Watson v. Federal Commissioner of Taxation.

Judges:
Kennedy J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 24 June 1983.

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Kennedy J.

The appellant is a surgeon specialising in urology. In 1957, he entered into partnership with Mr. E.W. Kyle and thereafter he continued in various partnerships until the events which have given rise to the present appeal. As from the 1st July 1978, he was in partnership with Mr. E.J. England, Mr. A.I. Low, Mr. B.W. McGregor and Mr. T.A. Taylor.

The appellant had been concerned for some time with his personal financial position. At the end of 1978, he was aged 55. He was married, and he had four children, who were then aged approximately 15, 16, 18 and 22. His principal asset was the house in which he resided. He had made no investments, although he had a relatively small life policy. He was, quite naturally, concerned with his financial security upon his retirement.

It appears that, in the latter part of 1978, Mr. N.J.E. Soutar, a chartered accountant and a partner in a firm of accountants which had previously acted for the appellant's partnership, had discussions with the appellant in relation to his financial position. Mr. Soutar indicated that a superannuation arrangement for the partners might be possible and it was suggested that all the partners should meet to discuss the matter. Accordingly, in November 1978, a meeting of the partners was arranged at the house of Mr. McGregor, which was attended by Mr. Soutar. Mr. Soutar spoke about a superannuation plan which would involve the partners becoming employees of a trust

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of which they would be the trustees. As it was expressed in evidence, Mr. Soutar suggested that each of them would then be able to pay into a superannuation fund and would receive superannuation when he retired. It was at this time or, perhaps, at a subsequent meeting, that Mr. Soutar indicated that the appellant's entitlement under such an arrangement would amount to approximately $150,000. The appellant's evidence was that the object of the proposal was ``predominantly superannuation'' but, clearly, there were other objects involved and, in particular, the distribution of profits in the trust to the families of the partners and the creation of a service trust. There were obviously income splitting advantages to be gained from the implementation of the proposal.

No decision was made at this meeting, which ended upon the basis that the partners would further consider the matter. Some of them wished to consult their own advisers.

Another meeting was held between Mr. Soutar and the partners in December 1978, at which the proposal was again discussed and when, it would appear, agreement was reached for the proposal to be implemented. It was left to Mr. Soutar and his firm to attend to all the necessary formalities.

By a letter dated the 16th February 1979, Mr. Soutar wrote to a firm of solicitors advising that his firm had been requested by Dr. E.W. Kyle to instruct them to prepare the necessary documentation to ``give effect'' to the unit trust, the name of which was given as ``W.E.L.M.T. Urological Unit Trust'', the initials representing the first letter in the surname of each of the partners. The details given in the letter included particulars as to the settlor, as to the settled sum, and as to the first unit holder, which was to be ``S.H. Watson Family Trust''. The trustees of the unit trust were shown as the five existing partners. The trustees were required to have the power to distribute either income or capital in such proportions as they saw fit. Units were to have equal voting rights. The letter also requested that an ``agreement of employment'' be ``drawn between the trustees and the doctors'', the salaries to be as mutually agreed ``by both parties'', and there was to be provision ``for each of the above doctors, a non-contributing superannuation scheme, contributions to which are not to exceed the maximum as allowed by the Deputy Commissioner of Taxation''.

Subsequently, three trusts were created. The first was the S.H. Watson Family Trust. The trust deed, which is undated, but which was stamped on the 12th April 1979, was made between Sophia Anne Watson, as settlor, and the appellant and his wife, as trustees. Four classes of beneficiaries are created, of whom the A class beneficiaries are the appellant and his wife, the B class beneficiaries are the children, grandchildren and remoter issue of the appellant and his wife, the C class beneficiaries are persons or entities connected with the C class beneficiaries, and the D class beneficiaries are charities selected by the trustees.

The trustees have power to pay or apply the income and capital of the trust, at their discretion, as set out therein. In either case, the appellant is a possible beneficiary. Neither he nor his wife is, however, a possible beneficiary in relation to the application of trust capital and income of the trust upon the termination of the trust, which is to occur on the 30th June 2019 or such earlier time as the trustees may determine. The appellant, during his lifetime, has power to appoint new trustees and to remove existing trustees of the trust.

