Bayly v. Federal Commissioner of Taxation.
Judges:Bray CJ
Court:
Supreme Court of South Australia
Bray C.J.: This is an objection to a taxation assessment by the respondent Commissioner which objection was disallowed by him. At the request of the taxpayer appellant the objection was treated as an appeal to this court pursuant to the provisions of the Income Tax Assessment Act 1936 as amended.
The appeal relates to the assessment of the appellant's income for the year the 1st July 1971 to the 30th June 1972. He returned his net taxable income for that year at $2,758. He showed himself as in receipt of $3,900 wages and $260 car allowance paid by an employer shown as Bayly's Pharmacy. That amount was excised and in its place was inserted a sum of $5,510, being the net income from the business of the pharmacy in question.
The appellant claims that the business of the pharmacy was at all relevant times the business of his wife and that the only income he derived from it in the year in question was his salary and allowance as manager. The contention of the Commissioner is that the total net income of the pharmacy was the appellant's, or at least that he was entitled to treat it as such for taxation purposes.
The appellant qualified in pharmacy in 1961. In 1963 he married. At first he worked in succession for two drug manufacturing companies. He then worked on wages for a pharmacist at Reynella and subsequently for another at Clare, where he began work in 1969. While he was still working there his wife, on the 16th March 1970, entered into an agreement with a Mrs. Vickers to buy from her the goodwill and stock of the business of a pharmaceutical chemist in premises at 117 Payneham Road, St. Peters, for $2,000. On the same day Mrs. Bayly entered into a tenancy agreement with Mrs. Vickers whereby the shop and dispensary at St. Peters were let to her for three years at a rental of $20 per week. The business name Bayly Pharmacy was registered under the Business Names Act and the premises were registered under the Pharmacy Act. Mrs. Vickers was the widow of a chemist who had carried on her late husband's business through a qualified pharmacist manager. After the sale the business was carried on, according to the evidence of the appellant and his wife, by him as her manager at a salary of $80 per week, which was later increased. During the year of income the shop at St. Peters was closed down and the business transferred to new premises at Firle: stock was transferred from St. Peters to Firle and new fittings were bought. Mrs. Bayly entered into a lease of the Firle premises for a term of three years from the 10th April 1972. The appellant continued as her manager.
The $2,000 for the purchase of the business was found as to $200 from Mrs. Bayly's own savings and as to about $1,000 from a loan by her father, Mr. Booth. The balance came out of a savings account in the joint names of the appellant and his wife. That amount was largely built up out of his savings. Some of the money in it, however, came from the sale of a house in which they had lived while he was working at Reynella, a house which, as I understand his evidence, was in joint names and, in any event, he says that she did a lot of work on the house and that he considered her as being morally entitled to a share in its proceeds. After the purchase of the business a house at Clare, in which the spouses had been living and which was in their joint names, was sold and Mr. Booth was repaid out of the proceeds.
Both the appellant and his wife gave evidence. They were asked about the reasons for the purchase of the St. Peters business being made in her name. He said that there were several reasons. He said that the business at St. Peters was in a run-down and almost derelict state and that though there were rumours of development on the site that development might not take place and that if the venture was not a success it was better that any consequent bankruptcy should be hers rather than his. Another reason, he said, was that there were rumours of changes in the Pharmacy Act which would prohibit the ownership of a pharmacy by an unqualified person, so that, unless the business was hers before any such amendments became law, he
ATC 4049
might not be able to leave it to her if he died before her, as he considered to be likely. When he was asked about income tax he said, ``I was aware that there were certain income tax advantages by splitting one's income, but this was not a primary motivation for my wife to purchase the pharmacy in her name.''She said that one of the reasons was that her parents were more likely to lend to her than to him. She gave as another reason that it was preferable that the risk of bankruptcy should be hers rather than his. She had been a teacher but she had young children and could not return to school teaching and she said:
``... I decided I couldn't go back to teaching... but I could get involved in a business because I could formulate my own working hours.''
And later she said:
``... if the business became a viable concern as it grew, in the event of my husband's death or a divorce or separation of any nature, I would then have the insurance policy of owning a business, provided of course it became a viable business.''
She said nothing about income tax and she said to me that the subject of possible amendments to the Pharmacy Act was not discussed between them when the purchase of the St. Peters pharmacy was under consideration.
