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Peate v Federal Commissioner of Taxation [1964] HCA 84; (1964) 111 CLR 443 (12 August 1964)

CATCHWORDS

HEARING

DECISION

2. A further observation of a general character is relevant. As the law stands, taxpayers who are in business as employers or employees have found it easier than those who are not to reap advantages from some of the deductions from assessable income that are allowed in the calculation of taxable income upon which tax is assessed. The establishment and maintenance of superannuation schemes is a good instance of this. So is the provision of a wide variety of amenities from which employees obtain nontaxable benefits while the cost is in a large measure deductible from the employer's assessable income. These are often called fringe benefits. Holiday pay is again something which those who do not get it envy those who do. Such benefits, real enough as they are in ordinary circumstances, would, however, obviously be of far greater value if it could be so arranged that they should accrue to taxpayers who would in substance employ themselves in the sense that their salaries, amenities, superannuation payments, etc. would come from their own earnings. Cases such as Lee v. Lee's Air Farming Ltd. (1961) AC 12 illustrate how incorporation may be used to effectuate what can be loosely described as self-employment. So long as the employer and the employee are separate, economically as well as legally, the cost of benefits to employees (such, for instance, as holiday pay and superannuation payments) must, after allowing for the value of tax deductibility, be borne by the employer but if a person were, in effect, to provide himself with such benefits and obtain taxation deductions in his role of a self-employer, the resulting tax saving would simply be money in the taxpayer's pocket. A further refinement would, however, bring even greater advantages to a family man who, it is established, cannot achieve taxation immunity by the simple expedient of assigning his earnings to his wife and family: Parkins v. Warwick (1943) 25 TC 419 If, for instance, it were possible for a man to re-arrange his affairs so as to work for his wife and his family as he previously worked for himself with the consequence that the return which his work produced, instead of being his own income and taxable as such, would be divisible between him - as salary - and his wife and family as his employers and that his holiday pay, superannuation payments and other benefits would be tax deductions from the income which his work produced, how much more would be left in the hands of the family group after each of them had paid tax on what came to his or her hands] To achieve such a result where a man has been working in partnership with others and wishes to continue to work with those who were his partners in much the same way except fiscally would, however, necessitate the exercise of some ingenuity, not to say boldness, particularly in the case of men subject to both professional and statutory controls, e.g. lawyers or doctors. (at p446)

3. It is at this point that I turn from general observations and reflections which provide no more than background to the facts of the case, which is an appeal by Dr. Peate from assessments of income tax for the years 1958, 1959 and 1960. (at p446)

4. Pursuant to a deed dated 30th November 1954 nine doctors practised in partnership in Cessnock and the surrounding districts but ostensibly did so not in one group but in three groups of three. One of these groups comprised Dr. Peate, Dr. Atkinson and Dr. Spence and their principal surgery was in Main Street, Cessnock. One of the nine partners retired on 1st July 1956 and subsequently the eight doctors then in partnership orally dissolved their partnership as from 31st August 1956 but, because of arrangements then in contemplation, they found it necessary to do no more than to agree that the goodwill of the partnership should be the goodwill of the doctors individually and that outstanding fees should be collected by A. E. Westbank Pty. Limited - a company which had been incorporated on 29th June 1956 - and accounted for by that company. On the day on which the partnership was determined there was incorporated a company, W. Raleigh Pty. Limited, and, it seems, seven other similar companies. Each of these eight companies was the family company of one of the eight doctors - Raleigh being the family company of Dr. Peate - and it is sufficient for the present purposes to take Raleigh as an example of what was done in every case. The signatories to the memorandum and articles of association and the first directors were two solicitors, E. B. and W. B. Phillips, who were members of the firm of solicitors advising the doctors and doing the legal work that the acceptance of their advice entailed. W. B. Phillips was the first governing director and the memorandum of association gave the governing director for the time overriding powers. Included among the comprehensive statement of the objects for which the company was incorporated (which ran into fifty seven paragraphs) there was the following: "(45). To carry on the business of importers and dealers in pharmaceutical, medicinal, chemical, industrial and other preparations and articles and providers of medical surgical hospital services and facilities of all kinds." It was seemingly pursuant to this paragraph that Raleigh on the day after its incorporation purchased Dr. Peate's practice, library, plant, motor cars, etc. and entered into a service agreement with him. It appears from the minutes of meetings of directors that at 10.40 a.m. on 1st September W.B. Phillips reported that he had conducted negotiations with Dr. Peate for the purchase of his medical practice for 7,500 pounds and it was resolved that the company should buy the goodwill for this sum and should also buy the personal chattels required for the practice at a valuation to be agreed. The total price was eventually fixed at 9,542 pounds. Ten minutes after this meeting began and according to Dr. Peate without reference to him in the meantime, there was a second meeting of directors and Mr. W. B. Phillips reported "that in accordance with the instructions of the Board he had conveyed verbally on behalf of the Company the acceptance of the verbal offer made by Dr. Peate for the purchase by the Company of certain assets". At this second meeting the agreement between Dr. Peate and Raleigh was sealed, as was an agreement between Raleigh, Dr. Peate and Westbank. The central feature of the agreement between Raleigh and Dr. Peate was that Dr. Peate should serve the company "as Medical Practitioner in the business carried on by the Company" at a salary of 1,000 pounds per annum or other agreed sum and in so doing should obey the lawful orders of the directors. Provision was made for sick leave, holidays and overseas visits. It is desirable to quote in extenso several of the clauses which the agreement contains:

"3. During the period of his employment hereunder the Doctor
shall
(a) Observe and conform to all the laws and customs of
the medical profession.
(b) Fulfil and obey all the lawful directions and orders of
the Directors of the Company from time to time and
not at any time except in case of illness or other
unavoidable cause absent himself from the service of the
Company without the previous consent of the Directors of
the Company.
(c) Not disclose (except to the Directors of the Company)
any professional secrets or any information with respect
to the Directors of the Company or his family patients
practice or affairs in relation to the affairs of the
Company or any directions given him by the Directors of
the Company.
7. (a) The Doctor hereby covenants that he will as the agent
of the Company or its nominee ensure that any person
to whom the Doctor renders medical or surgical
treatments contracts whether orally or otherwise with the
Company or its nominee that payment for such medical
and surgical treatment is due to the Company or its
nominee directly and even although the accounts for
such services may be rendered by the Company or its
nominee in the name of the Doctor AND IT IS EXPRESSLY
AGREED that if the Doctor fails to carry out the terms
of this covenant there shall become due and payable
by the Doctor to the Company or its nominees as
liquidated damages an amount equivalent to the amount
of the usual fees for such treatment and in satisfaction
of such liability for liquidated damages the Doctor
covenants with the company that any moneys tendered
or forwarded to him by any person in respect of such
fees shall be the property of the company or its nominee.
(b) The Doctor hereby authorizes the Company or its
nominee during the term of his employment hereunder
to render in his name accounts for all medical and
surgical treatment carried out or given by him during
his employment and covenants that he will at the request
and expense of the Company or its nominee do and agree
to permit to be done all such actions and things as may
be necessary or required by the Company for the purpose
of ensuring payment of any account to the Company or
its nominee.
9. The said Doctor agrees that he will during the term of this
Agreement whenever required by the Board of Directors
serve any Company or partnership carrying on a similar
business to the Company as a medical practitioner during
such time as the Board of Directors shall direct."

5. Westbank, incorporated on 29th June 1956, had among the multiplicity of its objects one (9) as follows: "To carry on the business of and dealers in anatomical, orthopaedic, radiological, scientific, chemical, photographical and surgical appliances of all kinds and the business of chemists, druggists and providers of medicinal (sic) surgical and hospital facilities and services of all kinds whether alone or in conjunction with any other person firm or corporation." Objects 50 and 51 cover inter alia the establishment of a superannuation fund. The subscribers were E. B. Phillips and G. C. Davies, who is a member of the firm of accountants, D. E. Rollason, Davies & Co., who were associated with the solicitors in advising the doctors. W. B. Phillips and E. B. Phillips were the first directors but on 18th August the eight doctors became directors of the company and on 20th August W. B. Phillips and E. B. Phillips resigned as directors. As the minutes record, their resignations were accepted with regret. On 31st August the two original shares were transferred, one to Raleigh and one to W. Gladstone Pty. Limited, Dr. Wiles' family company. On 1st September Westbank entered into separate agreements with Raleigh and the seven other doctors' family companies, to each of which the doctor concerned was a party. The substance of the agreement between Westbank, Raleigh and Dr. Peate was that Raleigh would for a fee arrange with Dr. Peate to serve Westbank - which was aptly called "the Operating Company" - as a medical practitioner. It was agreed that the fees should be fixed as follows:- "From the gross income of the Operating Company there shall be deducted all the expenses incurred in conducting the Operating Company's business including any contributions to a Provident Fund to be established by the Operating Company. Fourteen per centum of the balance of the gross income after deducting the sums as aforesaid from the gross income shall be paid to the Company". Clause 6 of the agreement was the same mutatis mutandis as cl. 7 of the agreement between Raleigh and Dr. Peate which I have already quoted. (at p450)

