Daniels v. Federal Commissioner of Taxation
Judges:Sweeney J
Court:
Federal Court
Sweeney J.
There are before the Court notices of referral of six decisions of the respondent (``the Commissioner'') disallowing objections by John Watson Daniels (``the taxpayer'') against assessments to income tax in respect of each of the years of income ending 30 June 1981, 1982, 1983, 1984, 1985 and 1986. The assessment in respect of the 1981 year was an original assessment and the remainder were amended assessments. At the request of the parties, the cases have been heard together. They involve, amongst other things, a consideration of sec. 260 and 170 of the Income Tax Assessment Act 1936 (Cth) (``the Act'').
The taxpayer was born in Scotland in 1940, and married in 1969. He has two children, born
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in 1970 and 1972 respectively. In the 16 or 17 years before migrating to Australia he had worked in Holland as a contract draftsman, on the basis that his employer was an agency which provided drafting services to the end users.Before coming to Australia, the taxpayer had sent a resume of his experience and qualifications to a number of Australian firms, which were either end users of drafting services or agencies for the supply of such services. The taxpayer received replies from some of them, including Bechtel Pacific Corporation Limited (``Bechtel'') who had received a completed employment application form from him on 1 September 1980. In its letter dated 19 September 1980 Bechtel suggested that on arrival in Australia he should make an appointment for an interview.
The taxpayer arrived in Australia on 14 January 1981 and on 27 January he was engaged by Jon and Associates, an agency, to render drafting services which they had agreed to provide to Bechtel as the end user. For the work which he did between 27 January and 18 February he was paid by cheque from Jon and Associates made payable to him. He included the amount of the cheque, $399, in his personal income tax return for the year ended 30 June 1981 under the heading ``Contract Drafting''.
Jon and Associates had advised the taxpayer to see Mr Brown, an accountant, upon whose advice J.W. Daniels Design Services Pty. Ltd. (``the company'') was incorporated on 18 February 1989 and thereafter acted as trustee for the J.W. Daniels Family Trust (``the Trust'') which was constituted on the same day. All subsequent cheques from Jon and Associates were made payable to the company.
There was tendered in evidence a document in the following terms:
Contract of employment
- This agreement made 20 January 1981 between Jack Daniels and J.W. Daniels Design Services Pty. Ltd. (hereinafter called ``the Company'').
- 1. It is agreed that the company will use its best endeavours to procure work for Jack Daniels in his capacity as a draftsman.
- 2. It is agreed that the company will receive all payments due under contracts performed by Jack Daniels.
- 3. It is agreed that the company will pay Jack Daniels and annual fee as may be mutually agreed from time to time for the performance of the work contracted.
- J. Daniels [signed]
- .......................
- Jack Daniels
- J. Daniels [signed]
- ........................
- J.W. Daniels Design Services Pty. Ltd.
In his affidavit of 21 December 1988 the taxpayer said, amongst other things:
``3. On 20th January 1981 Jack Daniels (hereinafter called `Daniels') entered into a contract with the prospective Trustee Company which was to procure work for him in his capacity as a draughtsman. Annexed hereto and marked JWD21 is a copy of the said agreement. (This has been set out above.)
4. The Trustee Company has employed Daniels as a draughtsman/designer and has made payments to him as follows:
- (a) One half of the family Trust's net income for the tax income year ending 30th June 1981
- (b) $11,000 for the year ending 30th June 1982
- (c) $17,000 for the year ending 30th June 1983
- (d) $13,000 for the year ending 30th June 1984
- (e) $28,000 for the year ending 30th June 1985
- (f) $23,000 for the year ending 30th June 1986
These payments were shown in the income tax returns filed by the Trustee Company on behalf of the Trust...
An adjustment sheet in the following terms in respect of the year ended 30th June 1986 was received on 22nd April 1987:
`The following is the basis of calculation of net income from personal exertion for the year ended 30th June 1986.
Gross Income $45,522 Total Expenditure Claimed $44,712 Less Expenditure disallowed Wages - John Daniels $23,000 - Olga Daniels $ 3,860 Filing Fees $ 95 $26,955 $17,757 ------- -------- Net Income $27,767' -------- 5. Adjustment sheets couched in similar terms were received in respect of the other years....
6. Contracts were obtained for Daniels as detailed in the following documents:... (The deponent then set out the relevant letters.)
