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CASE Y31

Members:
YFR Grbich

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 June 1991

Dr YFR Grbich (Senior Member)

This case raises important issues about the width of operation of the ``old'' general anti-tax avoidance provisions in s. 260 of the Income Tax Assessment Act 1936. The question is whether the provision annihilates a unit trust with a corporate trustee set up by a consulting engineer. It is fitting, some 10 years after the ``old'' general anti-avoidance provision in s. 260 abdicated its throne to the new pretender in Part IVA, that we should address the most basic issues on the scope of the annihilation provisions. These issues are just as important in the context of Part IVA. Through this vehicle we now revisit more fundamental issues which were touched on by the Federal Court and High Court in
FC of T v Everett 80 ATC 4076; (1979-1980) 143 CLR 440. Is there some principle or statutory provision which holds that income generated by ``personal exertion'' from labour always retains that character and cannot be diverted through trusts or companies or assignments into the hands of another? If such arrangements are not nullified by general principles, are they attacked by general anti-avoidance provisions? What are the limits to the application of the principles in
Tupicoff v FC of T 84 ATC 4851 and
Bunting v FC of T 89 ATC 5245? What is the relevance of antecedent transactions in the operation of the annihilation test?

2. The taxpayer is a chartered engineer. His work involves advising on project management for large construction projects. He worked in the industry for eight years before graduating. After graduating in 1970 he worked as an engineer for three separate employers until rising in 1974 to project manager, working on the design and construction of a large resource transporting project. His job for a major construction company included business management on the construction site. It included the co-ordination of professionals and tradespersons on site and the review of all advice from consultants.

3. His job with the major construction company ceased in October 1976. He decided to go into his own consulting business in project management. He had his lump sum termination payment of $20,000 from his last job to get him started. He went to a solicitor and a business structure was established. The main feature of the structure was a unit trust with a company as trustee. In the mid 1970s, before the introduction of company tax imputation, such a structure gave tax advantages when income was distributed. Distributed company income was taxed at both the company and the shareholder level. Distributed trust income was taxed at only the beneficiary level.

4. There is some controversy about whether the consultancy business commenced before the taxpayer went to his solicitor for advice on the unit trust structure. In cross-examination the taxpayer could not clearly recall the sequence of events because it was so long ago but conceded he may have started the consulting business before the company was formed. He said ``if there was a gap that would be a very short gap''. The formal structure was established within a month of the business commencing. I find, as a matter of fact, that the unit trust structure was formed on or about the time when the taxpayer left his employer and commenced a new consulting business. If there was an alteration of an antecedent set of arrangements constituted on the commencement of the taxpayer's own business, the earlier arrangements were de minimus. What is more intriguing is the fact, based on the chronology in the documents, that the business structure seems to have commenced before the termination of his work with his previous employer. This point was not picked up or explored in evidence and I shall not rely on it.

5. The structure took the following form. Two shelf companies were acquired. One was renamed after the taxpayer (let us call it ``A Taxpayer Pty. Ltd.'') on 29 September 1976. There is no evidence before me that the taxpayer and his wife formally became shareholders and directors but the taxpayer signed documents as director. The company was made the trustee of the ``Taxpayer Unit Trust'' on 3 December 1976. The other shelf company (let us call it ``A Taxpayer Holdings Pty. Ltd.'') was made its trustee of a family discretionary trust, also on 3 December 1976. Again there is no evidence whether the taxpayer and his wife were shareholders and directors. The trustee of the discretionary trust held units in Taxpayer Unit Trust and distributions, when available, went down the chain. The objects of the discretionary trust were the taxpayer's wife and children, the children's children and the taxpayer's future children. The taxpayer was not an object of the

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discretionary trust. The taxpayer was employed by A Taxpayer Pty. Ltd.

6. The business of A Taxpayer Pty. Ltd. commenced in serviced offices in Sydney. It later acquired a normal office lease. Under the early arrangement the taxpayer was entitled to one room and, for a further fee based on usage, to office services from a pool. One of the secretaries later became an employee. In formal documents the company names were used. On some occasions the taxpayer corresponded under his own name, or in the business name of, let us call it, ``A Taxpayer and Associates''. This business name was registered to A Taxpayer Pty. Ltd. by the Corporate Affairs Commission on 2 December 1977. When he was canvassing for business he sent out his own curriculum vitae or occasionally corresponded or rendered accounts as an individual. On other occasions, he used the company name or business name.