6. Here I may interpolate that I think it is quite clear that all the agreements and resolutions to which I have referred were drafted in advance to give effect to what had been agreed upon by the doctors concerned. Everythink had been arranged so that the change-over from firm to company could take place as it did on 1st September. It is also convenient here to say a little more about the service fees to be paid by Westbank to the doctors' family companies. The percentage set out in cl. 2 (i.e. 14 per cent in the case of Raleigh) represented the proportion in which the doctor concerned had shared in the profits of the partnership and during the years 1957 and 1958 Raleigh did in fact receive 14 per cent of what was distributed as service fees. As time went on there were changes: thus, in the course of the year 1959 Dr. Short withdrew and his family company, G. Dalton Pty. Limited, received only 4.235 per cent of the service fees instead of the full year's share (12.50 per cent) so that the other companies received a correspondingly larger percentage and Raleigh's share was in fact 14.993 per cent for that year. In 1960 there were more substantial changes: W. Gladstone Pty. Limited (Dr. Wiles' family company) that year received only 5.022 per cent instead of its original share of 14 per cent and Dr. Pitsch and Dr. Cook, who had previously been paid fixed salaries deductible before service fees were fixed, began to share in service fees. For the year 1960 Raleigh's share of the service fees distributed was 15.815 per cent. Returning now to Westbank's doings, at the meeting of directors on 1st September one resolution that was adopted was as follows:-

"Registration of Firm Names:
It was resolved that the Company make application to register:
(1) 'D. L. Peate, K. J. J. Atkinson, W. A. Spence'
(2) 'C. A. Wiles, B. Short, J. A. L. Allen',
(3) 'L. D. Bertinshaw, D. W. Lawson'
as business names under the provisions of the Business Names
Act, 1934 and further that the Company's Solicitors be instructed
to complete the necessary formalities."

"Resolved that the Company use the provisions of the
Agreements with Associated Companies when rendering accounts or
making claims upon medical funds or public departments or
like institutions if this course is more expeditious than rendering
the accounts or making the claims directly in the Company
name."

7. Some evidence was given about the way in which the practice was carried on after 1st September 1956. At some time a plate with the name A. E. Westbank Pty. Limited was added to the doctors' plates at the surgeries and, after what appears to have been a considerable time, notices that the doctors were employees of the company to whom fees were payable were exhibited at the surgery in Main Street. About the same time Dr. Peate and Miss O'Connor, who was an employee at the Main Street surgery, began telling some of the patients who came to the surgery that the doctors were employees of Westbank and fees were payable to the company. Accounts for medical services were in the first instance sent out from the Main Street surgery, as had been done previously, in the names - D. L. Peate, K. Atkinson, W. A. Spence - which it will be observed is not exactly the same as one of the business names registered by Westbank but this, I think, was the result of inadvertence. Receipts were similarly headed. Considerably later on the name A. E. Westbank Pty. Limited was stamped on such accounts and receipts. I am inclined to think that immediately after the incorporation of Westbank the change was in general glossed over but later on and at a time I cannot fix there was a change of policy and the notices to which I have referred were put up, in the Main Street surgery at any rate, and some intimation of the change was made to patients. I have the evidence of Dr. Peate and Miss O'Connor about this, which I am prepared to accept as a not very exact statement of what they said, but I have no evidence about what was done by other doctors at the Main Street surgery and I have no evidence at all about what was done at surgeries other than that at Main Street, Cessnock. Over the period with which I am concerned, not only did Commonwealth departments and authorities, State departments and authorities, municipal clinics, hospitals, union funds and insurance companies (whose payments made up half of the income of the practice) pay by cheques payable to the doctors or one of them personally, but most of the patients did so too. It seems that some patients at least were troubled about obtaining deductions for fees paid for medical services as provided by s. 82F of the Income Tax and Social Services Contribution Assessment Act, which is in terms confined to payments to a legally qualified medical practitioner, but such concern as there was was in some measure at least allayed by showing the patients an unidentified newspaper cutting stating that the Federal Government would ensure that medical expenses paid to doctor companies were allowed as taxation deductions and that, if necessary, legislation would be introduced to bring this about. There is no doubt, however, that under the section as it stood and still stands medical fees payable to a company such as Westbank were and are not deductible. It is clear that all fees paid either in cash or by cheque, whoever was the payee, were paid into Westbank's banking account. Where necessary the doctors endorsed cheques to enable this to be done. (at p453)

8. There are a few matters of minor importance that I should add to complete the statement of facts. First, for her services as secretary of Raleigh, Dr. Peate's wife was paid an agreed salary of 1,200 pounds per year, later increased to 1,300 pounds. Secondly, during the years with which I am concerned, Westbank itself had no telephone number but each doctor retained his own number. Thirdly, it seems that Westbank did demand payment of fees and did sue a number of persons for medical services rendered by it and in some cases obtained judgment upon default summonses. Fourthly, Westbank did arrange employer's indemnity policies covering its employees. Fifthly, Westbank introduced an up-todate system of bookkeeping and constituted itself a group employer for the purpose of the collection of income tax by instalments deducted from wages. Sixthly, although Westbank originally had practically no assets apart from debts owing to it by the doctors' family companies and sundry debtors, later on it did acquire some property for use as surgeries. Seventhly, some patients knew and some patients did not know of the change that had been made. It appears that some of the foregoing facts were proved to forestall a submission, which was not in the event made, that Westbank was nothing but a facade behind which things went on exactly the same as previously. (at p454)

9. It is now convenient to refer to the taxation returns that were made by Westbank, Raleigh and Dr. Peate and the assessments that were issued. Up to the year 1957 Dr. Peate made returns showing as his professional income a share in the medical partnership of which he was a member, doing so on a cash basis. In 1957 his return showed such an item for the period to 31st August, and for the period thereafter a salary from Raleigh of 953 pounds with tax deductions of 107 pounds. It also showed losses on the sale of his library, furniture, car, etc. to Raleigh on 31st August. With a minor adjustment, tax was assessed upon the net income as returned for 1957. In its return of income for the year 1957 Raleigh showed 4,100 pounds approximately as income from fees and claimed as deductions from its income consisting of the service fee paid by Westbank, salaries of 953 pounds paid to Dr. Peate and to his wife and 400 pounds contributed to Westbank's superannuation fund for Dr. Peate and his wife. The Commissioner disallowed the superannuation fund payments and 503 pounds of the salary paid to Mrs. Peate. Raleigh objected and in 1960 its objections were allowed. Westbank's return for 1957, showing about 43,000 pounds for fees and a deduction of about 29,400 pounds for service fees, was also accepted except for a deduction of 1,000 pounds contributed to the superannuation fund. Objection to this disallowance was allowed in 1960. In 1958 Dr. Peate's return showed as his only professional income a salary of 1,560 pounds paid by Raleigh, which was described as carrying on the industry of "medical services". The Commissioner did not assess tax upon this return. Instead he went to Westbank's return, made on a credit basis, and starting with the net income as returned, 5,013 pounds, he added the superannuation payments, 1,200 pounds, and service fees, 41,574 pounds, to arrive at a net income of 47,787 pounds and then treated 14 per cent of this, namely 6,690 pounds, as Dr. Peate's income. The basis of this assessment was that the partnership of the doctors continued and that Westbank and Raleigh were but its agents. The Commissioner, in a letter of 25th August 1959, explained the basis of the assessment saying it was based "on the understanding that services to patients are personally rendered by members of the partnership and that the accounts for services rendered and acknowledgments of fees received are issued in the firm's name. In these circumstances, any amounts received by the company are considered to represent the application of income after it has been derived by the partnership". In assessing Dr. Peate, the Commissioner dealt with deductions that were not covered by starting from Westbank's net income - which, it may be observed in passing, was arrived at after deducting payments to outside doctors - in the following terms:-

"Consistently with this adjustment the amount of 5,820 pounds shown
in the return of W. Raleigh Pty. Ltd. as fees received has been
excluded, the expenses claimed in the return of W. Raleigh
Pty. Ltd. adjusted as under have been allowed as deductions
and the amount of 1,560 pounds shown in your own return as salary
from W. Raleigh Pty. Ltd. has been excluded in ascertaining
your assessable income.