6. [sic] The Trust carries on the business of providing drafting services to various forms on a totally arms-length basis. The Trust agreed to provide the relevant firms with very specialised high level expertise on an assignment by assignment basis. The level of the expertise required for each assignment was beyond the capacity of the personnel of the firms to which the Trust contracted its services to. Although the nature of the services provided by the Trust required some time to be spent on the premises of the various firms with whom it contracted its services, it is emphasised that the personnel involved with providing such services on behalf of the Trust can in no way be construed as having acted under a master/servant relationship with the firms concerned, as was the position of course in the case of the firms' own employees. There was no formal provision for the Trust's personnel to work all their specific hours on the client's premises. Nor did they perform the work under the supervision of any of the client's employees. Also of course the Trust could be performing work for more than one client at the same time.
The Trustee Company invoiced the firms for all work done in its name....
Payment for the work done by Daniels was received by the Trustee Company and banked into its bank account.
...
Olga Daniels (Daniels' wife) was employed by the Trust doing general office duties during the years under appeal in accordance with an agreement entered into in January 1981....
8. Details of the wages paid to Olga Daniels are shown in the income tax returns lodged. The net income of the Trust for the year ended 30th June 1981 was divided between Daniels and his wife. In subsequent years they were paid wages and the net income of the Trust in the year ended 30th June 1982 was divided between Daniels, his wife, his two children and Blanca Layanna. In the years 1983 and 1986 inclusive the net income of the Trust was divided between Daniels, his wife, and his two children. Details of payments are shown in the income tax returns filed.
9. The Trustee Company became registered as a group employer on 1st January 1982 (Group No. 2363804)....
10. On 17th September 1985 the Trustee Company was registered as an employer for Workcare with the Accident Compensation Commissioner (No. 1513363)....
11. The Trustee Company has kept a separate office facility - it uses its own letterhead on stationery - it owns its own plant and equipment.''
The Commissioner, in the original assessment for 1981 and the amended assessments for 1982-86, assessed the taxpayer on the basis that he, and not the company, was the recipient of the income shown in the trustee company's returns. This assessment was based upon sec. 260 of the Act which reads as follows:
``(1) 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 -
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- (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.
(2) This section does not apply to any contract, agreement or arrangement made or entered into after 27 May 1981.''
Having been requested by the taxpayer to identify the ``contract agreement or arrangement alleged to have been struck down by sec. 260'', the Commissioner replied that it was ``the imposition of the trust between Mr Daniels and the respective employers''. The word ``imposition'' by common consent has been read as if it were ``interposition''.
In
Peate v. F.C. of T. (1963-1964) 111 C.L.R. 443 and (1966) 116 C.L.R. 38 a group of doctors, having determined the partnership under which they formerly practised, each formed a family company to which they sold their individual practices and plant. Each doctor then entered into a service agreement with his family company. As Menzies J., sitting at first instance, pointed out (at p. 447), the central feature of Dr Peate's agreement with his family company was that he should serve it ``as Medical Practitioner in the business carried on by the Company'' ``at a salary of £1,000 per annum or other agreed sum and in so doing should obey the lawful orders of the directors''.
That agreement contemplated that his family company might nominate a company or partnership carrying on a similar business which Dr Peate should serve and Menzies J. (at p. 449) was satisfied that the intended nominee was A.E. Westbank Pty. Limited, the same company which was set up to be the nominee of each of the family companies of the other members of the group. Dr Peate's wife received a salary for her services as secretary to his family company.
Assessments were made by the Commissioner which wholly disregarded the family company and disregarded the nominee company ``except to the extent that in starting from its net income Dr Peate was given the advantage of a proportion of the moneys which it had spent and which it claimed as deductions. In the result Dr Peate was assessed to tax on a taxable income of £4,298 instead of his return of taxable income of £1,232'' (p. 455).
Menzies J. decided 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''. He was satisfied that what was done was not explicable ``by reference to ordinary business or family dealing'', to use the language of Lord Denning in
Newton's case (1958) 98 C.L.R. 1 (at p. 8).
Menzies J. did not think "that the
War Assets case (1954) 91 C.L.R. 53 shows that what took place here was an ordinary business transaction" (p. 459).
His Honour referred to
Millard v. F.C. of T. (1962) 108 C.L.R. 336, in which a registered bookmaker had entered into an agreement with a proprietary company whereby it was provided that as from its date the company should take over from the taxpayer and carry on the bookmaking business on its own behalf and that as from the same date the taxpayer should carry on all bookmaking activities hitherto carried on by him on his own behalf for and on behalf of the company and as its agent. The company bound itself to pay him a fixed sum at an annual rate during the continuance of the agreement. All shares in the company were held by the taxpayer, his wife and his children.