The second trust, described as the Urological Service Unit Trust, was constituted by deed dated the 12th April 1979, made between Mr. E.W. Kyle, as settlor, and Beates Nominees Pty. Ltd., a company controlled by the five partners, as trustee. The appellant and his wife, as trustees of the S.H. Watson Family Trust, are listed in the schedule as the first unit holders, with 50 units. Each unit holder is entitled to a beneficial interest in the trust fund in proportion to his share of the total units in the trust and the unit holders are at all times presently and absolutely entitled to the income of the trust and, subject to the creation of separate classes of units, in the same proportions as they hold the units. Separate classes of units may carry rights to specific proportions of income for a particular period and of any capital distributed. The trustee is empowered at its discretion to make distributions of capital to

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unit holders. Determinations, decisions or approvals of the trustee, being a single company, require the unanimous agreement of all the directors of the company. The trustee is given power to carry on any business or business activity. A change of trustee may be effected by the holders of not less than 75 per cent of the units. The trust period will terminate on the 30th June 2019 or at such earlier time as the trustee may determine.

The third trust, described as the W.E.L.M.T. Urological Unit Trust, was constituted by deed dated the 29th May 1979, made between Mr. E.W. Kyle, as settlor, and the appellant and his four partners, as trustees.

Unit holders in the trust have generally the same rights as unit holders in the Urological Service Trust.

Clause 12(2) of the deed requires each trustee to be a medical practitioner and an employee of the trust and by cl. 13(2), if a trustee ceases to be a medical practitioner or to be an employee of the trust (for any reason and in any manner) he shall be deemed to have retired as a trustee of the trust. By cl. 12(3) a determination, decision or approval of the trustees requires the unanimous agreement of all of them. By cl. 12(4)(d), questions arising at any meeting of the trustees are required to be decided by a unanimous vote.

By cl. 13(3) and (4) a change of trustee may be effected by the holders of not less than 75 per cent of the units.

In addition to their other powers, by cl. 14(1)(m), the trustees are given power to carry on any business or business activity and to undertake all activities incidental thereto. But there follows the somewhat curious exception that ``the Trust shall not practise medicine or surgery (within the meaning of the Medical Act 1894) in all or any one or more of its branches''. A trust as such cannot practise medicine or surgery. Only the trustees can do so, and the whole object of the arrangement was that they should do so.

Subclauses (2), (3) and (4) of cl. 14 provide:

``(2) The Trustees may join with any other person or persons or body corporate or with the Trustees (or any of them) in their own or his own right or in their or his capacity as the trustee of any other trust in accepting or making or becoming a party to any of the applications or investments of the Fund authorised by this Deed or in exercising any of the powers or discretions contained in this Deed.

(3) The Trustees may exercise or concur in exercising the powers and discretions by this Deed or by law given to them notwithstanding that the Trustees (or notwithstanding that any one or more of the Trustees) may have a direct or personal interest in the manner or result of exercising such power or discretion.

(4) It shall be lawful for a person who is for the time being a Trustee of this Trust to sell property to the Trust and it shall be lawful for the Trustees to have power to purchase such property on such terms and conditions as the Trustees may in their absolute discretion think fit.''

By cl. 16, a unit holder is only entitled to transfer his units if the transferee has previously been approved by the trustees and subject to certain rights of pre-emption in the other unit holders.

The provisions relating to the trust period and to the earlier termination of the trust are the same as in the other two trust deeds.

The schedule to the deed lists the first unit holders, each of whom has ten units, as follows, namely, the appellant and his wife, Jill Dorothy Watson, as trustees of the S.H. Watson Family Trust, Mr. E.J. England, Mr. A.I. Low and Joan Marie Low as trustees of the Antony Low Family Trust, Mr. B.W. McGregor and Dianne Patricia McGregor as trustees of the B.W. McGregor Family Trust, and Adonis Nominees Pty. Ltd. as trustee of the T.A. Taylor Family Trust.