7. The business was successful in obtaining consulting work. It was commissioned by a local government body to advise on a large construction project in 1977. There was evidence that, in the later stages of the project, it engaged consultants to provide reports and personnel on this project in March 1977. A major report was issued in December 1977. The business was also commissioned to engage a general manager for the same project. A further substantial report, involving follow-up work for one of the local bodies, was dated May 1980. The company was also commissioned by receivers of a private construction and manufacturing company. It was engaged to prepare a litigation report. This was six months' work. It involved assessing the client's exposure to potential damages claims under a contract for a major engineering project. The business also reported to a contractor for a major government engineering project on its technical competence to do the work. This was carried out over one or two days. On this project the company engaged consultants to provide a draftsman to assist in the work. It was commissioned to report or assist in design of three other projects.

8. From about 1978 the taxpayer entered into business dealings with Mr K. and a private company, KB Pty. Ltd., run by him. The Taxpayer Unit Trust made loans to K. and KB Pty. Ltd. A Taxpayer Pty. Ltd. performed services for KB Pty. Ltd. These dealings ultimately led to the taxpayer's bankruptcy in December 1982. The receiver of KB Pty. Ltd. enforced a series of guarantees given by the taxpayer.

9. KB Pty. Ltd. ran a business of fitting metal parts to motor vehicles. The taxpayer became personally involved in KB Pty. Ltd. and worked ``quite intensively'' with this enterprise in late 1980 and 1981. In 1981 or 1982 a series of loans was written off and in February 1982 the taxpayer returned largely to his consulting activities. During much of the period KB Pty. Ltd. and the business of the taxpayer shared premises.

10. The business was run by A Taxpayer Pty. Ltd., trustee of the unit trust. Income, when available, was distributed to the trustee of the family discretionary trust. A Taxpayer Holdings Pty. Ltd.

11. The Commissioner invoked s. 260 and assessed the taxpayer for the following amounts:

  • $14,544 for the income year ended 30 June 1980
  • $7,880 for the income year ended 30 June 1981
  • $28,740 for the income year ended 30 June 1982
  • $9,607 for the income year ended 30 June 1983.

For the final year, though the point was not raised in the objection, it was submitted that, since the taxpayer became bankrupt in December 1982, the Commissioner should have proceeded against the trustee in bankruptcy (
Taylor v DFC of T 87 ATC 4441; (1987) 73 ALR 219). Since the parties were not given adequate opportunity to address this argument, I do not intend to rely on it at this stage but give leave for the parties to bring it back to the Tribunal if they wish.

12. Initially the taxpayer's salary was $18,000 per annum. This compared with $20,000 per annum from his last employer. This salary was not maintained. It fell dramatically. In the 1981 year, for example, the taxpayer's salary was $1,892 and $5,998 was distributed by the Taxpayer Unit Trust. Gross fees were $49,893 in this year and consultants were paid $13,655. In 1980 the taxpayer's salary was $3,016 and gross fees

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were $42,186. The taxpayer argued that this fall was due to financial difficulties and the taxpayer's approaching bankruptcy in December 1982. It was explained that:

``one benefit of the structure in that period [leading up to the bankruptcy] was that it enabled expenses to be withdrawn other than in the form of a salary and therefore without the need for it to pass through the hands of the trustee in bankruptcy.''

13. The essence of the Commissioner's argument was that the elaborate legal structure was merely a conduit to the taxpayer personally. To the relevant clients he represented himself as the relevant contracting entity. It was his own personal efforts and reputation that generated the income. It was a contrived arrangement designed to divert income by arranging to have it derived by the unit trust. It was emphasised that in later years most work was done for one client and time sheets for the taxpayer were made available to the client. The taxpayer contended that ``arrangements were not based on the information on those time sheets'' but conceded that the time sheets were provided and signified the amount of work he personally had conducted.