In that case, Taylor J. (at p. 342) said:
``To my mind it is about as plain as it could be that the whole purpose and effect of the agreement was to split the appellant's income into a number of parts in order to minimize the amount of tax which would become payable.''
Having held that sec. 260 applied to Peate's case, Menzies J. went on (at p. 461) to hold that it was the making of the agreements with the nominee company and the making of Dr Peate's agreement with his family company
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``which effectuated the tax-avoiding purpose with regard to Dr Peate. These agreements must, therefore, be disregarded''.In the Full Court of the High Court, Kitto J., with whom McTiernan and Owen JJ. agreed, said (at p. 469):
``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.
The case therefore falls, plainly as I venture to think, within the application of s. 260.''
Taylor J. (at p. 475) said:
``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.''
Windeyer J. was also of opinion that sec. 260 applied to the facts of Dr Peate's case.
In the Privy Council (1966) 116 C.L.R. 38, it was said (at p. 43):
``The first question therefore to be determined is did the contracts, agreements and arrangements made in 1956 or any part of them have one of the purposes or effects stated in this section.
In the opinion of their Lordships the answer is in the affirmative. Before these arrangements were made in 1956 the appellant received 14 per cent of the net profits of the partnership and was assessed accordingly. After they were made, the doctors who had been partners treated patients in the same way as they had before but as a result of these arrangements, their incomes from the practice of their profession were reduced to the salaries received from the `family' companies who received either by way of service fees or dividends the same percentage of the net profits of Westbank as the doctors had been entitled to under the partnership agreement.
In their Lordships' opinion these arrangements have the purpose and effect of avoiding a liability imposed on each doctor by the Income Tax and Social Services Contribution Assessment Act.
It follows from this conclusion that the respondent was right to treat as void as against him or in regard to any proceedings under the Act the whole or any part of any contract, agreement or arrangement which directly or indirectly had this effect.''
Peate's case was applied in the cases of
F.C. of T. v. Gulland, Watson and Pincus 85 ATC 4765; (1985) 160 C.L.R. 55.
Dr Gulland, a medical practitioner ``who had practised on his own account, began to practise as an employee of a unit trust, with the result that some of the income which would otherwise have been expected to be his was received by the beneficiaries of the trust who were members of his family. Both before and after the rearrangement, the practitioner conducted professional activities at the same place essentially in the same manner although the trustees of the unit trust made superannuation arrangements for the employees of the trust under which contributions to the superannuation fund were allowable deductions under sec. 51 of the Income Tax Assessment Act 1936 (Cth)''.
Gibbs C.J., Wilson, Brennan and Dawson JJ. (Deane J. dissenting) held that:
``Section 260 of the Act enabled the Commissioner to disregard the rearrangement and to treat the loss of the trust as a loss incurred by the practitioner; by Gibbs C.J. and Brennan J. on the ground that while a taxpayer may choose to
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organize his affairs in such a way as to take advantage of tax benefits provided by the specific and particular provisions of the Act, the choice principle recognized by
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 did not apply to an arrangement which did not attract such a benefit but sought to divert income from one taxpayer to another; and by Dawson J. on the ground that the choice principle did not apply when it was apparent from the circumstances that a choice involving a change in the way a taxpayer's business or professional activities were conducted had been made in order to avoid tax.''
Mr Watson who had conducted a medical practice in partnership set up a family trust, as did his partner. Together they set up a service trust controlled by the former partners and a unit trust in which the units were held by the trustees of the family trusts. The partners sold the practice to the unit turst, employment agreements were made between the unit trust and the practitioners, a superannuation fund was created for them as employees of the unit trust and a service agreement was made between the service trust and the unit trust. Original assessments were issued to Mr Watson on a basis consistent with the effectiveness of the arrangements. An amended assessment was later raised on the application to the arrangements of sec. 260.
Dr Pincus, had ``conducted a medical practice in partnership, which was dissolved and a family trust was set up by each of the former partners. The assets of the partnership, through the medium of these family trusts, were sold to the trustee of a unit trust who thereafter employed Dr Pincus. Half of the income of the unit trust was distributed to his children as beneficiaries of the family trust''.
