sir.
No? What, what was it for?---It was formed essentially because my
company - I intended to form a company in order to contract with people
other than radio and television, but other aspects of the entertainment
business and I wanted to have - or was advised that I should have
limited liability and it was to protect my assets more than anything.
Well, the fact of the matter is, is not it that before the 1986 year - -

-

?---Yes.
- - - you did seek to divide the amounts which the company received in
respect of your services, amongst the various beneficiaries of the trust
and they were not all distributed to you in the same sort of way as they
were in 1986. That is right, is not it?
THE D.PRESIDENT: Sorry, before 1976 was it?
MR SHAW: No, before 1986, your Honour.
THE D.PRESIDENT: Before 1986?
MR SHAW: I am sorry. I will start it all again if I have muddled the
dates up - I probably have. What I was suggesting, Mr Blackman, was
this. That 1986 was the first year in which a distribution was made of
trust income in which income which was deemed to be your personal
exertion income was all distributed to you. That is right, is not it?---
I am afraid, sir, I do not recall any of that I - - -
MR SEARLE: That could be conceded by the applicant as I understand that
is the arrangement from the accountants so that can be conceded by

consent.

MR SHAW: I am happy with that, sir. I should just make clear what I
think has been agreed to so that it can be disagreed with in case I have
got it wrong. My understanding is that in 1986 there was a resolution -
in respect of the 1986 year, there was a resolution that you will recall
because it is already in evidence that worked on the basis that there
were certain distributions made to the other beneficiaries but there is
a proviso to the distribution resolution which has the effect that any
income which is deemed to be personal exertion income of Mr Blackman
goes to him, but in the years before that, the resolution was not in
that form and there had been a split up of the income, including his,
what might be regarded as income coming from his personal announcing
efforts, if one can call it that, amongst the beneficiaries of the
trust. That is what I understand.
MR SEARLE: That is accepted, sir, yes.
MR SHAW: I shall not pursue that."

There having been suggested no reason why the Tribunal should not have accepted as facts what was "conceded" and "accepted" by counsel for the respondent, the Tribunal erred in law in finding, by inference, facts contradictory of the facts accepted by counsel for the respondent, Mr Shaw submitted.

5. Mr Searle of counsel for the respondent denied that the Tribunal had made, and that the impugned sentence in paragraph 24 included a statement indicating that the Tribunal had made, a finding of either of the kinds suggested by Mr Shaw in contradiction of what had been "accepted" by himself. Mr Searle submitted that in paragraph 22 the Tribunal had specified evidence by the respondent which it accepted and that the impugned sentence in paragraph 24 had to be understood as referring not only to the form of the 1986 accounts and the characteristics of the 1986 distributions, but also to what the Tribunal had indicated in paragraph 22 that it accepted of the respondent's evidence.

6. It is in my opinion clear that the impugned sentence includes an assertion that events found by the Tribunal to have occurred in each of several years, one of which is 1986 and the others before 1986, influence the Tribunal to a conclusion that the arrangements made before 28 May 1981 were not entered into for any of the purposes referred to in section 260. The only events to which reference could have been intended, having regard to the context in which the sentence is placed and to its grammatical structure, are the form of the accounts in respect of each year and the trust distributions in respect of each year. No sense can in my opinion be given to the sentence as a whole unless it is understood as including an assertion that the form of the accounts and the characteristics of the distributions were in the other years as they were in 1986. Such an assertion contradicts the concession. No reason for doubting the correctness of the concession having been suggested, to find in contradiction of the facts conceded is to err in law. The finding appears to have been regarded by the Tribunal as important in its reasoning to the conclusion that section 260 did not operate in relation to the arrangement. I do not accept the submission that in paragraph 22 of its reasons the Tribunal stated findings of fact. That paragraph recites evidence and, in the penultimate sentence thereof, expresses a view which may suggest an inclination on the part of the Tribunal to accept the evidence recited in the immediately preceding sentence. That is all. What appears in the first two sentences of paragraph 24 of the reasons may fairly be said to justify an inference that the Tribunal accepted the evidence it has recited in paragraph 22. But those two sentences also indicate that the legally erroneous inference made a substantial contribution to the conclusion expressed in the last sentence of paragraph 24 as well as to the conclusion, if conclusion there was, that the evidence recited in paragraph 22 was to be accepted. The appeal must be allowed on this ground.

7. A process of reasoning in which the legally erroneous inference was significant led the Tribunal to a conclusion that there had been no scheme, within the meaning of that word in Part IVA, to which that Part applies. On that ground also the appeal is to be allowed.

8. The Tribunal disposed of the review without expressing a conclusion upon the question as to whether the sum of $125,000 was assessable income of the trust estate within the meaning of that phrase in the definition of "net income" for the purposes of Division 6 of Part III. It was a ground of appeal that by abstaining from that conclusion the Tribunal was led to ignore the question whether, if the $125,000 was assessable income of the trust estate, that sum formed part of a share of the income of the trust estate to which the respondent was in the 1984 income year "presently entitled" for the purposes of section 97. Mr Shaw submitted that the passing of the resolution of the directors of John Blackman Pty. Ltd., to which reference is made in paragraph 23 of the Tribunal's reasons, had such a legal effect as compelled an affirmative answer to the latter of those two questions, if the correct answer to the first of the questions be in the affirmative. But it is not for the court to answer that first question : the correct answer may depend on a finding of fact not yet made by the Tribunal. I am not persuaded that the correct answer does not so depend. I do not uphold this ground of appeal. The other grounds of appeal (numbered (2) and (3)) were not pressed.

9. The orders I make are that the appeal be allowed, that the decision of the Administrative Appeals Tribunal made on 18 January 1991 in the proceeding numbered VT88/600 be set aside, that the case be remitted to the Administrative Appeals Tribunal to be determined according to law, that it be within the discretion of the said Tribunal whether to receive further evidence, and that the applicant's costs of the appeal be paid by the respondent.