14. The basis of the taxpayer's argument was that this case was to be distinguished from all the earlier decisions in which s. 260 was applied to income from personal exertion. It was not a Friday-Monday arrangement, nor a taxpayer changing legal arrangements mid-stream. In one of the years, it was argued, he paid more tax under these arrangements than he would have paid had he derived income personally. The taxpayer adopted these more complex arrangements because he wanted to provide flexibility for the eventuality that the consulting business might expand and change its nature in the future. He wanted ``to provide the maximum flexibility'' for whatever might occur in future years. The taxpayer established that the company ran a business of consulting engineering which engaged consulting staff, rented accommodation and undertook tasks for clients. It was submitted that the evidence disclosed that what was established here was a business running as many hundreds and thousands of others do in this country and that the taxpayer was not merely interposing an entity between himself and an employer. He distinguished earlier cases from ``cases where a taxpayer simply chooses between equally plausible and recognised business or properly holding vehicles''.

15. Some things are clear from the evidence. A Taxpayer Pty. Ltd. did lease premises and it did employ consultants at a considerable outlay (in the $10,000 range) in three of the relevant years. It did risk capital and it did promote its activities. But, argued the Commissioner, the employment of consultants was no different from a barrister hiring a freelance typist to meet a deadline. It did not alter the nature of the payments to the taxpayer himself.

16. The evidence, not unnaturally, concentrated on the taxpayer's purpose in establishing the unit trust structure. It was put to the taxpayer by counsel for the Commissioner that ``the very purpose of this structure which you well know was to achieve... a splitting of incomes so that part of the income derived by [the taxpayer's] services could be distributed to [the taxpayer's] family''. While the taxpayer did not accept that this was ``the entirety of the situation'', he accepted that he did ``not have any problem'' with the proposition that it was something he was ``well aware of as a benefit of this proposal at that time''.

17. Of course, the hearing took place more than 14 years after these events and the taxpayer's recollection, as one might have expected, was not entirely sharp after this time. On the whole, I found his evidence credible and not shaken in any basic respect under cross-examination. He kept referring to his ignorance of the finer points of trust and tax law and his deferral to the judgment of his legal adviser. But that adviser was not called on to give evidence. Having regard to the technical nature of the issue, the time lapse and the unconscious tendency of humans to reconstruct recollections in terms of subsequent knowledge, it is difficult to put conclusive weight on evidence in the witness box relating to his purposes. Suffice to say that the taxpayer concedes discussing the pros and cons of a number of structures before giving his solicitor authority to put the thing together in the most appropriate fashion. I find, as a matter of fact, that while the taxpayer was not fully aware of all the technicalities of law, that at the time he went into the arrangements he knew of the

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broad tax impact of the arrangements and instructed his legal adviser to implement them in accordance with this broad understanding of the tax and other legal outcomes.

18. All of this demonstrates the wisdom of going back to basic principles and the cogency of Lord Denning's reasoning in the leading authority,
Newton & Ors v FC of T (1958) 11 ATD 442, 445; (1958) 98 CLR 1, 8; [1958] AC 450, 465 when he said:

``the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it... In applying the section you must... look at the arrangement itself and see which is its effect - which it does - irrespective of the motives of the persons who made it.''

Two propositions follow from this. First, the subjective evidence of taxpayers is not the primary source of information in the application of the statutory test in s. 260. Second, the main thing to look at in applying s. 260 is the objective steps in the arrangement. Subjective evidence is not irrelevant, but in the normal run of cases it is not always helpful. Gummow J put it this way in Bunting v FC of T 89 ATC 5245, 5253 ```subjective' purpose... is not essential... [but] it cannot be irrelevant''. Then we get on to more difficult ground. Lord Denning's full discussion reads as follows:

``The answer to the problem seems to their Lordships to lie in the opening words of the section. They show that the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it. It affects every `contract, agreement or arrangement' (which their Lordships will henceforward refer to compendiously as `arrangement') which has the purpose or effect of avoiding tax. In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect - which it does - irrespective of the motives of the persons who made it. Mr Justice Williams put it well when he said: `The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. Those terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect.' 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.''