By letter dated the 11th May 1979, Mr. Soutar forwarded to the appellant a number of documents, including the unit trust deed for the third of the trusts, a management service agreement, a trust deed for the W.E.L.M.T. Urological Unit Trust Superannuation Fund, an application for registration of a business name, minutes of a meeting of trustees dated the 1st June 1979, an application for registration as a group

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employer and as an employer for payroll tax purposes, applications to the Australian Taxation Office for the approval of superannuation contributions, and three documents in connection with the superannuation fund, namely, a notice to members, an application for admittance, and the trustees' decision to commence the fund. Two other documents were also enclosed, being identified as drafts only. They were an employment agreement and a sale agreement. Having listed the enclosures, the letter continued:

``Before signing the documents, could you please peruse them all in detail. In particular, could you please confirm the following -

• (i) The goodwill figure of $30,000 referred to in the draft Sale Agreement. This is based on an amount of $6,000 per doctor and is what we consider reasonable in your situation.
• (ii) The salary figures of $25,000 for Drs. Watson and England and $20,000 for each of the remaining doctors. These salaries were determined having regard to the profitability of the practice, the ratio of profit distribution between the doctors and what would be considered reasonable salaries for doctors of your experience, bearing in mind that it is preferable to keep them reasonably low to optimise the tax benefits.
• (iii) The payment of doctors' telephone accounts and entertainment expenses referred to in the Draft Employment Agreement. We would point out that claiming these expenses through the trust would invite less attention from the Taxation Department than each doctor claiming them in his individual return.

It is our intention that this trust commence operating from 1 June and a staff member from this office will be seeing Mrs. Simpson prior to this date to discuss its implementation.''

Shortly thereafter, Mr. Soutar instructed Mr. L.R. Stagoll, an accountant employed by his firm, in relation to the rearrangement of the partnership practice and, on the 28th May 1979, Mr. Stagoll visited the partnership's rooms to discuss with Mrs. Simpson, who was in charge of the partnership office, what was required to be done in order to give effect to the arrangement. Amongst other things, he gave Mrs. Simpson a schedule, to enable her to allocate expenses between what was described on the sheet as the Medicine Unit Trust and the Service Trust. He also arranged for new bank accounts to be opened. In addition, he took with him a suggested form of notice to be sent to patients and to be displayed in the surgery. It is headed ``Change in Business Structure'' and it reads:

``This is to inform you that as from 1st June, 1979 the medical practice formerly conducted by Doctors Watson, England, Low, McGregor and Taylor will be conducted by the W.E.L.M.T. UROLOGICAL UNIT TRUST of which Doctors Watson, England, Low, McGregor and Taylor are joint trustees and as from that date medical services will be performed by Doctors Watson, England, Low, McGregor and Taylor as employees of the Trust.

Payment for services rendered will become due and payable to the aforementioned trust.

Thanking you.''

There is no evidence that any such notice was sent to patients, and although there was some rather uncertain evidence from Mr. McGregor to the effect that a notice was put up in the surgery, no one else referred to it, and I am not satisfied that this was in fact the case. Nor was there any evidence that any other notice was placed in the surgery to advise of any change in the structure of the practice.

An application for registration of the business name ``W.E.L.M.T. Urological Centre'' was signed by the appellant. That was not, of course, the name referred to in the draft notice. In the application, the business was described as that of ``Urological Services''. Initially, the appellant was named as the applicant, without any qualification. Subsequently, a fresh application was prepared, which indicated that the appellant was acting as ``trustee for the W.E.L.M.T. Urological Unit Trust''. There was nothing

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to indicate that there was any other trustee of that trust. The business name was duly registered on the 13th June 1979.

Although the minutes forwarded to the appellant with the letter of the 11th May 1979 purported to relate to a meeting held on Friday the 1st June 1979, no meeting was held on that day. Notwithstanding this, each of the doctors was apparently willing to sign the minutes, which showed the incorrect date alongside his signature. There was, however, a meeting held on the evening of the preceding day, the 31st May 1979, at the home of Mr. McGregor, during the course of which I accept that it was agreed in general terms that the arrangement was to have effect from the 1st June 1979. That meeting was attended by the five partners, by Mr. Soutar and by Mr. R.D. Fayle, who was then acting as the accountant for Mr. England and for Mr. Low. It was not suggested by anyone that the minutes accurately or at all reflect what took place at the meeting, when it appears that most of the discussion concerned the terms of the sale agreement and of the employment agreements, which were, at that time, still in draft.

The minutes purport to set out a resolution in relation to the W.E.L.M.T. Urological Unit Trust, dividing the units into five separate classes, each class relating to one of the original unit holders.

Under the heading ``Purchase of Medical Practice'', the minutes record:

``The Chairman produced and read a Sale Agreement dated 1 June 1979 made with Drs. S.H. Watson, E.J. England, A.I. Low, B.W. McGregor and T.A. Taylor relating to the purchase by the trust of their medical practice.