Total deductions claimed in
return of W. Raleigh Pty. Ltd. . . . 4,767 pounds
Less:
Private proportion of car
expenses . . . . . . . . . . . . 45 pounds
" " " " depreciation . . . . . . 33
Superannuation contributions . . 400
Remuneration of Dr. Peate . . . . 1,560
" " Mrs. Peate reduced from
1,200 pounds to 540 pounds . . . 660
Cost of signboard . . . . . . . . 3 2,701
Deductions allowed . . . . . . . . . 2,066 pounds"

10. At the hearing of these appeals a good deal of attention was given to certain provisions of the Medical Practitioners Act of New South Wales and, although ultimately I do not think that my conclusions upon the questions that were argued are vital to my decision upon Dr. Peate's objections, I do think that some reference to the Act is necessary. The covenants by Dr. Peate to allow Raleigh and Westbank to use his name for the collection of fees and the resolution of the 10th September 1956 are, of course, to be explained by ss. 35, 36 and 41B which allow a registered person to sue and forbid a person not registered from suing for charges for medical or surgical services and which no doubt engendered what I consider was a well-based apprehension that no matter what was agreed between the companies, doctors and the patients, neither Raleigh nor Westbank could sue for medical services. Mr. Jenkins, relying upon Pharmaceutical Society v. London and Provincial Supply Association (1880) 5 App Cas 857 and Law Society v United Service Bureau Ltd. (1934) 1 KB 343, argued that "person" in the Act wherever it is used means a natural person and not a corporation and that the Act is, therefore, silent about corporations suing for medical services. It is clear that in some sections the word "person" means a natural person only (e.g. those relating to registration and qualifications therefor) but it is just as clear that in some sections it means corporations as well as natural persons (e.g. ss. 43, 45 and 46.) The sections relating to suing for medical services, therefore, may or may not apply to corporations and the conclusion I have reached is that the Act means that only registered persons can sue for fees. The language of ss. 35 and 41B, taken together, not only warrants this conclusion, but indicates it, and I see no reason to cut down the meaning of a word apt to describe a corporation as well as a natural person when to do so would, I think, be contrary to the policy of the Act and would allow an unregistered person, by the simple device of forming a company and becoming its servant, to enforce payment for medical services. Cases decided upon different statutes are of little assistance in construing this Act which, as I have said, does clearly in some places use "person" to cover a corporation as well as a natural person. (at p456)

11. The next question is whether there has been any departure from the Act in the sending out of accounts and receipts in the name of Westbank and by publishing both in writing and by oral statement that Westbank is carrying on a medical practice. The oral communications that I refer to are those by Dr. Peate and Miss O'Connor to patients and the writings are the notices exhibited in the surgery at Main Street. One notice, for instance, states:- "This practice is run as a Medical Services Company. The Doctor is really an employee of the Company and you pay the Company for his services. That is why the receipt has A. E. Westbank Pty. Limited on it". It was contended for the Commissioner that ss. 27 (2), 42 (2) and 43 (2) warrant an affirmative answer to these questions. Section 27 (2) makes it infamous conduct in a professional sense for a registered person knowingly to enable an unregistered person to engage in professional practice "as if that person were duly qualified and registered". I do not think this provision has any application here. Dr. Peate did not hold Westbank out as a duly qualified registered person. Section 42 (2) forbids an unregistered person from advertising himself to be willing to practise medicine or surgery or to perform any medical or surgical services. It seems to me it might well be said that Westbank did advertise that it would perform medical and surgical services but, after some hesitation, I have come to the conclusion that s. 42 is one of the sections of the Act that relates only to natural persons. Sub-section (1) clearly does; so does sub-s. (2) (b). Sub-section (3) is a slight indication that sub-s. (2) (a) is similarly limited and the use of the word "himself" in that part of the sub-section supports this view. Upon the whole, therefore, because Westbank is a company and not a natural person I do not think that any breach of s. 42 (2) (a) was involved in its advertising that it would perform medical or surgical services through its employee doctors. Section 43 (2) provides that every person who exhibits or publishes any placard, billhead, receipt form or document used in connexion with any business practice or profession whereby any person advertises or holds himself out contrary to the provisions of s. 42 shall be guilty of an offence and publication by spoken words is stated to be a forbidden publication. Had Westbank committed an offence under s. 42 (2) I would have thought Dr. Peate and Miss O'Connor would probably have committed offences under s. 43 (2) but, having come to the conclusion that there was no offence under s. 42 (2), there can, I think, be no offences under s. 43 (2). It was also argued that there were breaches of s. 41A but I am not prepared to accept this argument. My conclusion is, therefore, that the Act did no more than prevent both Raleigh and Westbank from suing for fees for medical services. Whether the insistence when it occurred that fees were payable to Westbank and not to the doctor personally would prevent the formation of any contract upon which the doctors could sue is something about which I express no opinion. (at p457)

12. I am now in a position to consider Dr. Peate's objections to the assessments that were made and these in substance amount to this: that his only income - and the only income to which he was entitled under the arrangements outlined - was his salary from Raleigh, despite the fact that his labours as a professional man produced substantially more, and that the arrangements made and each step which was taken leading to the foregoing result were not only real and legally effective but were not to any extent void against the Commissioner or in these proceedings by reason of s. 260. (at p458)

13. For the Commissioner the assessments were supported in the first place on the footing that all the fees that were received by the doctors or by Westbank were in fact payment for services performed by the doctors and were in law the income of the doctors and all that was done by the doctors in relation to fees was to observe the covenant at the end of clause 6 (a) of the Westbank agreement and treat moneys received by them as fees as the property of Westbank. So it was argued that all the fees that were paid constituted income "derived by the doctors" for the purposes of s. 17 of the Act. In support of this contention it was emphasized that only doctors could earn some of the fees that were paid and that only doctors could sue for any of the fees that became payable. Moreover, some reliance was placed upon the facts that all governmental and institutional fees were paid by cheques payable to the doctors and that most of the private fees that were paid by cheque were paid by cheques in which a doctor and not the company was named as payee. This argument, which leaves s. 260 out of account, is formidable and if it stood alone would require very serious consideration, but there are substantial difficulties in the way of accepting it. For instance, I find it difficult to regard every payment of fees that was made to Westbank as income of the doctors and, as an illustration, I take the case of a patient who paid fees to Westbank because he accepted both the statement that the services for which he had to pay were rendered by the doctor, not on his own account but as the servant of Westbank, and the position that fees were payable not to the doctor but to Westbank. It may be that this happened but rarely but it did, I think, happen sometimes. Furthermore, it would, taking the documents at their face value, be difficult to infer a partnership between the doctors although it is clear that none of the doctors was practising on his own. However, I see no point in attempting to decide this matter independently of s. 260 if the case falls within its scope, for in that event that section, without the Commissioner or Court "invoking" its operation, is part of the law that has to be applied and, so far as the Commissioner is concerned and in these proceedings, its operation would require some things that were done to be disregarded notwithstanding that for other purposes their legal effect would remain unimpaired. It is desirable, therefore, to decide whether s. 260 applies and, if it does, with what effect. (at p459)