This wider context allows us to go further. The section, Lord Denning says, is not concerned with the motives of individuals. Lord Denning goes on with the ambiguous words, ``It is not concerned with their desire to avoid tax''. Presumably Lord Denning means that the mere desire to pay less tax is not the relevant criterion. Taxpayers are quite entitled to make business decisions with tax consequences in mind. Section 260 does not strike out every taxpayer who chooses between a partnership or company or other mode of doing business on the basis of the tax consequences. Thus a third proposition can be formulated. Third, the minimisation of tax or the motive to diminish tax is not, of itself, sufficient to trigger the annihilation provisions of s. 260.

19. The critical job is to formulate a test to be applied in determining the circumstances which are sufficient to trigger the annihilation test in s. 260. Putting aside the ambiguity with that ``avoiding tax'' formula, the thrust of Lord Denning's approach to this critical fourth proposition appears to be this. You must be able to predicate from the objective facts that the arrangement was implemented in that particular way to avoid (in the sense of circumvent) the intended impact of the charges imposed by the Act. Thus stated, it is a test which looks at the actual way in which the transaction was constructed and asks whether it is more plausible to predicate that those particular steps which are the subject of evaluation were constructed in that way to dodge the Act and the impact of its charges to tax or for normal business or family purposes. After
FC of T v Gulland; Watson v FC of T; Pincus v FC of T 85 ATC 4765, 4772; (1985) 160 CLR 55, 67-68 it is clear that if tax avoidance (in the sense I have used the term) is

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one of the main purposes of an arrangement, in the sense that it is not inessential or merely incidental, that gets us over the threshold. This was recently affirmed, in a context similar to the present, by Gummow J in Bunting v FC of T 89 ATC 5245. An overriding commercial or family purpose for the whole transaction is not determinative that the subject steps themselves do not offend s. 260. As Beaumont J put it in Bunting v FC of T 89 ATC 5245, 5250 the issue is whether ``the structure which was created was more than was necessary to provide those [commercial or family] benefits.''

20. To summarise the tests I have to apply to the facts in this case are as follows:

  • 1. The subjective evidence of taxpayers is not the primary source of information in the application of the statutory test in s. 260.
  • 2. The main thing to look at in applying s. 260 is the objective steps in the arrangement. Subjective evidence is not irrelevant, but in the normal run of cases it is not always helpful.
  • 3. The minimisation of tax or the motive to diminish tax is not, of itself, sufficient to trigger the annihilation provisions of s. 260.
  • 4. You must be able to predicate from the objective facts that the arrangement was implemented in that particular way to avoid (in the sense of circumvent) the intended impact of the charges imposed by the Act.

21. What are the objective facts here? The taxpayer ceases a job and commences consulting work. At about the same time he gets legal advice and sets up a trust structure. Non-tax objectives may well have entered into the decision: the desire to project a corporate image for his new consulting enterprise, some limitation of liability, possibly some attempt to set up a separate entity to keep the business, if it did grow large, distinct from himself. Since the taxpayer also registered a business name (let us call it ``A Taxpayer and Associates'') and used it on occasions, the first rationale does not weigh particularly strongly. I find that, as a matter of fact, after hearing all the evidence and reviewing the objective circumstances, that, while these other factors were in varying degrees relevant, minimising his total tax payment was a significant, and, in my judgment, the most significant purpose of implementing the structure. This was either because the taxpayer would have been advised of this or because such knowledge is imputed to him through the decision of his legal adviser to proceed with this structure. But this is not enough.

22. I have to apply the critical fourth proposition. Am I able to predicate that this arrangement was implemented in this particular way to circumvent the intended impact of the charges imposed by the Act? Is it to be characterised (and the fit will not be perfect, whatever predicate is adopted) predominantly to get round the impact of the progressive tax system as it impacts on the individual as a separate tax base or was it constructed in that way in pursuit of legitimate business objectives? In answering this question I go back to recently decided authority.