The evidence was that during the year in question she would have put in at most one day's work a week in the shop, not, of course, necessarily a continuous 8 hours. She did some selling and some unpacking and display of the goods and she played some part in the selection of cosmetics and the like.
There was a bank account for Bayly's Pharmacy. Both the appellant and his wife had authority to operate on that. They also had a joint account. Cheques were drawn on the Bayly Pharmacy for wages, including his salary. The bulk of his wages were paid into the joint account. At times she drew money out of the pharmacy account and paid it into the joint account. Sometimes she drew on the pharmacy account for household expenditure. In effect his salary and her profits were merged for the purpose of living expenses. The business prospered and much of the profits went towards improving it.
Of course, much, indeed the bulk, of the trading came, not from the sale of ordinary commercial goods, but from the dispensing of prescriptions which was under his control alone. Payment for these came in large measure from the Department of Health, the Department of Repatriation, the Mutual Hospital Association and like sources. The Bayly Pharmacy was appointed an agent for the Mutual Hospital Association. The appellant was appointed an agent for the Savings Bank of South Australia to receive deposits, a business that is often conducted in conjunction with a chemist's business. That appointment was to him as an individual. After the transfer to Firle a similar agency agreement was entered into in Mrs. Bayly's name. The relevance of these matters will appear later.
Before turning to the various contentions before me I should say something about the witnesses, i.e. the appellant and his wife.
I accept him with some reservation. I was unfavourably impressed by one piece of evidence. When the lease of the Firle premises was applied for he wrote to the manager of Tom the Cheap (S.A.) Pty. Ltd., the then owner of the Firle premises. In that letter he said:
``I have an established business at St. Peters and the finance to establish a new business.''
He also said that he would personally manage the business. It is true that in later correspondence he said that the lessee would be his wife. When asked in the witness box why he wrote in this strain if the business belonged to his wife, he said:
``In the first place I don't believe we were as liberated towards women as we are today, so it seemed far more logical to approach him with an uncomplicated situation, imply that I was in control of a thriving business. I believe that landlords were inclined to look at somebody with another business to prop up a new one. The idea was to perhaps present a rosier picture than may have been true at the time.''
It seems to me that when it is in his interests to do so he is prepared to equivocate and to assume varying roles as best suits the exigencies of the moment. Nevertheless I see no reason to disbelieve his general account of
ATC 4050
what happened and of the practices and routines adopted. Mrs. Bayly appeared to me to be transparently honest. I accept her as a witness of truth, if not necessarily of accuracy, especially with regard to matters of bookkeeping and accountancy where her expertise is small.Mr. Matheson, Q.C., for the Commissioner sought to uphold his client's amended assessment on four grounds. These were:
- 1. That the business both at St. Peters and at Firle was really his and that the whole appearance of her ownership was a mere sham.
- 2. That any ownership or operation of such a business as the business of Bayly Pharmacy by someone who was not a duly qualified pharmaceutical chemist was illegal, completely illegal by reason of the provisions of the Pharmacy Act 1935 as amended and partly illegal by reason of the provisions of the Poisons Regulations contained in Part VI of the regulations under the Food and Drugs Act 1908 as amended and possibly also by reason of the provisions of the Commonwealth National Health Act 1953 as amended and the regulations made thereunder.
- 3. That the net profits of the Bayly Pharmacy were derived by the appellant within the meaning of sec. 17 and 19 of the Income Tax Assessment Act and hence taxable as his income.
- 4. That in any event the Commissioner was entitled to treat those net profits as the appellant's income by reason of the provisions of sec. 260 of the Income Tax Assessment Act.
I will deal with these contentions in turn, recognising that under sec. 190 the burden of proving that the assessment is excessive lies on the appellant.