In his judgment in the cases of Gulland and Watson, Gibbs C.J., after reviewing the authorities, said (at ATC pp. 4773-4774; C.L.R. pp. 71-72):
``In my opinion the arrangements made by Mr Watson, like those in Peate v. F.C. of T., bear on their face an indication of a purpose to avoid tax. It is true that the arrangement revealed other purposes as well, namely the desire to make adequate provision for the superannuation of Mr Watson and to benefit the members of his family. I do not think that the attempt to obtain deductions for contributions to the superannuation fund should be treated as merely another attempt at tax avoidance. It would have been possible, theoretically at least, for Mr Watson to provide for himself a superannuation scheme while he remained self-employed, but unless he were an employee, contributions to the superannuation scheme would not have been tax deductible. As at present advised I do not consider that sec. 260 would have frustrated an arrangement made by Mr Watson to become an employee for the purpose of enabling his employer to have the benefit of the deductions allowed by sec. 82AAC of the Act, even if the employer were a company or trust which he himself controlled. However, the arrangements in fact made, went far beyond what was necessary to take advantage of the tax benefit provided by sec. 82AAC. The creation of the unit trust, and the allocation of units in the trust to the trustees of the family trust, together with the employment agreement, viewed objectively, can only be regarded as an attempt to split the income from Mr Watson's practice, and thus to avoid tax which Mr Watson would otherwise have paid, or to alter the incidence of the tax payable on that income. I am unable to agree that tax avoidance was an inessential or incidental feature of the arrangement. At the very least it was one of the main purposes of the arrangement and sec. 260 accordingly applies.
In my opinion sec. 260 also applies to the arrangements made by Dr Gulland. I have already mentioned the points of distinction between the two cases. The introduction of another medical practitioner quite unconnected with the practice, as co-trustee of the unit trust emphasized the artificiality of the arrangement. On the other hand, the arrangement, if effective against the Commissioner, would have increased rather than reduced Dr Gulland's income in the relevant income year, because the unit trust made a loss during that year. It does not follow that the arrangement did not have one of the purposes or effects described in sec. 260. Viewed as an arrangement intended to operate in future years, the objective purpose of the arrangement can be
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seen to be an attempt to avoid tax. Further, the arrangement had the purpose and effect of altering the incidence of tax in the relevant income year.The fact that Dr Gulland's family trust was already in place leads to no different conclusion. The creation of the unit trust, and the issue of all the units in that trust to the trustee of the family trust, stamped the arrangement as one whose purpose or effect was to avoid tax or alter the incidence of tax.''
The learned Chief Justice considered the facts in the Pincus case, looked at the points of distinction, and having concluded that they were not material, went on to hold that sec. 260 was applicable.
Peate's case had earlier been applied by a Full Court of this Court in
Tupicoff v. F.C. of T. 84 ATC 4851; (1984) 4 F.C.R. 505, in which the taxpayer had resigned his appointment as an agent on commission for an assurance company, and procured the appointment in his stead of a company which was the trustee of a newly-formed discretionary trust, the beneficiaries of which were the taxpayer and members of his family. He thereafter continued selling policies for the assurance company, which paid or credited the appropriate commissions to the trustee of $10,492 to the wife and children of the taxpayer and lodged an income tax return accordingly. The Commissioner added the amount of $10,492 to the taxable income of the taxpayer. It was held at first instance that the taxpayer's arrangement was void as against the Commissioner within the meaning of sec. 260 and the Full Court dismissed the taxpayer's appeal.
In
F.C. of T. v. Bunting 89 ATC 4358 Lockhart J. had before him an appeal from the Administrative Appeals Tribunal which had decided that the arrangements made by the taxpayer were not avoided by sec. 260.
Mr Bunting had migrated from England to Australia in March 1980, having been employed in England for about a decade by various companies as a computer programmer and later as a computer systems analyst. After his arrival in Australia he arranged for the incorporation of a company on 9 April 1980 and on 14 April it became the trustee of a discretionary trust, the beneficiaries of which were members of his family. Mr Bunting was excluded from the class of beneficiaries.
The Tribunal had found that Mr Bunting became an employee of the trustee company which entered into contracts with end users to provide them with consultancy services. The necessary consultancy work was done by Mr Bunting. The end users paid the trustee company for these services and it paid him a salary and on 29 May 1981 established a superannuation fund for him, its only employee.
The Tribunal was satisfied that there was no transaction or situation which preceded the derivation of income by the trust upon which sec. 260 could operate, holding that the section says nothing about how a new stream of income should flow, in a case where no existing stream of income could be said to have been rechannelled. It did not regard the earlier derivation of income in the United Kingdom as constituting an antecedent situation for the purposes of sec. 260. It reduced the taxable income of Mr Bunting accordingly.