23. The most recent authority is a divided Full Federal Court decision in Bunting v FC of T 89 ATC 5245. This concerned a computer programmer who set up a structure, not unlike that before this Tribunal, except that it used a single discretionary trust. There was a company which hired the taxpayer. Its two shares were held by the taxpayer's wife and his friend in trust for the wife. The company was trustee for a discretionary trust. The objects were the taxpayer's wife and his children; but they excluded the taxpayer. The Full Federal Court (Beaumont, Gummow JJ; Hill J dissenting) applied s. 260. The decision was complicated and is distinguishable because the taxpayer had previously derived income in the same field on his own account. This continuity was seen as important in the application of s. 260 by Beaumont J but not by Gummow J. In Bunting clients paid an hourly rate based on hours worked by the taxpayer.

24. Gummow J found (at 5253):

``... what was done is not fairly explicable without an inference being drawn that a purpose, if not the primary purpose, was to effect a `split' of the income of the taxpayer between himself and the members of his family.''

Of course, though it might possibly have been supported without it, the evidence that the taxpayer had been employed for a decade in England in the same occupation was used as a reason for this decision by Gummow J. Beaumont J appears to rely largely on this ground (at 5250, proposition 7).

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25. In Tupicoff v FC of T 84 ATC 4367 and 4851, the Full Federal Court applied s. 260 to a life insurance salesman who channelled his commission through a family trust. In this case it was ``not possible... to discern any significant business or commercial purpose in the taxpayer's arrangements'' (Fisher J at 4852). The taxpayer continued to sell life insurance for the same single company he had before and the taxpayer continued to preserve employee benefits like superannuation and medical benefits from the employer. Minor differences such as letterheads and the acquisition of assets by the trustee were not considered significant. This case is distinguishable because, in the facts before me, there clearly were commercial reasons for the change in arrangements. It was strenuously argued by the taxpayer that the structure in this case before the Tribunal did not ``simply divert a stream of personal exertion income''. It was argued that there were ``many and diverse activities carried out over the years'' and that the situation is ``quite separate'' from Bunting where ``someone continued in quasi-employment throughout a period'' or cases like
Peate v FC of T (1966) 14 ATD 198; (1966) 116 CLR 38 and Gulland and Watson v FC of T 85 ATC 4765; (1985) 160 CLR 55 ``where people simply varied the manner in which their personal exertion income was derived''. It is largely on this narrow question of the assessability of such transparent attempts to dress up personal exertion income with the vestments of trusts on which these cases and Ruling IT 2121 are focused. But to assert that Tupicoff or Bunting are distinguishable is not necessarily to go the further step and assert that s. 260 should not also annihilate the particular steps by which the business arrangement before me was organised. This remains to be decided.

26. In Case T4,
86 ATC 123 the Board of Review refused to apply s. 260 to a draftsman who used a trust arrangement with a corporate trustee. But the test applied by Mr Stevens in that case was (at 129):

``that the arrangement was not one which, objectively considered, was capable of explanation only as an attempt by the taxpayer to avoid tax.''

This is no longer the test. The reasoning also relied on the premise that s. 260 does not strike at new sources of income. For the reasons I indicate later in this decision, this is no longer the law.

27. In an ideal tax system it would be unnecessary to mobilise either specific or general anti-avoidance provisions against income-splitting schemes. By making the taxation of tax units coincide with economic realities, and fully integrating the treatment of the individual taxpayer and various artificial legal ``entities'' (like trusts and companies) the policy objectives of a progressive tax system could be retained and there would be no pay off from splitting income. The social security system attempts some of these objectives. Much economic analysis of taxation proceeds on the working hypothesis that this is a realistic working objective for the tax system. Unfortunately, the real world does not permit the luxury of such surgical solutions or perfectly level playing fields. Competing policy and practical considerations make full scale implementation of the ideal tax unit and full tax integration impracticable for now and for the foreseeable future. Even if it is attempted, practical evidential issues will prevent its full realisation. It is important that policy makers are fully aware of the implications of the fact that they are operating within a second-best policy framework and the important consequences of this trite observation. Because, once we move away from the ideal, the nature of the policy problem alters fundamentally. Best results are not necessarily obtained by wholesale pursuit of the ideal in those limited situations which are accessible to the policy maker.