1. Sham
In my view Mrs. Bayly's ownership of the pharmacy business was not a sham in any relevant sense of the word. It was not, in short, a mere screen for his ownership. On the contrary I think that the parties really intended that the legal and equitable ownership of the goodwill and the stock of the pharmacy at St. Peters and the interest of the tenant in the tenancy agreement should be hers. After all, it takes two to make a sham of this kind. He may have thought that he could effectively control the business, though legally hers, and that she would use the net profits over and above his wages as he advised, either by way of putting them back into the business and improving and extending it or by assuming some of the burdens of ordinary household expenditure. But I think he intended her to be the owner. I accept his evidence about the fear of bankruptcy, supported as it is by hers. But I have no doubt that, as she said, she welcomed the chance to own an asset, both for its own sake as an interest and as a security against death or divorce, that she regards it as hers, that she took at the time of the purchase, and has taken since the acquisition, an intelligent and keen interest in it and that she would resist most energetically any attempt to take it away from her. And I accept her evidence that her father was more likely to lend to her than to him. It is no answer to say that the loan was soon repaid. The money had to be forthcoming on settlement. I might add that, even if she was legally forbidden to carry on all or part of the pharmacy business, that would not affect my conclusion that the parties intended that the transactions in question should produce their ostensible legal result and that they did produce that result.
2. Illegality
There were long and able arguments on this matter on both sides, as indeed there were with regard to all the issues in the case. But I remain unconvinced that illegality can affect the case. Let us assume for the purpose of the argument, though, as will be seen, I am not prepared ultimately to accept it, that Mrs. Bayly was carrying on the business of a pharmaceutical chemist illegally, since she was not a qualified pharmacist, and that she was dealing in poisons with the meaning of the regulations under the Food and Drugs Act without being an authorised seller of them. What follows?
In the first place the income she made from these activities, assuming the business to be really hers, would nonetheless be taxable in her hands. It would nonetheless be the proceeds of a business carried on by her within the meaning of the definition of ``income'' in the Income Tax Assessment Act (sec. 6(1)). In these days it is frequently an offence to carry on certain occupations without holding
ATC 4051
licences or other qualifications. Builders, land agents and electricians are only three of the examples that come readily to mind. If someone in this category forgets to renew his licence so that he is in one sense carrying on business illegally, it would be ridiculous to suppose that he immediately ceases to be liable to pay tax. It might be profitable to incur the fine if that were so. And as Lord Morrison said inLindsay & Ors. v. I.R. Commrs. (1933) 18 T.C. 43 at p. 58:
``It is... absurd to suppose that honest gains are charged to tax and dishonest gains escape.''
See also
Southern (H.M. Inspector of Taxes) v. A.B. (1933) 18 T.C. 59.
Secondly, even if as a result of this argument it was held that the agreement to purchase the business from Mrs. Vickers was tainted with illegality, that would not, in my view, prevent Mrs. Bayly from having become the lawful owner of the stock and the goodwill and the lawful tenant of the premises. Where property is transferred pursuant to an illegal contract the title passes to the transferee, Halsbury, Laws of England 4th Ed. Vol. 9 para. 434. Therefore, even if Mrs. Bayly is carrying on business illegally, the stock and goodwill remain hers and she was the lawful tenant of the premises at St. Peters and is the lawful tenant under the lease of the premises at Firle. The income from the business carried on on premises of which she was the tenant and derived from the sale of the stock belonging to her cannot be converted into the appellant's income because of any illegality in the mode of carrying on the business.
For these reasons I do not propose to canvass in detail the arguments with regard to illegality. But in case the matter should go further I should briefly indicate my view.
(a) The Pharmacy Act
In my opinion, despite arguments based on other sections of the Pharmacy Act which might have considerable weight if they stood alone, it is clear from the provisions of sec. 30, added by amendment in 1951, and sec. 25a, added by amendment in 1972, that Mrs. Bayly was not during the year in question prohibited from carrying on a pharmacy business by reason of her lack of professional qualification so long as the business was at all times under the supervision of a registered pharmaceutical chemist and his name was displayed on the premises in the manner indicated by the sections to which I have referred. The appellant is a registered pharmaceutical chemist and the business was under his constant supervision and management. Whether the display of the name ``Bayly'' in the way mentioned in the evidence was a complete compliance with the requirement about the display, I do not find it necessary to decide. If not, it was easily remediable.