14. In view of recent decisions, it is unnecessary for me to re-state the meaning and effect of this section. Its application depends upon whether there is here an arrangement having the purpose or effect of avoiding a liability for tax that would otherwise fall upon Dr. Peate. The facts stated indicate this purpose and this effect, for despite other reasons that were advanced by Dr. Peate for so much of what was done as consisted in putting Westbank in the place of the partnership, when all that was done is looked at and in particular when the role of Raleigh is examined, there is a strong prima facie case that the purpose and effect of what was done was to obtain increased tax deductions from assessable income and to divide what would otherwise have been Dr. Peate's taxable income between himself, his wife and his children. For Dr. Peate it was argued, however, that this conclusion should not be drawn. First, taking the language of Lord Denning in Newton v. Federal Commissioner of Taxation (1958) AC 450, at p 466; [1958] UKPCHCA 1; (1958) 98 CLR 1, at p 8 , it was contended that it cannot be predicated by looking at what was done that the arrangement was to avoid tax and that it was explicable "by reference to ordinary business or family dealing". To arrange for the formation of a company in which all the shares would be held in trust for two children and then that Dr. Peate should transfer his professional practice, his books and his instruments to that company and become its servant in the practice of his profession upon the terms of the agreement to which I have already referred is not, to my mind, explicable by reference either to ordinary business or ordinary family dealings even when due weight is given to the circumstance that Dr. Peate, upon his becoming governing director, really had control of the company. There is little similarity between this case and Purcell's Case [1921] HCA 59; (1921) 29 CLR 464 where, a man having declared that he held certain property in trust for his wife and daughter, it was held, rightly in the view of the Privy Council, that the declaration was not avoided by s. 260. Nor do I think that the War Assets Case [1954] HCA 81; [1954] HCA 81; (1954) 91 CLR 53 shows that what took place here was an ordinary business transaction. Lest, however, it should be thought from my emphasis upon the part played by Raleigh that it is only the interposing of Raleigh between Dr. Peate and Westbank that prevents the arrangement as a whole being regarded as an ordinary business transaction, I should say that this is not my view. It is true that I do regard the incorporation of Raleigh and the seven other doctors' family companies as colouring everything that was done here but, even without this, I would have concluded that it was not an ordinary business transaction for a body of professional men who are entitled to sue for fees for medical services to transfer their practices, their libraries and their instruments to a company which could not sue for fees and to become that company's servants in the conduct of their profession, particularly in the circumstance that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s. 82F. What, outside a profession, might be regarded as an ordinary business transaction may, within a profession, have an altogether different appearance. In the second place, although in the face of the decisions it could not be argued that s. 260 does not apply to future income, Mr. Jenkins did seek to limit its application to income derived from sources of income already in existence and it was pointed out that in cases such as Bell, Newton and Hancock when the arrangements were made the companies concerned had already in hand the funds from which the dividends that were treated as the income of the taxpayer were eventually paid. This submission is, I think, directly in conflict with the recent decisions of this Court in Millard v. Commissioner of Taxation [1962] HCA 28; (1962) 108 CLR 336 and Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation (1962) 111 CLR, at pp 432-436 . In the former case Taylor J. held that s. 260 applied when a bookmaker carried on his business as a paid servant of a company he had formed and had returned his salary as his income. The decision was that the profits of the business gained after the introduction of the new order was the income of the bookmaker himself. In this case s. 260 was applied to what became profits but what were at the time of the arrangement moneys in the pockets of punters. In the later case Owen J. applied s. 260 to an arrangement for future business whereby the profits of the taxpayer were to be reduced by interposing between it and the supplier of goods another company which charged the taxpayer more than the supplier's price. From the judgments it does not seem that the point taken before me was taken in either case but, independently altogether of the authority in these cases, I do not regard it as a good argument and consider that s. 260 can apply to prospective income from future personal exertion as well as to prospective income from property. The language in which (a), (b), (c) and (d) of s. 260 is expressed affords no support for the appellant's argument. In Newton's Case [1958] HCA 31; (1958) AC 450; (1958) 98 CLR 1, their Lordships, in disposing of an argument that the avoidance with which s. 260 is concerned is nothing beyond the displacement of an accrued liability, said:- "Their Lordships cannot accept this submission. They are clearly of opinion that the word 'avoid' is used in its ordinary sense - in the sense in which a person is said to avoid something which is about to happen to him. He takes steps to get out of the way of it. It is this meaning of 'avoid' which gives the clue to the meaning of 'liability imposed'. To 'avoid a liability imposed' on you means to take steps to get out of the reach of a liability which is about to fall on you. If the submission of Sir Garfield Barwick were accepted, it would deprive the words of any effect: for no one can displace a liability to tax which has already accrued due, or in respect of income which has already been derived" (1958) AC, at p 464; (1958) 98 CLR, at p 7 It appears to me that in 1956 Dr. Peate and the other doctors did what they did to get out of the way of taxation which was in prospect if they were to carry on their professional practice in partnership as they had theretofore and that this, in the circumstances stated, is sufficient to meet the test propounded by their Lordships. I conclude, therefore, that s. 260 applies. (at p461)

15. The next question is how much of the arrangement and what was done to carry it out is void against the Commissioner in assessing Dr. Peate and in these proceedings. It seems to me that it was the making of the agreements with Westbank and the making of Dr. Peate's agreement with Raleigh which effectuated the tax-avoiding purpose with regard to Dr. Peate. These agreements must, therefore, be disregarded. (at p461)

16. What is left then is a group of doctors practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned. In assessing Dr. Peate the Commissioner has rightly given him the advantage of the group expenses paid by Westbank but has excluded from those expenses the contributions made by Westbank to its superannuation fund for the benefit of employees. In so far as these payments relate to employees and dependants of employees - the doctors not being employees - I see no reason why these payments should not be allowable deductions under s. 66 of the Act in the same way as other expenses of the practice paid on behalf of the doctors as a group by Westbank. I think, therefore, the Commissioner was wrong in disallowing such superannuation payments made by Westbank to its staff before calculating Dr. Peate's income by reference to Westbank's figures. (at p462)

17. On the basis that the agreements to which I have referred are void as against the Commissioner, the calculation of Dr. Peate's income for the years with which I am concerned is not an altogether easy matter and I am not at all sure that I understood the refinements of the method adopted by the Commissioner which, as I followed it, was for the year 1958 to treat Dr. Peate as entitled to 14 per cent of what Westbank received less what it paid as expenses, and for the later years to take separately each period after a change in the identity of those receiving service fees and calculate Dr. Peate's income for that period by obtaining the proportion of service fees Raleigh received during the period and applying it to Westbank's receipts less expenditure for the same period. I agree with the Commissioner that the service fees that were paid by Westbank do provide the key to the proportions in which each doctor became entitled to share in what was left after expenses paid by Westbank had been deducted and that no question about dividends arises. What ought to have been done was, I think, to take the proportion which amounts paid as service fees to Raleigh each year bore to total service fees paid in that year as the proportion in which Dr. Peate was entitled to share in the total fees less expenses paid by Westbank of that year. The data for obtaining this proportion appears on Exhibit BB and according to the calculations there shown Dr. Peate was entitled to 14 per cent in 1958, 14.993 per cent in 1959 and 15.815 per cent in 1960. From the figures so reached the deduction of expenses of practice which the Commissioner transferred from Raleigh to Dr. Peate were correctly allowed. Here, however, contributions to the Westbank superannuation fund for the benefit of Dr. Peate and Mrs. Peate were rightly disallowed nor do I think that the Commissioner made any error in allowing only a proportion of the sums paid to Mrs. Peate for her services. (at p462)

18. It was argued for Dr. Peate that if the appeal on the main point failed, as it has, at least his assessments should be on a cash basis rather than on the credit basis derived from Westbank's figures, and statements were tendered to show his income on the basis of fees actually paid. It seems to me that in assessing as he did on a credit basis the Commissioner followed the only course that was open to him in the circumstances and I do not propose to direct him to re-assess on a cash basis. My order will not, however, preclude him from doing so should he see fit to do so. On the figures before me it would seem that were the assessments to be made on a cash basis, Dr. Peate would be appreciably better off for the year 1958 but in very much the same position for the years 1959 and 1960. (at p463)

19. The order that I propose to make is to remit the assessments to the Commissioner for amendment by (1) including in the deductions allowed to arrive at the net income of Westbank for the years 1958, 1959 and 1960 payments to the superannuation fund made by it for the benefit of its employees and their dependants and (2) treating the taxpayer as entitled to the difference between the amounts paid to or credited by Westbank as fees and the amounts paid by it on account of the expenses of the medical practice in which such fees were earned in the following proportions - 14 per cent, 14.993 per cent and 15.815 per cent for the years 1958, 1959 and 1960 respectively. The appellant, having substantially failed, must pay the costs of the appeals. (at p463)

20. From this decision the appellant appealed to the Full Court. (at p463)

21. Hermann Jenkins Q.C. (with him R. B. Murphy), for the appellant. If at common law or under the Medical Practitioners Act, 1938-1957 (N.S.W.) there is no bar to a corporation providing medical services through doctors, then the doctors stand in no different situation from engineers, electricians or plumbers. All of them can form companies and become employed by the companies. It is unusual in the case of doctors, but there is no difference in principle. It is an every day experience for a person self-employed or employed by a partnership to form a limited company and then become employed in the company and draw profits therefrom. Section 260 of the Income Tax and Social Services Contribution Assessment Act 1936 does not strike at such an arrangement because the moneys are still taxed in one form or other. It is a choice allowed by the Act. Newton v. Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) AC 450; (1958) 98 CLR 1 does not cover such a case. Davies v. Makuna (1885) 29 Ch D 596 shows that it is permissible for an unregistered person, whether a body corporate or a natural person, to employ doctors. Section 260 cannot apply to any arrangement or agreement which affects income in prospect only. It has no application to a contract, agreement or arrangement whereby a taxpayer alters his method of earning future income. The section applies to a case where there is money in existence upon which a tax is about to fall and that is the extent of its operation. (He referred to Federal Commissioner of Taxation v. Newton [1957] HCA 99; (1957) 96 CLR 577, at p 665) Menzies J was in error in his conclusions as to what was left if the agreements between W. Raleigh Pty. Ltd. and the appellant and W. Raleigh Pty. Ltd. the appellant and A. E. Westbank Pty. Ltd. were disregarded. His Honour said that there was left a group of doctors practising together. What was in fact left was, inter alia, ownership of the disputed moneys, income moneys, by Westbank or Raleigh, and no right or title to possession of those moneys by the appellant. Even when these agreements are annihilated one still does not find in the hands of the taxpayer moneys which the Commissioner is entitled to treat as income derived by the taxpayer. The course of action taken in this case did not result in any of the moneys being free of tax. It was the exercise of a free choice by the appellant and those concerned, but all the money became subject to tax. It was a choice allowed by the Act. Westbank pays tax, Raleigh pays tax, and the appellant pays tax. There is no conversion of income into capital at any stage. For the Commissioner to attribute to the appellant moneys which went to Raleigh and which went to Westbank he has to go beyond saying that there is left a group of doctors practising. He has to say that there is left a group of doctors in partnership. (at p464)