Lockhart J. held (at p. 4362) that:
``No business or family purpose can be found for the creation of the family trust. The trust is a discretionary trust from which Mr Bunting is expressly excluded as a beneficiary. This provides a strong indication that the primary purpose of the transaction was to split Mr Bunting's income between himself and members of his family.''
His Honour held that the choice principle was of no assistance to Mr Bunting and turned to consider what he described as ``the critical question on which this case ultimately turns'', namely ``whether there was an antecedent transaction or situation in the sense in which those expressions are used in the authorities'', saying (at p. 4363):
``It is generally accepted that sec. 260 does not apply where there was no antecedent transaction or situation whereby income was derived. This principle is based on the ground that the operation of sec. 260 has been said to be dependent upon an alteration in the incidence of tax or in some existing liability to pay tax...''
His Honour quoted the passage from the judgment of Gibbs C.J. in Gulland (at ATC pp.
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4774-4775; C.L.R. p. 73) which has been set out above, and continued:``It is true that Mr Bunting derived no income in Australia until after he migrated here. But he arrived in this country on 27 March 1980 and very soon thereafter commenced looking for employment of the kind from which he had derived income in the United Kingdom. He commenced working here on 14 April 1980, less than three weeks after his arrival. He must have taken steps to put the income-splitting structure in place almost as soon as he arrived here because Manting was incorporated on 9 April 1980, less than two weeks after his arrival in this country, and the deed of trust was executed five days later, the same day as he commenced work as a computer consultant. In the United Kingdom Mr Bunting had been employed for about 10 years by various companies doing the same kind of work that he did here. There was no antecedent transaction, but there was an antecedent situation consisting of Mr Bunting's practice of his work in the computer industry as or akin to a computer consultant and as an employee. He was in receipt of income; and the fact that it was in the United Kingdom, not Australia, though relevant, is not in my opinion a circumstance which deprives the facts of their character as an antecedent situation within the sense in which that expression is used in the sec. 260 cases.
The arrangement changed that situation and did so for the purpose of altering the incidence of income tax. The change did not give rise to a new source of income. It was Mr Bunting's services before and after the arrangement that produced the income albeit through the intervention of a corporate structure under the arrangement. The moneys paid to Manting were directly related to and calculated by reference to Mr Bunting's services on the basis of an hourly rate. It is from Mr Bunting's activities as an employed computer consultant that the income in question here was derived notwithstanding changes in the intricacies of Mr Bunting's employment details.''
In the light of these judgments, it can be seen that the taxpayer in the present case faced formidable difficulties. His counsel sought to overcome them by submitting that:
- 1. the taxpayer is entitled to the benefit of the choice doctrine;
- 2. the taxpayer was starting afresh in Australia, so that there was no antecedent transaction or situation;
- 3. (a) the Commissioner could succeed under sec. 260 only if he could avoid, not merely the ``contract of employment'' of 20 January 1981 and the ``imposition'' of the Trust between the taxpayer and the end users, but also each of the individual contracts made by the company for the provision of drafting services;
- 3. (b) as some of those individual contracts were made after 27 May 1981 they were saved by the provisions of sec. 260(2);
- 4. in any event the Commissioner was not entitled to rely upon the amended assessments because of the provision in sec. 170(3) of the Act, as it stood at the relevant dates.
It was not necessary for the taxpayer to deal with any contention based upon sham, as the Commissioner did not press this question.
Dealing with the first submission, the doctrine of choice was considered in Tupicoff's case 84 ATC 4851; (1984) 4 F.C.R. 505 where a Full Court held that it had no application to a case where ``the practical, although not the legal, source of the income of the trust is the personal exertion of the taxpayer'' (see per Beaumont J. at ATC p. 4863; C.L.R. p. 522).
In Gulland (cited above) Gibbs C.J. said (at ATC p. 4773; C.L.R. p. 70):
``it is simply not right to say that the Act allows a taxpayer the opportunity to have his own income from personal exertion taxed as though it were income derived by a trust and held for the benefit of a number of beneficiaries.''
Brennan J. said (at ATC p. 4778; C.L.R. p. 79):
``the choice principle operates only to the extent necessary to give effect to a `specific provision' of the Act. The choice principle gives expression to the scope of sec. 260 ascertained by reading down the words of the section in order to allow other and specific provisions of the Act to have their intended operation. The choice principle is inapplicable when the arrangement does not
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attract a tax benefit conferred by a specific provision but is an arrangement which, as in the present cases, seeks to divert income from one taxpayer to another.''