I need not elaborate on these conclusions. Section 30 as amended in 1951 in my view permitted a non-qualified person to carry on the business of retailing, compounding and dispensing drugs provided that the requirements of personal supervision by a qualified person and the display of the name of both the proprietor and the supervisor were observed. Section 25a (which came into force on the 20th April, 1972, hence during the year of income) prohibited the ownership or carrying on of a pharmacy business by an unqualified person, but it contained a saving clause in favour of a person who had carried on such a business immediately before the commencement of the amending Act and continued to do so thereafter, provided that the requirements about supervision and display of the name of the supervisor referred to in the section were observed. The provisions about the display of the name are slightly different in the two sections. Probably there was compliance with the first; perhaps not with the second. However, for the reasons which I have given I do not regard that as material. The amending Act of 1972 is, in my view, not only a legislative authorisation for the future, but a legislative recognition of the lawfulness of what had been done in the past.
(b) The Poisons Regulations under the Food and Drugs Act
The regulations prohibit the sale of poisons except in accordance with their provisions. No doubt the normal business of a dispensing chemist does involve the sale of poisons within the meaning of the regulations. The sale of poisons is forbidden except by an authorised seller of poisons or by certain wholesale dealers and holders of special licences or permits (Reg. 110). Mrs. Bayly is certainly not within the latter categories. ``Authorised seller of poisons'' is defined as meaning a registered pharmacist carrying on the business of a retail
ATC 4052
seller of medicines and drugs, provided that the premises where the business is carried on are under his personal control or that of some other registered pharmacist and registered under the Pharmacy Act and that his name and practising certificate issued by the Pharmacy Board are displayed on the premises as required.It may be that Mrs. Bayly was not authorised to sell poisons and that that branch of her business which consists of such sales is being carried on illegally. It may be, on the other hand, that the references to selling and carrying on the business of a retail seller can be read as including a sale made by a registered pharmacist who is lawfully managing a business owned by an unqualified person in the course of such a business. The regulations are linked in with the Pharmacy Act. The reference to the registration of the premises under that Act (as the premises at St. Peters and Firle were registered in this case) and to the display of the practising certificate granted by the Board show that. The regulations in question were made before the 1972 amendment to the Pharmacy Act. The Pharmacy Act and the Food and Drugs Act are the products of the same legislature. It could be argued that one was not intended to stultify the other and that the regulations ought to be read down so as at least not to render unlawful what the Pharmacy Act renders lawful. It is true that one could in theory still carry on a truncated pharmacy business even though the dispensing of prescriptions containing drugs on the poison list was excluded, but that would be unusual, inconvenient to the public and probably uneconomic, and such an intention, I think, is not lightly to be ascribed to any legislative body. Though I incline to the second view in favour of such a restricted construction of the poisons regulations, for the reasons I have given it is not necessary to decide the matter.
(c) The National Health Act
The point made here is that pharmaceutical benefits under the National Health Act are only available in respect of benefits supplied by an approved pharmaceutical chemist (sec. 89), i.e. approved by the Director-General for the purposes of supplying pharmaceutical benefits at particular premises, and that ``pharmaceutical chemist'' is a defined as meaning a person registered as a pharmaceutical chemist under State law and including also a friendly society or other body of persons carrying on business as a pharmaceutical chemist and the legal personal representative of a deceased pharmaceutical chemist carrying on his business (sec. 4). No mention is made of the unqualified owner of a business lawfully managed under State law by a registered pharmaceutical chemist. Mr. Matheson naturally placed reliance on the specific inclusions and the absence of any inclusion of persons in the position of Mrs. Bayly, and hence it was said that her customers were not entitled to pharmaceutical benefits.
This is not really an argument based on illegality at all. Indeed I doubt if Mr. Matheson intended it to be so. I mention it here for the sake of completeness, but a detailed discussion of the point and of the facts which raise it in the present case is perhaps more properly dealt with under the next head.
3. Derivation of Income
Section 17 imposes income tax on the taxable income derived during the year in question. Section 19 reads:
``Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.''
No doubt these words are apt to catch any disposition by the taxpayer after it is earned of income which is really his when it is earned. Clearly they cannot apply where the right to receive the income has been alienated in advance, so that it is no longer his income when it accrues but the income of someone else, e.g. a moneylender to whom the right to receive it has been assigned before it accrues, cf.
Perkins' Executors v. I.R. Commrs. (1928) 13 T.C. 851, per Rowlatt J. at p. 858. Clearly, too, a servant or manager does not derive his employer's income within the meaning of sec. 19 merely because it is earned as the result of his labours or is paid into his hands.