22. M. H. Byers Q.C. (with him J. R. Gibson), for the respondent. We adopt the reasons and conclusions of Menzies J. When one comes to the question of what was the purpose of this arrangement it is relevant to have regard to whether what was sought to be done reflected on the one hand some sort of normal business transaction or on the other, even apart from the provisions in the agreement, something so unusual or artificial that its whole purpose must have been the avoidance of tax. The evidence discloses that it was never intended that Raleigh should carry on a medical practice. The essential part of the scheme which attracts s. 260 is that part which prevents the doctors deriving the income in question. The savings the doctors sought to achieve were savings by way of income tax and they hoped to use that product in superannuation and the like. That is the essence of the scheme, which will not work unless the doctor ceases to derive income other than a salary. If the agreements are annihilated it cannot be said that Westbank derived the income, because all the company got was the payments. The company applied these towards the expenses of carrying on the practice and thereafter they go to the private companies which are formed pursuant to the arrangement for the very purpose of receiving this proportion and of applying it in a particular way. If you find an obligation imposed upon the patient to pay someone other than the doctor then that can be treated as a direction within the meaning of s. 19 or alternatively as a payment on the doctor's behalf. If s. 260 applies to make "derived" an item which but for the arrangement would not be derived by the taxpayer, then it must follow that the arrangement which is struck down by s. 260 is an arrangement which prevents the taxpayer deriving the income. The arrangement is a thing which prevents the income being derived. (He referred to Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258, at p 283) (at p465)

23. (KITTO J. "Derived" only means "obtained or got or acquired": Federal Commissioner of Taxation v. Clarke [1927] HCA 49; (1927) 40 CLR 246, at p 261 .) (at p465)

24. Once it is shown that there was a distribution of an agreed proportion of the income from the eight doctors' efforts, then the result is that if the service agreements are struck out between the doctors, their private companies and Westbank, and the contracts made with the patients, there are coming into Westbank sums of moneys from a general practice. These are distributed in agreed proportions. The result is that the assessable income of the group is what comes in to Westbank. The things that are struck out are the agreements between the family companies and the doctor, the agreements between the family companies, the doctors and Westbank, and the contracts made with the patients that the sums due for treatment should be owed to Westbank. What is then left is that the partnership has been dissolved, the doctor continues to treat patients in the same place and under the same conditions, the patient pays, the payments go to Westbank, Westbank pays the group expenses, Westbank pays to the respective family companies the amount remaining after payment of the group expenses in the proportions settled by the partnership agreement, the family company pays out of the sums it receives the doctor's individual professional expenses and the family company enters into agreement with the respective doctor to pay him a salary. As an alternative, it is submitted that the initial step in the arrangement indicates that in fact the income was applied on behalf of the doctors within the meaning of s. 19, that is when one strikes out the essential parts. (He referred to Millard v. Commissioner of Taxation [1962] HCA 28; [1962] HCA 28; (1962) 108 CLR 336, at p 338 ; Mayfield v Commissioner of Taxation [1961] HCA 57; (1961) 108 CLR 303, at pp 320, 321 ; Mayfield v. Commissioner of Taxation (No. 2) [1961] HCA 58; (1961) 108 CLR 323, at pp 333, 334) Reference to the Medical Practitioners Act, 1938- 1957 shows that a number of things which the doctors in this case did could only be done by a registered medical practitioner: ss. 40, 41, 41A and 44. These sections permit and only permit a registered person to treat people, for example, for certain diseases. If it is right to say that they are employees of the company, what they did they did for the company. This tells against the conclusion that the payment for these services was income derived by the company. (at p466)

25. Hermann Jenkins Q.C., in reply.
Cur. adv. vult. (at p466)

1964, August 12.

The following written judgments were delivered:-
McTIERNAN J. I agree with the judgment and reasons of Kitto J. (at p466)

KITTO J. The Court has before it three appeals against orders of Menzies J. made on the hearing of appeals against three assessments of income tax under the provisions of the Income Tax and Social Services Contribution Assessment Act 1936 (Cth) as amended. The assessments related to the income derived by the appellant in the years ended 30th June 1958, 1959 and 1960 respectively. His Honour remitted the assessments to the Commissioner for amendment in certain minor respects and otherwise dismissed the appeals. (at p466)

2. The contest between the parties relates to certain amounts of an income nature which, though the appellant did not in fact derive them, have nevertheless been treated in the assessments as part of his assessable income. The ground of their inclusion is that s. 260 of the Act applies to the facts of the case with the result that the appellant must be considered as having derived those amounts. The section declares void as against the Commissioner inter alia every "arrangement" made or entered into, orally or in writing, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly, avoiding any liability imposed on any person by the Act. A liability is imposed by s. 17 upon any person to pay tax at the rates declared by the Parliament upon the taxable income derived by him, that is to say (see s. 6) upon the amount remaining after deducting from his assessable income all allowable deductions. The assessments in the present case have been made on the footing that an arrangement into which the appellant entered had the purpose or effect of avoiding his liability under s. 17 in respect of the amounts abovementioned, by making what otherwise would have been a derivation by him a derivation by others, and that s. 260 makes the arrangement ineffectual to achieve that result. (at p467)

3. The relevant facts as established before Menzies J. are fully stated in his Honour's judgment, and I shall not restate them in detail. It is sufficient to pick out here the salient features only of the case. The taxpayer is a doctor. For some years before the relevant years of income he practised in partnership with a number of other doctors, but the partnership was dissolved by mutual agreement on 31st August 1956. This was done in order to clear the ground for the adoption of a plan which the doctors were advised would serve several purposes, including the improvement of their tax position. By a series of concerted steps, including the formation of companies and the execution of agreements, a situation was brought about in which the doctors practised no longer in partnership with one another, but each of them attended to patients on behalf of a company called A. E. Westbank Pty. Limited, the formation of which had been part of the plan. I shall call the company Westbank. Each doctor bound himself by an agreement to which Westbank was a party to ensure that every patient should contract with Westbank that payment for treatment should be due to Westbank directly, even though the doctor might have rendered services in his own name. The doctor further bound himself, if he should fail to carry out the obligation just mentioned, to pay Westbank as liquidated damages an amount equivalent to the usual fees for the treatment; and he agreed that in satisfaction of such damages any moneys tendered or forwarded to him by any person in respect of fees should be the property of Westbank. What happened in fact was that some payments in respect of the doctors' services to patients were made to Westbank, while others were made to the doctors, but the doctors passed on the amounts they received to Westbank. (at p467)

4. Westbank employed, in addition to the doctors referred to, some doctors who were outside the plan and some persons who were not doctors. The fees received by Westbank for medical services rendered, whether rendered by the doctors in the group or by doctors engaged from outside, were applied in accordance with decisions made from time to time by the participating doctors in their capacity of directors of Westbank. In particular, disbursements were made (1) in paying the salaries and wages of the doctors engaged from outside and of other employees, and in meeting the expenses of Westbank's business as a company supplying medical services to the public through the doctors who were in the plan; (2) in making contributions to a superannuation fund for employees; and (3) in paying what were called service fees. The recipients of the service fees were family companies which had been formed under the plan, one in respect of each of the participating doctors. The payment of the service fees was, in effect, the distribution of Westbank's net income among the family companies in proportions agreed upon between the doctor-directors from time to time. The proportions did not always correspond exactly with the proportions in which the profits of the partnership had been divided - not even while all the doctors who had been partners continued to participate in the carrying out of the plan; and from time to time changes in the personnel of the group took place. But at the beginning the appellant's share was the same as under the partnership, and it increased slightly later on. (at p468)