It was resolved that the Trust agree to purchase the practice in accordance with the Sale Agreement, a copy of which is attached to these minutes and initialled by the Chairman for identification purposes.''

No copy of any sale agreement is attached to the minutes. Indeed, as at the 1st June 1979, no agreement had been concluded. On the 31st May, as already indicated, the partners had been discussing a draft. It appears that, on that day, there had been considerable discussion in connection with the sale agreement and, in particular, as to the justification for including in it any sum for goodwill. The appellant indicated very forcefully at that meeting, and he repeated in his evidence, that he did not consider that goodwill was worth anything. But the fact was that, in 1957, he himself had paid an amount of $3,000 for goodwill when he was admitted into partnership and Mr. England also made a payment for goodwill when he became a partner.

The figure for goodwill was, as appears from the letter of the 11th May 1979, Mr. Soutar's own suggestion. His evidence in justification of that figure was not entirely convincing. Virtually all patients came to the practice by referral from other doctors and its continued success depended almost entirely upon the esteem in which the individual surgeons were held by their colleagues, based upon their own ability and experience. Nevertheless, as he indicated, there must be some benefit in coming into an established practice with an established surgery and connections with particular hospitals. It was on this basis that he suggested that the value of the goodwill would be at least $6,000 for each partner. This in itself suggests that the question of goodwill was approached incorrectly. Any goodwill was that of the partnership, and not that of the individual surgeons. Be this as it may, the partners having been told that they had to sell something, the appellant's objection at the meeting to the value of the goodwill was dropped, and the figure of $30,000 was then pencilled into the draft. There remained a certain air of unreality about it, which was made manifest when Mr. Watson retired and, the goodwill then being considered valueless, it was written off.

A sale agreement was subsequently engrossed. A date, the 29th March 1979, is typed in the document. That date is patently incorrect, for the document was not forwarded to the doctors for signature until the 20th June 1979. The solicitors who prepared the document suggested in their letter to the accountants of the 18th June 1979 that it should merely be signed by the doctors in their capacity as vendors, and that their acceptance of the offer to sell should be recorded in the minutes of the trust, in order that stamp duty might not be payable. So far as the minutes were concerned, this came too

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late, and the comment written on the solicitor's letter is: ``Already done in trustee's past resolution.''

The agreement purported to be made between the five doctors as ``Vendor'' and ``The Trustees of the W.E.L.M.T. Urological Unit Trust'' as ``Purchaser'', without identifying them. It recites that ``the Vendor'' carried on the medical practice and that ``they'' agreed to ``sell to the Purchaser the whole medical practice on the terms and conditions of this Agreement''.

By cl. 1 it is provided:

``The Vendor hereby agrees to sell to the Purchaser and the Purchaser agrees to purchase from the 1st June 1979 (herein referred to as `the Date of Sale') free from encumbrances the whole of the medical practice, including the goodwill and the plant, equipment and supplies belonging to the Business at the Date of Sale for the price calculated in accordance with cl. 2, and on the other terms of this Agreement. The debtors of the Business are not included in the sale.''

By cl. 2, the price payable is expressed to be the total of the following:

      ``Goodwill       $30,000
        

Plant and Equipment at written down tax values as at the Date of Sale

Medical Supplies as at the Date of Sale at the value agreed between the Vendor and the Purchaser or the value of the above items so finally assessed by the Commissioner of State Taxation for stamp duty purposes whichever is the higher.''

The latter is an odd provision in the light of the suggestion from the solicitors that the document not be stamped. As to payment, the price was, by cl. 3(1), expressed to be payable on demand by the vendor. Subclause (2) of cl. 3 then goes on:

``Notwithstanding subcl. (1), the personal representatives of the deceased Vendor may demand payment of the total purchase price in which event the purchase price shall be payable in full three months after the date of the demand.''

The document pays little heed to the fact that the business was a partnership. Furthermore, there is no restraint of trade provision to protect the goodwill which was agreed to be sold.

In relation to the employment agreements, the minutes state:

``It was resolved to engage Drs. Watson, England, Low, McGregor and Taylor as salaried medical practitioners at a commencing salary of $25,000 for each of Drs. Watson and England and $20,000 for each of Drs. Low, McGregor and Taylor and otherwise on the terms and conditions of the employment agreement with each medical practitioner dated 1 June 1979.''