Mr. Matheson placed some reliance in this part of the case on what was said by Gibbs J. in
Hollyock v. F.C. of T. 71 ATC 4202 at p. 4204; 125 C.L.R. 647 at pp. 653-4. What the learned judge said there was said by way of observation on a point which he did not find it necessary to decide. There the pharmaceutical
ATC 4053
chemist concerned had declared that he held the assets of his business on trust for his wife and himself and it was in connection with that state of facts that the learned judge said at ATC p. 4204 and C.L.R. p. 653:``There is something to be said for the view that quite apart from sec. 260 the entire income derived from the business was income derived by the appellant and that the trust only operated on the income after he had earned it and had become liable to pay tax on it.''
In short, if I am right in my conclusion that there was nothing sham about the arrangement here and that the parties intended that Mrs. Bayly should become, both in law and in equity, the owner of the business, its stock and goodwill, and the tenant of the premises on which the business was carried on, there is no room for the argument that he derived the income from the business as a whole simply because he managed it on her behalf.
There is, however, a more limited argument confined to part only of the income from the business, that springing from the payment of pharmaceutical benefits and of agency fees from the Mutual Hospital Association and the Savings Bank, which demands specific attention.
In so far as it is based on the construction of the provisions of the National Health Act. to which I have previously referred, I do not find it necessary to explore it. If in the circumstances which have happened the customers of the Bayly Pharmacy were not entitled to receive pharmaceutical benefits in respect of prescriptions filled for them by the appellant, so be it. That does not in itself make the income in respect of such benefits actually received by Bayly Pharmacy - even if on the argument improperly or even illegally received - his income. A similar remark applies to an argument based on sec. 82F of the Income Tax Assessment Act, which allows deductions to taxpayers for medical expenses including payments to a legally qualified chemist. If Mrs. Bayly's customers are not entitled to such a deduction, that does not make the income his. Again, if I had had to decide it, I think it would be possible to read down both sec. 82F and the relevant provisions of the National Health Act so as to avoid these results, but I do not stay to discuss the matter.
There is an argument, however, based on the actual course of business in the year in question in respect to the pharmaceutical benefits and agency fees which lends some colour to the contention that, whatever may be the case with regard to the income from the business as a whole, these particular amounts were income derived by him.
The claim for payments for pharmaceutical benefits under the National Health Act were signed by the appellant as claimant. They contain a certificate by him that the benefits in question, i.e. the drugs and medicines compounded in accordance with prescriptions received by him - ``were supplied by me or on my behalf'' and that the conditions specified in sec. 92A of the National Health Act have been complied with. Certainly this could be construed as a claim for money in respect of goods and services supplied or rendered by the appellant as a principal.
These claim forms, however, must be read within the context of the correspondence passing between the appellant and the Department of Health.
In March 1970 the appellant made an application to the Department of Health for approval in respect of pharmaceutical benefits. The application was not put in, but the answer was. That reads as follows:
``Dear Mr. Bayly,
Thank you for your application of 16 March 1970.
Under Section 90 of the National Health Act Peter John Bayly is approved as pharmacist manager to supply pharmaceutical benefits at premises situated at 117 Payneham Road, St. Peters, South Australia as from 5 April, 1970.
The registered number 6119 should be used in all official communications with this department.
When you cease to act as pharmacist manager for Mrs. C.J. Bayly you are required under Section 98(2) to notify the Commonwealth Director of Health, Adelaide accordingly.
Yours sincerely,
(signed) L.S.D. Campbell
Delegate of the Director General of Health''
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When the business was transferred to Firle he made a further application. This is in evidence. He applied for approval as a registered pharmaceutical chemist, but on behalf of his wife. The Department answered in terms similar to those of the letter just quoted.
It will be seen, therefore, that approval was given to him as pharmacist manager on her behalf. That shows at least that the Department did not regard it as shocking that pharmaceutical benefits should be supplied by a pharmaceutical chemist from the premises of a business of which he was not the owner. That may or may not throw some light on the proper interpretation of the relevant sections of the National Health Act.