5. The issued shares in each family company (except two subscribers' shares in the case of the appellant's family company and possibly in the other cases also) were held by or in trust for members of the family of the doctor concerned. Each doctor had sold his practice, motor cars, etc., to his family company, and had entered into an agreement with it to serve it or its nominee at a salary. Westbank was the nominee of each of the family companies for this purpose. In the case of the appellant, the family company was W. Raleigh Pty. Limited, which I shall call Raleigh. From September 1956 Raleigh's directors were the appellant and his wife. He was the governing director with all the powers of the board, and one consequence was that it was in his power to depress his own salary as he chose, and so to regulate the portion of the service fees from Westbank that would be available for distribution to or for the benefit of his family. His wife was the secretary of Raleigh at a salary of 1,200 pounds at first, and later 1,300 pounds. Out of the service fees which Westbank paid to Raleigh there were paid the appellant's salary and his individual professional expenses, that is to say his expenses over and above the group expenses met by Westbank. (at p468)

6. In accordance with the plan, the appellant and the other doctors who participated from time to time conducted as employees of Westbank the work of the practices that formerly they had carried on in partnership. The plan and all that was done under it plainly constituted an "arrangement" in the sense of s. 260; for Newton's Case (1958) AC 450, at p 465; [1958] UKPCHCA 1; (1958) 98 CLR 1, at pp 7, 8 establishes, as this Court had held in earlier cases, that the word "arrangement" in the section comprehends both a plan made between two or more persons and all the transactions by which it is carried into effect. Newton's Case [1958] UKPCHCA [1958] UKPCHCA 1; 1; (1958) AC 450; (1958) 98 CLR 1 makes clear also that the question whether an arrangement has or purports to have the purpose or effect of avoiding a liability to tax under the Act is a question as to the purposes or effects of the arrangement itself, rather than of the purposes in the minds of the parties. That is to say that it is a question whether, upon consideration of the overt acts which have been done in carrying out the plan, the arrangement is to be recognized as a means for the avoidance of a tax liability, whether or not it be a means to other ends also. (at p469)

7. The arrangement in the present case, considered objectively as is thus required, may well seem to be characterized by several purposes and effects, some of them unconnected with taxation, including the protection of individual members of the group against liability for negligence; the making of superannuation provision for employees, including doctors employed to assist the group; the better organization of the group's activities and particularly its methods of accounting; and the making of provision for the doctors' families. (All of these purposes, indeed, the appellant swore were actually contemplated in the formation of the plan.) But the question remains, whether the overt acts that were done under the plan are fairly explicable without an inference being drawn that tax-avoidance is a purpose of the arrangement as a whole. Menzies J. thought they were not, and with respect I agree. The arrangement bears ex facie the stamp of tax-avoidance. An understandable purpose of providing for the doctors' families, and doing so quite honestly, is perfectly evident; but what is equally evident is a purpose of doing so by a method which will divert income away from the participating doctors to or for the benefit of their families, to the end that a substantial part of the tax might be avoided which would have been incurred if the income had first been derived by the doctors and then applied by them for the benefit of their families. (at p469)

8. The case therefore falls, plainly as I venture to think, within the application of s. 260. The argument we have heard has been directed mainly to the consequences of this conclusion. In most of the cases which the Courts have decided under s. 260 the purpose and effect of the arrangements has been to avoid tax by converting what would have been a derivation of income into a derivation of capital. The work of the section being to invalidate such an arrangement "so far as it has or purports to have" that purpose or effect, the success of the arrangement as a means of achieving the conversion of income into capital has been denied. For the appellant in the present case an endeavour has been made to limit the operation of the section to arrangements of that kind. But the section must be given full operation according to its terms, and its terms apply to every arrangement which has the stated purpose or effect, whatever be the method by which it seeks to produce an avoidance of tax. The provision, it is true, operates only to destroy; it supplies nothing. But if a statutory denial of any of the legal consequences of the steps taken in carrying a concerted plan into effect will suffice to defeat a tax-avoidance for which the arrangement as a whole is a recognizable means, the section provides the denial, and by so doing enables an assessment to be made in disregard of those legal consequences. (at p470)

9. The Commissioner contends that the assessments are sustainable under the section without departure from this view of its operation. It is nothing to the point so far as the decision of the case is concerned that s. 260 was not mentioned either in the adjustment sheets which accompanied the notices of assessment or in contemporaneous letters in which the Commissioner offered the appellant an explanation of the steps taken in making the assessment. The adjustment sheets showed that what had been done was to reject so much of the appellant's return as treated his salary from Raleigh as an item in his assessable income, and instead to treat him as having derived a proportion of the net income of Westbank. The explanation in the letters was expressed in terms which went a little too far. It was considered, the letters said, that the gross income shown in Westbank's return was, "in fact and in law", derived by the partnership. This way of putting the matter has led the appellant to give prominence to a submission that s. 260 will not support the notional creation of a partnership where no partnership existed in fact. It is important to remember, however, that the word "partnership" is given by s. 6 an extended meaning. It includes inter alia an association of persons in receipt of income jointly. The adjustment sheets and the explanatory letters should be read with this in mind. The Commissioner was saying, in effect, that he ignored the separate corporate existence of Westbank, and consequently put out of account the contracts with Westbank, both of doctors and of patients, and the position of the participating doctors as directors of that company, and that the result was to find gross income produced by the work of the participating doctors and others who worked with them, pooled in an agreed bank account which was under the control of the participating doctors, drawn upon for the payment of the group expenses of producing that income, and (subject to that) made available for distribution in agreed proportions among the family companies. He was saying that there you have an association of doctors receiving income jointly, (i.e. into a common purse in the form of Westbank's bank account) and agreeing that the amount of that income which they considered available for distribution after providing for expenses should be divided, each doctor's share being paid to a company set up by him for the purpose. (at p471)

10. Menzies J. took the same view of the application of s. 260 to the facts of the case. "What is left then", he said, "is a group of doctors practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned" (1962) 111 CLR, at p 461 (at p471)

11. In my opinion this is correct. It means that s. 260 renders the arrangement void as against the Commissioner so far as it gave Westbank the beneficial property in fees collected and gave the quality of a resolution of a board of directors to the decisions of the doctors as to disbursement. What remains is the income produced by an association of doctors, received by them jointly, and subject to division in agreed proportions so that, in the language of s. 19, each doctor's distributable share was dealt with as he directed. It follows that each doctor must be considered to have derived his proportion of the income. It is nothing to the point that some of the income consisted of fees which had become due to Westbank and not to any individual doctor, or that some of it consisted of fees for the services of doctors employed from outside. Clearly s. 260 does not enable contracts that were made between patients and Westbank to be notionally replaced by contracts between patients and the individual doctors; but no such process is required for the upholding of the assessments. If all the patients' contracts be simply treated as void, so that all fees paid are regarded as having been paid gratuitously, it makes no difference. The fees are none the less income, brought into existence by the associated activities of the doctors and those who worked at their direction, and channelled into the common fund which bore the name of Westbank, there to be dealt with in the agreed manner. (at p472)

12. We have not been asked to review so much of the orders of Menzies J. as remitted the assessments to the Commissioner for amendment in respect of certain matters of detail. Having reached the conclusion above stated on the substantial question in the case, I am of opinion that the appeals should be dismissed. (at p472)