Once again, the minute is quite fictitious, only a draft being before the meeting. The draft was, however, the subject of very considerable discussion, and I am satisfied that agreement was reached between all the partners at that time for them, as trustees, to employ themselves in the practice at the salaries mentioned in the minute. That they were to be employed formed the basis of the whole arrangement.

So far as the fixing of the amounts of the salaries was concerned, Mr. Soutar had already given his views in his letter of the 11th May 1979. The appellant's evidence initially was that his salary was based roughly on current salaries at the Repatriation General Hospital and at the Sir Charles Gairdner Hospital, but I am not satisfied that this was so. In the end, the appellant himself accepted that $25,000 was, in April 1979, substantially less than the current rate for a urological surgeon. The amounts to be paid to three of his then partners must have been very substantially less than those rates. I am satisfied that the amounts of the salaries were fixed having regard to the necessity for fixing salaries which would provide maximum superannuation benefits, but at the same time keeping them low enough to avoid the payment of what was regarded as excessive income tax. Although, however, I am satisfied that there was an oral agreement reached that each of the doctors should be employed as a salaried medical practitioner commencing on the 1st June 1979, and that, so far as the appellant was concerned, he was to be paid an annual salary of $25,000, it is clear that not all the other terms of the agreement were settled at this time. In

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particular, there was discussion concerning long service leave and sick leave, but no final agreement on these matters was reached at the meeting. Nor was agreement reached as to the payment of expenses in addition to salary, as the draft envisaged. Furthermore, differing views on accident insurance cover were put forward without their being resolved.

Under the heading of ``hours and duties'' the draft agreement contained an agreement by the appellant:

``To observe the ethics and customs of the medical profession and comply with all laws and conditions and all lawful directions and orders of the employer.''

This provision was not changed in the successive drafts and it was not said to be the subject of any discussion. I am prepared to accept that it was agreed to at the meeting.

The settling of the terms of the employment agreement was protracted. In their letter to the appellant of the 14th June 1979, the accountants requested particulars of any amendments required. This was followed up by a letter of the 6th July 1979 to the appellant stating:

``We would also remind you that as yet you have not advised us of amendments you require to be made to the employment agreements between the doctors and the trust. As it is imperative that this document be finalised, your early reply would be greatly appreciated.''

Then, on the 10th October 1979, the accountants wrote to the solicitors requesting that the agreement be re-drafted. The request is in accordance with notes which were made by Mr. Soutar on the draft agreement, presumably following discussions. An amended draft was thereafter forwarded to the appellant with a letter from the accountants dated the 17th October 1979. The appellant responded by letter dated the 6th December 1979, requesting certain amendments in relation to long service leave, annual leave and sick leave. He indicated that a ``restricted covenant'' was not desired. These amendments were not conveyed to the solicitors until a letter dated the 6th February 1980. In the meantime, as an internal memorandum of the accountants dated the 24th January indicates, the salaries of the appellant and Mr. England were agreed to be increased to $40,000 per annum and those of the others ``in proportion to their profit sharing to the nearest $100''. This arrangement was back dated to the 1st July 1979. It appears that it followed the expression of dissatisfaction with the existing salary levels.

A further draft was forwarded to the appellant by letter dated the 18th February 1980. Apparently, discussions were held between Mr. Soutar and the doctors and further minor amendments to the draft were requested in relation to, inter alia, sick leave and a motor vehicle allowance. Yet another draft was sent to the appellant with a letter dated the 6th May 1980, but nothing appears to have been resolved until a sense of urgency was imparted by a request from the Acting Deputy Commissioner of Taxation dated the 22nd October 1980 for certain information and the provision of a number of documents, including a copy of the ``signed contracts of employment''. The terms of the agreement were then rapidly settled and the accountants requested the solicitors by letter dated the 28th October 1980 to prepare ``signature copies for each doctor''. This was done, but, even then, the amounts of the initial annual salary and of the expenses were left blank, as was the commencing date. Eventually, the agreement with the appellant was signed on a date which is unknown, but which must have been prior to the 2nd December 1980, when the document was submitted for stamping. It was, however, dated the 1st June 1979.

The executed agreement was expressed to be made by the five doctors ``as trustees of the W.E.L.M.T. Urological Unit Trust'', referred to as ``the Employer'', of the one part, and the appellant, referred to as ``the Doctor'', of the other part.