But at least, in my view, it prevents any inference being drawn against the appellant from the terms of the claim form. When he was talking about benefits supplied by him or on his behalf he was, in my view, talking about benefits supplied by him as pharmacist/manager within the terms of the correspondence with the Department to which, after all, the claim forms were rendered, and I do not think that payment for these benefits was derived by him otherwise than as manager for her.
Commission was paid to ``Bayly Pharmacy'' in pursuance of an agreement with the Mutual Hospital Association relating to St. Peters and dated the 20th April 1970 (Ex. D. 14) and another agreement relating to Firle dated the 21st April 1972 (Ex. P. 8). The second agreement is signed by Mrs. Bayly but the first agreement is signed by the appellant though the agent as defined in the document is Bayly Pharmacy. The appellant's signature, in my view, was placed on the first form as agent for Bayly Pharmacy, that is for Mrs. Bayly. I see no reason to distinguish the payments for commission under the agreements from any other receipts of the business.
On the other hand, the application for the Savings Bank agency at St. Peters was made by the appellant in his own name (Ex. D. 16). He entered into a bond in his own name with relation to that agency on the 21st April 1970 (Ex. D. 17). There is no reference in either document to Bayly's Pharmacy or to Mrs. Bayly and nothing to indicate that he was not entering into the agreement on his own behalf but on behalf of someone else. After the move a new agreement was entered into between the bank and Mrs. Bayly.
For some time I was in doubt about the Savings Bank commission from the St. Peters agency. I thought there was a strong argument for the proposition that this was a venture of his own entered into on his own behalf and that he did derive the income from it within the meaning of sec. 19, even if he could have been made to account for it to his wife. But on consideration I think that that would be an unreal construction. He said in evidence that he was acting on behalf of his wife's pharmacy when he applied for the agency. The evidence is that these agencies are traditionally associated with pharmacies. I do not see why he would want to depart from the general principle that the receipts of the pharmacy were hers for the sake of this small sum. I think that he made the application and signed the bond in his own name without thought. I think the commission was received by him as his wife's manager and agent and that he entered into the agency agreement on behalf of an undisclosed principal, namely his wife.
Accordingly I think that the derivation argument fails.
4. Section 260
This is the branch of the case on which Mr. Matheson placed the greatest weight.
I begin by setting out sec. 260:
``Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -
- (a) altering the incidence of any income tax;
- (b) relieving any person from liability to pay any income tax or make any return;
- (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
- (d) preventing the operation of this Act in any respect,
be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.''
ATC 4055
It and its legislative predecessors and its legislative analogues in other countries have received much judicial attention. The courts have striven to place some restriction on the extravagant generality of the language and to confine it within reasonable bounds.
Mr. Matheson was asked by Mr. Fisher, Q.C. for the appellant to give some particulars of his case on this point and, in particular, to specify the contract, agreement or arrangement relied on. He did so in the following terms:
``COMMISSIONER'S VIEW OF ARRANGEMENT UNDER SEC. 260
AN arrangement entered into:
IN or about the months of February and March 1970 -
BETWEEN
- Peter John Bayly (the appellant) and
- Carol Joan Bayly (the appellant's wife)
THAT the pharmacy business which the appellant was in the process of negotiating to buy, or had decided to buy, would be bought and carried on by the appellant's wife, on the basis that -
(i) the appellant's wife would enter into an agreement for sale and purchase with a Mrs. Vickers to purchase the pharmacy business at St. Peters;
(ii) the appellant's wife would enter into a tenancy agreement in respect of business premises at St. Peters;
(iii) the appellant would be employed by his wife as manager of the pharmacy business at a salary;
(iv) the appellant and his wife would do all such other things necessary to enable the income of the pharmacy business to be derived by the appellant's wife.
AND whereby in those months and since -
(a) The appellant's wife did enter into an agreement for sale and purchase with Mrs. Vickers to purchase the pharmacy business at St. Peters;
(b) The appellant's wife did enter into tenancy agreements in respect of the business premises at St. Peters and subsequently at Firle;
(c) The appellant's wife did employ the appellant as manager of the respective pharmacy businesses at a salary;
(d) The appellant and his wife did all such other things necessary to enable the income of the pharmacy business to be derived by the appellant's wife
AND the arrangement has or purports to have the purpose or effect of defeating or avoiding liability imposed on the appellant by the Act.''