TAYLOR J. The relevant facts are fully set out in the reasons which led Menzies J. to make the orders from which these appeals are brought and I find it necessary only to refer to the principal features of the plan disclosed by the evidence. What is disclosed is that eight medical practitioners, then practising their profession in partnership, devised, with the aid of their legal advisers, a somewhat complicated plan pursuant to which they would, after its inception, cease to practise in partnership and, thereafter, each would become an employee of a family company incorporated for that express purpose (in the appellant's case W. Raleigh Pty. Limited) and bound to work as a medical practitioner either for that company or, at its direction, for any other company carrying on a business similar to that carried on by the family company. The salary payable to the appellant by Raleigh was to be 1,000 pounds per annum "or such other salary as shall be mutually agreed upon from time to time". As evidenced by the minutes of a meeting of directors of Raleigh held on 3rd September 1956 the appellant also agreed to make available to Raleigh the surgery theretofore used by him in consideration of his employment by that company. On the same day as the appellant entered into a formal agreement with Raleigh to this effect he entered into a further agreement to which that company and a recently incorporated company, known as Westbank Pty. Limited, were parties. One of the two subscribers' shares in Westbank was transferred to Raleigh on 31st August 1956 and the other was transferred to another of the family companies on the same date. The only other issue of Westbank's shares which took place occurred on 10th September 1956 when 198 shares were issued in parcels of twenty-five plus or minus a few shares in some cases to each of the eight family companies and at all material times the eight medical practitioners were its directors. By this second agreement Raleigh undertook to arrange for the appellant to serve Westbank as a medical practitioner and the appellant undertook that he would as the agent of Westbank ensure that any person to whom he should render medical or surgical treatment would contract orally or otherwise with Westbank that payment for such medical or surgical treatment should be due to Westbank directly even though the accounts for such services might be rendered by Westbank in the name of the appellant. In return Westbank undertook to pay to Raleigh a service fee of fourteen per cent of its gross income after deducting therefrom all the expenses incurred in conducting Westbank's business including any contributions to a provident fund to be established by that company. At all material times only two ordinary shares in the capital of Raleigh were issued and these were held by the appellant's legal advisers whilst 15 C class and 15 D class shares were issued on 28th February 1958 to trustees for each of the appellant's two children. This latter shareholding did not carry any right to vote at any general meeting except as the directors might determine and it conferred a right to such dividends only as the directors might think fit to determine. On 24th April 1958 the directors determined that the holders of the C and D class shares should be entitled to receive separate dividends of 385 pounds in respect of each class of shares but as to 350 pounds in each case the dividend was to be satisfied by a further issue of these special category shares. Further dividends were declared on these shares in April 1960 and further C and D class shares were issued to the trustees. Prior to 30th June 1960 850 C class shares and 850 D class shares had been issued. It remains to be said at this stage that the appellant and his wife were the directors of Raleigh and that a resolution in writing of the appellant as governing director was by the articles of association as valid and binding as a resolution passed by the board of directors. Further, article 79 provided that the remuneration of the directors should be fixed by the directors and that such remuneration should be divided among them in such proportion and manner as they might determine. (at p473)

2. The initial step in the implementation of the plan was the dissolution of the pre-existing partnership and the purported sale to Raleigh by the appellant of the goodwill of his medical practice together with instruments, furniture and plant at valuation. The price payable for goodwill - 7,500 pounds - was apparently arrived at by taking the appellant's average income over the previous three years and the amount of the purchase money became a debt owing by Raleigh to the appellant. This debt, it is said, has been reduced from time to time. It is, it seems to me, doubtful whether the appellant had any goodwill to sell to Raleigh for prior to the dissolution of the partnership the practice was the property of the partnership and the capital and assets of the partnership and the profits and losses thereof were expressed to be divided into a hundred parts, the share of the appellant being fourteen of such parts. (at p474)

3. Another feature of the plan was the formation by Westbank of a superannuation fund to provide benefits for the employees of that company and for employees of such of the eight family companies, including Raleigh, as became members of the fund and from time to time Raleigh made contributions on account of its employees, that is to say the appellant and his wife. (at p474)

4. It is clear to the point of demonstration that the pivotal point of the whole plan was an exchange by the appellant of his income from the pre-existing partnership, that is to say, fourteen per cent of the net profits, for the right to receive a salary from Raleigh and the right of that company to receive from Westbank fourteen per cent of its net profits. However, as governing director of Raleigh, the appellant was at liberty to fix his own salary and the disposition of the profits, if any, of that company was to a very large extent in the hands of the appellant. In the first of the years under review Raleigh paid to the appellant a salary of 1,560 pounds, in the second 2,080 pounds and in the third 2,080 pounds and 200 pounds as director's fees in the same years Raleigh paid as salary to the appellant's wife 1,200 pounds, 1,300 pounds and 1,300 pounds respectively. Additionally, as already mentioned, Raleigh, pursuant to resolutions of the appellant and his wife, paid several sums to the trustees of the superannuation fund established by Westbank on their respective accounts and, as already appears, they also determined that dividends should become payable on its C and D class shares and that the bulk of the dividends so declared should be appropriated as payment for shares issued to trustees for their children. All of these disbursements and appropriations were made out of the "service fee" paid by Westbank to Raleigh, supplemented in each of the years under review by a comparatively small amount of dividends declared by the former company. The "service fees" were, during the years in question, 5,820, 5,155 and 5,271 pounds respectively and the dividends were 525 pounds, 724 pounds and 632 pounds. (at p474)

5. The interrelated and concerted transactions by which these results were brought about were attacked as constituting an arrangement having the purpose or effect of defeating, evading or avoiding a duty or liability imposed on the appellant by the provisions of the Income Tax and Social Services Contribution Assessment Act. The difficulties attendant upon the application of the provisions of s. 260 of the Act to any given set of facts have been adverted to in a number of recent cases and the effect of the decision in Newton's Case [1958] UKPCHCA 1; (1958) AC 450; (1958) 98 CLR 1 has been comprehensively stated by Kitto J. in Hancock v. Federal Commissioner of Taxation [1961] HCA 90; [1961] HCA 90; (1961) 108 CLR 258, at p 283 I do not repeat what his Honour there said but it is clear enough that here there was an arrangement constituted by a predetermined and concerted series of transactions which had the effect, and were calculated to have the effect, of avoiding the liability of the appellant to tax on a specified share of profits earned by him in co-operation with a number of other medical practitioners and yet leaving him free, to all intents and purposes, to make such dispositions of that share for his own benefit and for the benefit of his wife and children. Indeed, in its final analysis, the picture is little different from that which would have appeared if the appellant had assigned his future gross income upon condition that the assignee, after paying the appellant's share of working expenses, should then pay to the appellant such part of the net amount as he should direct and, thereafter, expend the balance in a specified manner for the benefit of the appellant's wife and children. (at p475)

6. For the appellant it was contended that, although the interrelated transactions in question, prearranged and concerted as they were, may be said to constitute an arrangement, the arrangement, as such, was not of such a character as to bring it within s. 260. First of all it was somewhat boldly contended that it was "capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax" (see per Lord Denning in Newton's Case (1958) AC 450, at p 466; (1958) 98 CLR, at p 8 ) and then it was suggested that the application of s. 260 is limited to cases where it appears that the arrangement which is attacked, is concerned with the disposal of a fund already in existence when the arrangement is made. I confess to some difficulty in appreciating the basis upon which the latter submission is made for the interrelated transactions, pursuant to the general framework of the arrangement which had been made and which envisaged those transactions, dealt with the ultimate destination of the income that had resulted from the professional activities of the eight medical practitioners. Indeed, in Newton's Case (1) the shareholders had no present rights, either by way of capital or income, to the fund in the hands of their company when they became parties to the arrangement which subsequently regulated the various dealings which took place. I see nothing in s. 260 to preclude the view that an agreement to deal in a particular manner with a fund when it comes into existence and which, when that event occurs, is carried into effect, is within the terms of the section. (at p476)

7. As to the appellant's first submission it is, I think, not open to doubt that the purpose and effect of the arrangement which is now attacked was to avoid tax. It is true, no doubt, that it had other ends in view such as the making of provision for the appellant's wife and children. But avoidance of tax was the means to those ends and a diminution in the appellant's tax was not merely an incident of what might be regarded as an ordinary family settlement; as I have already indicated avoidance of tax on income produced by the professional activities of the eight medical practitioners in question was at the very heart of the arrangement which was about as far removed as possible from any concept of ordinary business or family dealing. Further, it possessed no other feature to deny its true character, that is an arrangement having the purpose or effect of defeating, evading or avoiding income tax. (at p476)

8. A further point was made that even if the various dealings did constitute an arrangement of that character its avoidance did not enable it to be said that the appellant had derived the income in respect of which he has been assessed. That is to say, that no part of the profits earned by the professional activities of the appellant could be said to have found its way into his hands. It may be of some significance on this aspect of the case to advert to the manner in which fees were paid by the patients attended to by the doctors concerned for the evidence disclosed "that all governmental and institutional fees were paid by cheques payable to the doctors concerned and that most of the private fees that were paid by cheque were paid by cheques in which the doctor and not the company (Westbank) was named as the payee" and that where necessary the doctors endorsed cheques to enable them to be paid into Westbank's bank account. In these circumstances the bulk of the income earned found its way in the first instance into the hands of one or other of the doctors concerned. It may also be of some importance to observe, as I have already pointed out, that the disposition of the whole of the service fee received by Raleigh from Westbank was, for all practical purposes, in the hands of the appellant as governing director of Raleigh. But it is unnecessary to rely upon these matters in rejecting the appellant's submission on this point. I have no doubt that the avoidance of the agreements made by the appellant with Raleigh and Westbank produces a situation in which the Commissioner is entitled to say that what Westbank received it received in part on behalf of the appellant. The part which it can be said to have received on his behalf is the proportion of the total amount received ascertained by applying to that amount the percentage used in each of the income years under review for the calculation of the services fee paid to Raleigh. I have used this formula because Raleigh's "service fee" did not remain constant during the three years under review. In the year ended 30th June 1958 it was 14 per cent of Westbank's net income and in the two years following it was 14.993 per cent and 15.815 per cent respectively. These variations were said to have occurred because of the withdrawal of one medical practitioner and his family company during the second year and other changes in the composition of those practising ostensibly on Westbank's account during the third year. These departures from the express terms of Raleigh's agreement with Westbank show clearly enough that from time to time there was agreement among the medical practitioners concerned as to how the profits resulting from their professional activities should be shared among their family companies. I agree with Menzies J. that when the agreements between the appellant and Raleigh and between those parties and Westbank are treated as void as against the Commissioner what is left exposed is a receipt of moneys by Westbank on account of the medical practitioners in question and that to the extent of the percentages indicated the appellant can be said, within the meaning of s. 19 of the Act, to have derived income. (at p477)