28. Unlike the courts, this Tribunal is enabled under its authorising statute, s. 43(1) of the Administrative Appeals Tribunal Act 1975, and indeed is expected by its own decisions to ``exercise all the powers and discretions that are conferred... on the person who made the decision''. It can substitute its own decision for that set aside. Such policy questions can and properly should be explicitly addressed. Part of our job is to consider the untidy second-best context in which real world policy makers must operate and to contribute to that development of practical guidelines to manage the inevitable ambiguities which are generated. While the primary job of the Tribunal is to settle individual disputes, it also has the job of providing clarity for a mass decision-making process dealing with well over 10 million

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returns annually. But such a job must be located within an overriding framework of the functions and limitations of this Tribunal. Brennan J said in the early leading decision in
Re Becker and Minister for Immigration and Ethnic Affairs (1977) 15 ALR 696, 700-701:

``this Tribunal is empowered, as a court is not empowered, to review a decision on the merits (see ss 25 and 43), and the merits of a decision include not only the facts of the case but also any policy which has been applied or which ought to be applied to the facts in reaching the decision. Jurisdiction is thus conferred upon the Tribunal to review policy considerations which govern or affect certain discretionary powers. This is a novel jurisdiction, and the occasions for its exercise will require definition... Whenever the review of a decision involves consideration of policy, it is essential that the Tribunal be fully informed as to the policy and the reasons for it. Otherwise the decisions of the Tribunal may, instead of providing a rational analysis of policy and assisting to develop principled yet flexible decision-making, intervene incongruously to disrupt the due course of administration.

A distinction will necessarily be drawn between policies of different kinds. Some policies are clearly made or settled at the political level, others at the departmental level. In the
Ipec-Air Case (113 CLR 177 at 202; [1965] ALR at 1080), Menzies J, with reference to the factors which might properly affect the exercise of discretionary power, observed that: `There are... sound grounds for treating a decision to be made at departmental level as something substantially different from a decision to be made at the political level.'

The difference between the factors to be taken into account in the two kinds of policy provides one ground of distinction between them; the difference in parliamentary opportunity to review the two kinds of policy provides another. Some policies are basic, and are intended to provide the guideline for the general exercise of the power, other policies or procedural practices are intended to implement a basic policy. Different considerations may apply to the review of each kind of policy, and more substantial reasons may have to be shown why basic policies - which might frequently be forged at the political level - should be reviewed. There may, of course, be particular cases where the indefinable yet cogent demands of justice require a review of basic or even political policies, but those should be exceptional cases and this is not one of them.''

29. This analysis must be tempered by the broad nature of the Tribunal as as an administrative tribunal operating as an adjudicator in an adversarial model based on legal foundations. This imposes constraints and limitations on the methods by which its policy role should be developed. It requires an appropriate degree of detachment and appropriate procedures. But, having said all that, Parliament accorded this Tribunal a distinctive role and this should be articulated and given substance. It tried to ensure that disporportionate costs and excessive formality or concentration on procedural issues were not allowed to dominate its essential mission to do justice between government and the citizen. Inevitably, the focus shall be on those matters which its procedures and comparative expertise fit the Tribunal. In practice, this will tend to concentrate on developing principled guidelines as disputes indicate areas of ambiguity or incoherence in statutory tests or in common law rules. It will test the congruence of taxation rulings against the language and broad purposes of statutory provisions. It shall pay particular attention to the traditional legal role of ensuring that the assessing process operates fairly and that it gives taxpayers a reasonable chance to put their case and to have it properly addressed by the decision-maker and to be given reasons for the decision.

30. In the case of income-splitting, the second-best dilemma looms large. It is clear that taxpayers with income from property or a business can transfer income-producing property to other persons or entities. It is typical to use companies or trusts as a vehicle for the business. Why should a general prohibition operate on taxpayers who wish to organise the provision of professional services in a similar manner? The answer is that no such prohibition should or, in my opinion, currently does exist. If the legislature wishes to proscribe such forms of business organisation that is a matter peculiarly for them. General anti-avoidance provisions can, and it is important

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not to gloss over the distinction, act as a sword for attacking schemes or parts of schemes which are engineered predominantly as vehicles for circumventing the legislative purpose. This broad policy imperative is given operational form in Lord Denning's fourth proposition. The evil targeted by s. 260 is not the paying of the least tax consistent with proper operation of the Act but the use of legal structures or parts of structures which are constructed for the very purpose of avoiding the proper operation of that Act. Section 260 has a proscribed job to play in the Act, and that job should not be over-extended by taking its sweeping language out of context.