The arrangement relied on, then, is an arrangement which includes at least three separate transactions, the sale and purchase of the business, the tenancy agreement and the contract of employment. That, of course, is not fatal to the argument. An arrangement under this section may comprehend an initial plan and all the transactions by which it is carried into effect,
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at pp. 7-8.
Two questions arise:
(1) Is the arrangement an arrangement within the meaning of the section?
(2) If it is, is the consequence of holding it to be void as against the Commissioner that the appellant is liable to pay tax on the net profits of the business?
I say at once that in my opinion the answer to the second question is ``No'' and therefore strictly speaking it is unnecessary to answer the first. But again, in case the matter goes further, I should express my opinion on it, but, because of the conclusions which I have reached on the second question, I do not canvass the cases to the extent which might otherwise have been desirable.
If one were to look at the section untrammelled by authority and to give normal effect to the presence of the disjunctive ``or'' in the phrase ``purpose or effect'', one would say that the two nouns were meant to have separate operation and that what was caught was both a transaction which had the forbidden motive, whatever effect it had in practice, and a transaction which had the forbidden consequence, whether it was intended or contemplated or not. But that is not the way in which the section has been interpreted. There are apparently not two questions but one only. Lord Denning, in delivering the judgment of the Privy Council in Newton's case above, said at p. 8:
``The word `purpose' means, not motive, but the effect which it is sought to achieve
ATC 4056
- the end in view. The word `effect' means the end accomplished or achieved. The whole set of words denotes concerted action to an end - the end of avoiding tax... the section is not concerned with their desire to avoid tax, but only the means which they employ to do it... In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.''
In order to decide the first question, then, it is necessary to look at what was done in order to see whether it can be predicated that it was done in that way in order to avoid tax and that the transactions in question are not capable of explanation by reference to ordinary business or family dealing.
I accept that ``business or family dealings'' are only examples of transactions capable of reasonable explanation by reference to considerations other than the avoidance of tax,
Hancock v. F.C. of T. (1961) 108 C.L.R. 258 at p. 283.
I accept also that it is not necessary in order to attract the operation of the section that tax avoidance should be the sole purpose of the arrangement. In Hollyock's case above Gibbs J. held that it was not necessary that it should even be the principal purpose. He said that it is enough if it was not merely inessential or incidental (ATC p. 4206 and C.L.R. p. 657).
It seems to me, however, that in the recent case of
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. 76 ATC 6001 the Privy Council has reverted in effect to the formulation expressed in
Mangin v. Commr. of I.R. 70 ATC 6001 at p. 6006; (1971) A.C. 739 at p. 751. In the Europa case their Lordships said that the section does not strike down arrangements which do not have as their main purpose or one of their main purposes tax avoidance (p. 6009).
I think that I must accept this last dictum. I have expatiated at some length on the point in
Jones v. F.C. of T. 77 ATC 4058, judgment in which is being delivered contemporaneously, where it is of decisive importance.
I turn therefore to see what were the main purposes of the arrangement.
In order, however, to see what you can predicate of it is not enough to look at the mere words of the documents. All the surrounding circumstances must be taken into account.
In doing that different minds may come to different conclusions. Thus the fact that the dealings are between husband and wife and relate to the husband's occupation may tend to dissipate suspicion,
Peacock v. F.C. of T. 76 ATC 4375 at p. 4385, or to increase it,
Peate v. F.C. of T. (1964) 111 C.L.R. 443 at p. 459. The unusual nature of the arrangement may excite enquiry, but even unusual transactions, when all the facts are known, have been held to escape the net of sec. 260, Peacock's case above.
If it had been necessary to decide whether this arrangement was caught by sec. 260 in order to decide the case, a detailed analysis would probably be called for. It is enough, for my purposes, to say that on the evidence I think it can be predicated that the purpose and effect of this arrangement was to give Mrs. Bayly an asset of her own, both because she wanted one and as a security against death or divorce, and also to protect the appellant as a professional man against the risk of bankruptcy in the operation of a decaying and speculative enterprise. In addition I think that the necessary finance was at least more easily obtained, and possibly only obtainable, if she was the sole purchaser. Tax avoidance was certainly not, in my view, one of the main purposes of the arrangement. Indeed I think it was inessential and incidental. It is not without significance that the machinery of trust used in Hollyock's case was not employed and, in my view, the ownership and operation of a pharmacy business by an unqualified person is not necessarily illegal (cf. Hollyock's case), at least not for all purposes and could not have been thought to be illegal at the time of the purchase, and was certainly not thought to be so by the parties here, even if it was feared that it might shortly become so in respect of future transactions.