9. Other questions relating to the necessity of minor adjustments in the assessments which were debated before Menzies J. were not raised upon the appeals and I do not refer to them. In my view the appeals should be dismissed. (at p477)

WINDEYER J. I need not repeat the facts in detail. (at p477)

2. It was argued that the arrangement that the taxpayer and his associates made was outside the operation of s. 260. Doubtless several elements of the total scheme could, for the participants in it, have other advantages than the avoidance of a liability for income tax. And when, with the advice of their advisers, they concerted and entered into the scheme they had some of those advantages in mind. But that does not redeem their arrangement and what was done under it from the provisions of s. 260. Moreover, in so far as those ulterior advantages do not themselves depend upon the avoidance of taxation they can be enjoyed. Section 260 makes the arrangement void as against the Commissioner of Taxation only: it does not impair whatever be the validity and effect of it and of its subordinate transactions as between the parties. In this respect s. 260 is a new form of response to the attempts of taxpayers to escape by lawful means from the tax-gatherer's net. It is not altogether fanciful to see the section as a parallel with the Statute of Uses and its reference to "divers and sundry imaginations, subtle inventions and practices". For, just as in Tudor times men sought to separate the enjoyment of the profits of land from the legal title to it and so to avoid the burdens of the old feudal dues, so in modern times men have sought to have the enjoyment or the disposition of the produce of their labour or their capital without the burden of the levy which the state imposes. In each case the legislature intervened to frustrate their designs. (at p478)

3. A taxpayer may legitimately regard it as a business-like action so to arrange his affairs in the interest of himself and his family as to reduce his liability for taxes. But that does not mean that whatever method he adopts to that end can itself be said to be explicable as an ordinary business or family dealing putting it outside s. 260. It was argued that the arrangement in this case did not in one of its aspects differ essentially from the mere carrying on by a company of a trading business formerly carried on in partnership and in another aspect from the management and investment of capital assets by a private company and the distribution among shareholders of the income periodically arising. The resemblances seemed to me remote. Whatever may be said of the company, Westbank Pty. Limited separately regarded, the combined and inter-related activities and purposes of it and its companion Raleigh Pty. Limited are certainly remarkable and out of the ordinary. (at p478)

4. A proprietary company, controlled by one man, has to-day taken the place of John Doe, William Roe and others who at an earlier time came out of ink-wells in attorneys' offices to do acts in the law of which law-abiding citizens might have the benefit while avoiding disadvantageous consequences. By incantations by typewriter, the obtaining of two signatures, payment of fees and compliance with formalities for registration, a company emerges. It is a new legal entity, a person in the eye of the law. Perhaps it were better in some cases to say a legal persona, for the Latin word in one of its senses means a mask: Eripitur persona, manet res. (at p478)

5. Raleigh Pty. Limited was upon its creation at once obedient in its mind and its actions to the bidding of its governing director. He was a solicitor, who with his partner had subscribed the memorandum of association (each for one share) as desirous of themselves being formed into a company. The expressed objects for which, according to the memorandum, the company was established range from buying and selling all forms of property, manufacturing a great variety of goods to building and running ships and aeroplanes, and so forth and so on - stated with much elaboration and some tautology in fifty-seven paragraphs. Tucked away among them was paragraph 45: "To carry on the business of importers and dealers in pharmaceutical, medicinal, chemical, industrial and other preparations and articles and providers of medical surgical hospital services and facilities of all kinds". Relying on this disingenuous phraseology the company commenced a form of business, surely odd. Pursuant to plan, it first bought, or purported to buy, what was said to be the taxpayer's goodwill of the practice he had formerly carried on in partnership with the other medical practitioners who were participants in the plan, and also his surgical instruments, furniture in his surgery, and motor car. He, being then in law without the equipment he needed to carry on his profession, a few minutes later covenanted "to serve the company as medical practitioner in the business carried on by the company" for a salary and to obey the lawful orders of the directors: the deed further provided that he would during the term of the agreement "whenever required by the board of directors serve any company or partnership carrying on a similar business to the company as a medical practitioner during such time as the board of directors shall direct". Accordingly he became, at the direction of Raleigh Pty. Limited, a servant of Westbank Pty. Limited. The two companies had been begotten and born at the same time. For a medical practitioner to enter into an agreement to become the paid servant of a company which was to make it its business to hire him out as a servant of another company is surely not an ordinary business dealing. If it were not that we can look further and see what was really intended and what occurred I would have said that a statement of Lord Atkin's was apposite at this point: "I had fancied", his Lordship said, "that ingrained in the personal status of a citizen under our laws was the right to choose for himself whom he would serve: and that this right of choice constituted the main difference between a servant and a serf": Nokes v. Doncaster Amalgamated Collieries Ltd. (1940) AC 1014, at p 1026 But, of course, the appellant was in no danger from his subjection to the dictates of Raleigh Pty. Limited, because no sooner had he become its servant on these terms then he became in substance and effect its master. That occurred in this way: the governing director, the solicitor who had formed the company, resigned, and the appellant thereupon became governing director with complete and overriding powers under the memorandum. This was pursuant to the pre-arranged plan. (at p480)

6. It is not in legal theory impossible or incompatible for a person to be both governing director in sole control of a company and servant of that company or its agent to contract on its behalf, "always assuming", said Lord Morris, "that the company was not a sham": Lee v. Lee's Air Farming Ltd. (1961) AC 12, at p 26 If a company is duly incorporated and registered under the Act and the proper records are kept in due form and the prescribed returns are made, it continues to exist as a legal entity. In that sense it is a reality not a sham. But I though that in the argument for the appellant too much was made of this. The cat that the monkey employed to pull the chestnuts from the fire was a real cat. And other cats' paws have been real too. Straw bail were real men. (at p480)

7. Whatever philosophical theory, if any, one entertains of the nature of corporate personality, not much assistance for questions such as arise in this case is got by emphasizing that in law a company is an entity distinct from its members. What is important is the function that the company in fact performs and which it was created to perform. It is not necessary for the application of s. 260 to find that the case is one for "lifting the veil". As to this, see Professor Gower's Modern Company Law, 2nd ed. (1957) chap. 10. To the authorities and articles there cited I would add the decision of the Court of Appeal in Tunstall v. Steigmann (1962) 2 QB 593 There Ormerod L.J. said that any departure from the strict observance of the principle laid down in Salomon's Case (1897) AC 22, "if indeed any of the instances given can be treated as a departure, has been made to deal with special circumstances when a limited company might well be a facade concealing the real facts" (1962) 2 QB, at p 602 Whether that description could be used of Raleigh Pty. Limited I do not consider; for I prefer to regard that company not as a facade or screen but as one of the instruments by which the appellant and others sought to carry their plan into effect. I agree with my brother Taylor that it, Raleigh, was like an assignee to whom the appellant had assigned the future income which Westbank Pty. Limited was to collect as the fruits of his practice of his profession, such assignment to Raleigh being upon condition that it would deal with the moneys it got as he, the appellant, directed. That seems to be substantially the only part Raleigh had to play. Nevertheless its business was treated as sufficiently important to justify it paying a salary of 1,300 pounds a year to the appellant's wife. What services she had to perform for Raleigh is not very clear, because the taxpayer had become the servant of Westbank and the details of his medical practice, appointments with patients and so forth, were no concern of Raleigh. (at p481)

8. I have made these remarks about Raleigh because it sheds a light upon the purpose and effect of the whole arrangement in which it was created to play and did play a part. But I agree with Menzies J. that it is not the interposition of Raleigh that brings the arrangement within s. 260. That comes about, not because of some particular element in the arrangement or of any of its subordinate transactions but from a consideration of it as a whole. (at p481)

9. Of other matters discussed in the argument I need say no more than that I agree in what my brothers Kitto and Taylor have written. I agree that the appeals should be dismissed. (at p481)

OWEN J. For the reasons given by Kitto J. I agree that the appeals should be dismissed. (at p481)

ORDER