31. In my view, no single test can give adequate expression to the characterisation job involved. There is real danger in plucking any one test out of context and investing it with undue significance. In particular, the issue of whether there was a previous income-earning activity must be put firmly in context. The basic issue is whether the transaction or the particular way it was carried out can be characterised as a means to circumvent the Act or its full charges. The existence of previous activity is merely one factor to be considered. An exhaustive list cannot be spelled out but the following factors might be relevant:

  • 1. Whether the business or family reasons for the arrangements plausibly justify the steps in the legal framework as constructed.
  • 2. The precise nature of the entities used by the taxpayer and their interrelationship. Are the entities unnecessary, cumbersome or complex having regard to all the non-tax circumstances? How convoluted is the interrelationship between the various entities? How usual would such arrangement be if tax considerations did not enter into the equation?
  • 3. Whether the taxpayer merely changed the legal form of the same ongoing income-earning activity. Were there new sources of income or changes in the mode of doing business which might justify the change?
  • 4. Did the legal nature of the transaction give accurate expression to the reality of the transactions, the actual commercial or family outcomes, actually pursued by the taxpayer? This is not to revisit the sham doctrine or some extended judicial version of it. In this context it is merely an aid to characterising the nature of the transaction. For example, if the taxpayer continues to act as an employee or enjoys benefits normally associated with employees, or is paid on the same basis as employees, these will be relevant criteria.
  • 5. What was the nature of the business? How appropriate are the entities used to that form of business? Is the projection of a company vehicle of assistance in selling its product? Is it necessary to hold property or to deal with debtors? Is limited liability a real concern in the circumstances? Why would the taxpayer use a company and trust in tandem?

32. In my opinion there is no general reason why a professional, such as the engineer in this case, should not in appropriate circumstances use a trust structure to conduct his consultancy business without risking the s. 260 sword of Domocles. In any event, if such behaviour is to be proscribed it properly falls within the function of Parliament rather than a Tribunal such as this. There is no reason why tax considerations should not enter into that decision. Nor, in appropriate cases, is there any reason why a professional should not move to such a structure after some period of deriving income on his own account. Nor is the fact that the personal exertion and expertise of a particular entrepreneur is the main productive asset and dominant income-generating force in a trust or company conclusive evidence that the structure was formed to avoid the Act. Nor does the lack of any goodwill or property held by the trust, in itself and taken alone, lead to that conclusion (though it would be one factor to be weighed in the balance).

33. In this particular case, my characterisation decision is not self-evident but turns on a weighing of all the circumstances and turns largely on the objective steps in the transaction. This case is on the borderline. I find, on balance, that this transaction satisfies Lord Denning's critical fourth test and that the transaction is annihilated by s. 260. The following factors moved the balance in favour of this view. First, there was the complexity of the structure. Whilst a company trustee of a unit trust and a separate discretionary sub-trust might be justified for a large and complex professional practice, the use of such complexity seems difficult to explain

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satisfactorily in this case without predicating that the structure was implemented in the way it was to escape the burden of the normal operation of the progressive tax system on the taxpayer. Second, the taxpayer's use of a registered business name rather than the company and the general inference from all the facts that the taxpayer projected himself personally and acted as if he were running his own business. Third, the limited scope of the taxpayer's consulting business and the ``uncomfortable'' means and ends relationship between the nature of that consulting, the limited organisation, minimal staff and office space, and the elaborate legal structure adopted to give practical expression to ``these'' objectives. Fourth, the minimal payments of salary to the taxpayer during the relevant period from 1980 to 1983 bear no relation to his work for the trust in later years. The mere fact that such a small salary might be explained, at least over part of that time, as a means of escaping other creditors does not legitimise the structure as being for commercial or family purposes, so far as this particular ``creditor'' (the Commissioner) is concerned. In my view such disproportionality is not repaired by vague assertions that the business structure was being established for all future eventualities.