In my opinion, the principle laid down in Tupicoff, Gulland, Watson and Pincus governs the present case and the first submission should be rejected.
Speaking of the subject matter of the second submission, Gibbs C.J. in Gulland and Watson (cited above) said at ATC p. 4775; C.L.R. p. 73:
``there is nothing in sec. 260 that supports the view that that section can apply only when there has been an antecedent transaction between parties. An arrangement will, for example, be within the section if it alters the incidence of income tax in a case in which the only relevant antecedent circumstance is that the taxpayer is in receipt of income.''
In the present case, the receipt by the taxpayer of payment by Jon and Associates for his work between 27 January and 18 February and his inclusion of that payment as income in his personal tax return constituted an antecedent transaction. Even if it had not taken place, I consider that his work for 16 or 17 years in Holland as a contract draftsman employed by an agency would have constituted an antecedent situation. It is indistinguishable from the position in Bunting's case which Lockhart J. held, as I respectfully consider, correctly to amount to an antecedent situation.
Turning to the third submission, it can be seen from the particulars given that the Commissioner under sec. 260 seeks to avoid only the interposition of the trust between the taxpayer and the respective employers, contending that no more is required to sustain the assessment and amended assessments in question.
Once that is done, what remains is a series of payments in respect of the personal exertion of the taxpayer which the Commissioner thereupon treats as part of his assessable income, disregarding the interposition of the trust. In my opinion the Commissioner has no need to seek to avoid the contracts between the trust and the end users. Indeed, he relies upon them to show the derivation of income. As Menzies J. observed in Peate (at p. 461) the agreements to be disregarded in that case were those between Dr Peate, his family company and the nominee company. Menzies J. did not consider it necessary to strike down the agreements made with the individual patients of the practice.
In the same way, the Commissioner does not need to strike down the individual contracts made here by the company for the provision of drafting services. Accordingly, the third submission of the taxpayer is rejected.
His fourth submission was based on sec. 170(3) of the Act, which, at the relevant times, read as follows:
``(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact; and no such amendment shall be made after the expiration of three years from the date upon which the tax became due and payable under that assessment.''
The onus rests upon the taxpayer to show that there is a full and true disclosure of all the material facts necessary for his assessment (
McAndrew v. F.C. of T. (1966) 98 C.L.R. 263).
As Fullagar J. observed in (
Australasian Jam Company Proprietary Limited v. F.C. of T. (1953) 88 C.L.R. 23 at p. 33):
``I think further - what is of some importance in the present case - that, if there is a material omission in the taxpayer's return, it is nothing to the point for the taxpayer to say to the Commissioner: `It was obvious on the face of the return that there was something I had not told you: you could have asked me about it, and, if you had done so, the information would have been immediately and willingly supplied'.''
In Watson's case at first instance 83 ATC 4336 at p. 4351 Kennedy J. held that in a case under sec. 260 the taxpayer must disclose the whole of the arrangement.
The first question to be answered under the subsection is whether ``the taxpayer has made to the Commissioner a full and true disclosure
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of all the material facts necessary for the assessment''.Even if, on the view most favourable to the taxpayer, one reads the returns of the taxpayer, the Trust and the company together, one does not find in them any disclosure of the fact, known to the taxpayer, that he had entered into the ``contract of employment'' with the company pursuant to which it was agreed that the company was to use ``its best endeavours to procure work'' for him ``in his capacity as a draftsman'', to receive ``all payments due under contracts performed by'' him and to pay him ``an annual fee as may be mutually agreed from time to time for the performance of the work contracted''.
This was, in my opinion, a material fact which was ``necessary for the assessment'', as it would have enabled the Commissioner to consider whether he should seek to invoke sec. 260 in reliance upon it.
Accordingly, the taxpayer can take no comfort from subsec. (3).
In my opinion, the overt acts which were done under the taxpayer's plan are not fairly explicable without an inference being drawn that tax avoidance was at the very least a main purpose of the arrangement as a whole. The taxpayer used a method which diverted income away from him to or for the benefit of his family, in order to avoid a substantial part of the tax which would have been incurred if the income had first been derived by him and then applied for the benefit of his family. To borrow the language of Kitto J. the present case falls, plainly as I venture to think, within the application of sec. 260. The decisions of the respondent disallowing the taxpayer's objections should stand. In accordance with the wishes of the parties, I will leave it to them to bring in minutes of orders to be made in each of the six cases and reserve liberty to apply if it proves necessary.
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