But these questions are, in my view, academic. Even if the arrangement is caught by the section and void as against the Commissioner that would not suffice to put
ATC 4057
the income notionally into the hands of the appellant so as to make him taxable upon it.The effect of sec. 260 is simply to annihilate the arrangement as against the Commissioner. One looks then to see what would happen here if the arrangement was so annihilated. If the whole arrangement referred to in Mr. Matheson's memorandum is wiped out, the only result would be to leave the business and the premises in the hands of Mrs. Vickers and the appellant presumable still working in the pharmacy at Clare. It could not vest the stock and goodwill of the business in him or make him the tenant of the premises. It could not make the income from the business the income from his business, cf.
War Assets Pty. Ltd. v. F.C. of T. (1954) 91 C.L.R. 53. To annihilate a transaction is not to impose on the taxpayer a liability which could only arise out of some other transaction into which he might have entered but did not enter,
Clarke v. F.C. of T. (1932) 48 C.L.R. 56 at p. 77. It cannot be said that ``the end result'' (see Newton's case at p. 10) or ``the facts which remain'' (see
Bell v. F.C. of T. (1953) 87 C.L.R. 548 at p. 573) leave him as the owner of the business. They do not. No annihilating as against the Commissioner can make him the owner of the stock or the tenant of the premises. It would be absurd to say that he must be taxed on the gross takings with no regard for the rent or the purchase price of the stock. It seems to me, as it seemed to Lord Donovan in
Peate v. F.C. of T. (1966) 116 C.L.R. 38 at p. 55, that the conclusion to which Mr. Matheson invites me to come ``substitutes fiction for fact, and is thus in conflict with repeated judicial pronouncements that sec. 260 does not permit such inventions''. In my respectful view the force of this remark is not affected by its presence in a dissenting judgment.
This case differs from cases which may appear at first sight to be similar to it like Peate's case and Hollyock's case above and
Millard v. F.C. of T. (1962) 108 C.L.R. 336, because in those cases the taxpayer directly or indirectly divested himself of a business or a share in a business which was formerly his in favour of his family or a company of which his family took the benefit. When the arrangement was annihilated as against the Commissioner the taxpayer was left with the business or a share in the business on his hands. The status quo ante was notionally restored. Here the business was never the appellant's business and the operation of sec. 260 cannot make it his. In Hollyock's case above Gibbs J. said at the conclusion of his reasons for judgment:
``Once the arrangement whose purpose was to avoid tax is annihilated, what clearly remains in the present case is that the appellant received the entire income from the pharmacy business.''
There the taxpayer had agreed to sell a half share in his pharmacy business to his wife, though the purchase price was not immediately payable, and had declared that he held the business on trust for his wife and himself in equal shares. The wife's equitable interest under the declaration of trust being annihilated as against the Commissioner, that notionally left the taxpayer with a full equitable as well as legal interest in the business. When the learned judge spoke of the appellant receiving the entire income from the pharmacy business he was, in my view, speaking of the net income, not the gross income. The arrangement in question here cannot be annihilated so as to leave the appellant with the net income of the business.
It may seem capricious that a man can obtain an advantage by the purchase of a new business in the name of his wife (though that is not a correct description of what happened here) which he could not have obtained from a transfer of his existing business into the name of his wife. But the ordinary principles of the civil law will operate in the same way in both cases. The capricious effect arises from the language of sec. 260. It is, in my view, so framed as to strike down the second and not the first. It would be different if, as has so often been remarked, the section had given the Commissioner a power to re-assess the taxpayer in accordance with the justice and logic of the particular case in a manner appropriate to any situation created by the operation of sec. 260. Parliament did not do that. It gave the Commissioner power to destroy, perhaps to reinstate the old, but not to construct on a new basis.
The consequence is that, in my view, the Commissioner fails on all points.
The appeal is allowed, the disallowance of the objection set aside and the objection allowed in toto.
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