34. It is now a matter of historical record that s. 260 was rendered largely impotent during the 1970s as a result of exaggerated versions of the choice principle, narrow interpretation of the power to produce a liability to tax after annihilation (the so-called ``reconstruction'' authorities) and by the antecedent transaction doctrine. Because of constraints on full-scale critical evaluation of the concept and because of the shift in focus to the new general anti-avoidance provisions in Part IVA, despite the extensive revision of the law in the 1980s, ambiguity remains and the residual relevance of antecedent transactions has not been clarified. There is, in turn, the danger that this will divert our attention from forthright attention to the scope and limits of the annihilation test. The doctrine was specifically invoked by counsel for the taxpayer in this case to distinguish Peate v FC of T (1966) 14 ATD 198, 201-202; (1966) 116 CLR 38, 43. Counsel went through a detailed analysis of recent cases to demonstrate the continuing preoccupation with this doctrine, as demonstrated by my analysis of Bunting and by both the High Court and more particularly the Federal Court in Gulland and Watson v FC of T 85 ATC 4765; (1985) 160 CLR 55. It is useful at this stage, now the dust has settled, clearly to address the continued relevance of the antecedent transaction doctrine.

35. In my respectful opinion, the antecedent transaction doctrine was always based on a reading of s. 260 which did not give full weight to its context. It involved an unhapply synthesis of the annihilation and ``reconstruction'' doctrines. Where there is an antecedent set of circumstances, a liability to tax which is then removed or diminished as a result of an artifical transaction, this provides a basis for the operation of s. 260 in two ways. First, because the recasting of the formal structure of a transaction with very little change in the practical non-tax effects in the real world provides significant evidence, though, as I have shown, only one factor to be weighed in the balance, on which to predicate that the new arrangements were developed to avoid the operation of the Act. Second, because the stream of taxable income which existed beforehand makes it very easy to create a liability to tax. But it is very easy to jump from the conclusion that an antecedent transaction will supply the basis for a liability to tax, to the further inference that the absence of such an antecendent transaction will automatically lead to the conclusion that there is no tax. It is a common fallacy in legal discourse. To assert a proposition is not to deny the general validity of its converse.

36. The lack of an antecedent transaction does not and, in my respectful opinion, cannot, on a balanced consideration of the language of s. 260 in the context of its policy objectives, support the inference that s. 260 cannot operate. If that inference were correct, the most blatant and artifical tax avoidance scheme would escape s. 260, provided only that it was constructed to give legal form to a new set of circumstances. Section 260 operates by making offending transactions ``absolutely void'' but only ``as against the Commissioner'' and only ``so far as'' the transaction has the purpose or effect of avoiding or defeating liabilities imposed by the Act. This is not utter obliteration. The non-tax avoidance aspects of the transaction will often be sufficient to produce a liability to tax. The authorities for this proposition were extensively analysed by Gummow J in Bunting v FC of T 89 ATC 5245,

ATC 322

5254. The existence or otherwise of an antecedent transaction, as I have shown, will be relevant as one factor to be weighed up in the operation of the annihilation test.

37. The new Part IVA removes the problem by giving a statutory power of ``reconstruction'' in s. 177F. But, even under s. 260, a liability to tax could be created without an antecedent transaction.

38. The consequences of annihilation were not addressed by the parties in the present case. But if the trust and company arrangements are annihilated as part of the tax avoidance scheme, we are left with the taxpayer with the cash in his hands. We are left with evidence of his personal exertion. We have ample evidence of the receipt of the cash in periodic form. Putting all this together, there is sufficient basis for a finding that the taxpayer derived income under s. 25 and is thus liable to income tax. If it were necessary, s. 19 could be utilised. This is all clear from the judgment of Gummow J in Bunting v FC of T 89 ATC 5245, 5256-5257.

39. Accordingly, for the reasons given, the decision under review is affirmed. Liberty is reserved for the applicant to argue issues about the proper taxpayer to be assessed for the period from December 1982.


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