By cl. 1 it is provided:

``The Employer hereby agrees to engage the Doctor as a salaried medical practitioner, on the terms and conditions of this agreement commencing on the 1st day of June 1979, and continuing indefinitely until terminated by either party at any time in accordance with cl. 8 hereof.''

Clause 8 requires three months' notice ``or otherwise as may be mutually agreed in writing by the parties''.

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Clause 2 provides:

``The Doctor shall be paid an initial annual salary of $19,800 which shall be payable monthly in arrears or such sum as may be mutually agreed upon by the parties hereto.''

By cl. 3(2), in addition to his salary, the appellant was entitled to $5,200 per annum ``in respect of expenses incurred... in the maintenance and operation of a motor vehicle for use in connection with the practice''. The salary and the motor vehicle allowance together make up the sum of $25,000, which was the initially agreed salary. The original draft had made no provision for a fixed allowance.

Clause 3(1) provides that:

``The Employer will make contributions on behalf of the Doctor to a superannuation fund nominated by the Employer, such contributions not to exceed the maximum non-contributory amount as from time to time determined by the Commissioner of Taxation.''

No minimum figure was specified.

By cl. 4(ii) the appellant agreed ``to observe the ethics and customs of the Medical Profession and comply with all laws and regulations and all lawful directions and orders of the Employer''.

The document is said to be signed ``as a Deed by the parties hereto all in their capacity as Trustees of the W.E.L.M.T. Urological Unit Trust''. The appellant, however, signed the document twice.

Similar agreements were entered into with each of the other doctors.

When a copy of the agreement was forwarded to the Deputy Commissioner of Taxation in compliance with his request, it was not pointed out to him that the date of the deed was incorrect, that the salary was not that at the time of execution of the agreement nor that a number of the terms had only recently been agreed to and were not operative during the financial year in question.

Income tax deductions in relation to the appellant's salary for the year ended the 30th June 1979 were calculated by the accountants on the basis of a salary of $25,000.

Thereafter, it would appear that deductions were calculated upon the basis of a travel and, perhaps, an entertainment allowance of $5,200 per annum. Nevertheless, his income tax return for this year showed an allowance of $400, which, on an annual basis, would be $4,800, an amount which is referred to as being the motor vehicle allowance being paid to the doctors in the accountants' letter to the solicitors dated the 17th April 1980.

Registration as a group employer under the Act for income tax was granted to the trust on the 12th June 1979, to be effective from the 1st June 1979.

On the 11th June 1979, the appellant completed an income tax instalment declaration. Each of the other former partners completed a declaration within the following ten days.

In relation to the service trust, the minutes record:

``It was resolved that the trustee would enter into a Service Agreement with Beates Nominees Pty. Ltd. as trustee for the Urological Service Unit Trust for the provision of certain services to the trust and in the terms and conditions of the Agreement dated 1 June 1979.''

That agreement is, in fact, dated the 29th May 1979, although the evidence satisfies me that it was signed by the doctors on the 31st May 1979 in the course of the meeting at Mr. McGregor's house. It was not, however, then signed by the appellant and by Mr. England as secretary and director respectively of Beates Nominees Pty. Ltd. and it had to be returned by the accountants for this purpose on the 1st June 1979. When finally it was returned to the accountants, Mr. Stagoll saw fit to sign as if he had been a witness to the signatures of each of the doctors. He was not at the meeting, and he was not even familiar with some of these signatures.

The agreement is made between the five trustees of the W.E.L.M.T. Urological Service Trust, referred to therein as ``the Trustees'' and Beates Nominees Pty. Ltd., referred to as ``the Manager''. By cl. 1, the trustees engaged the manager to provide the services described in the agreement in relation to ``the practice carried on at 1st Floor, 167 St. George's Terrace, Perth and

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such other places as the Trustees may from time to time carry on practice''.

By cl. 2(1) it is provided:

``Without limiting the generality of the terms of the Manager's appointment as set out in cl. 1, the Manager shall provide and make available to the Trustee -

• (a) all staff from time to time requested by the Trustee for the purposes of their medical practice;
• (b) all surgeries, consulting rooms, medical supplies and equipment from time to time required by the Trustee;
• (c) all other management and office services and functions from time to time required by the Trustee.''

The Manager's fees were, by cl. 3, to be as agreed from time to time. By cl. 5, the agreement was to continue ``indefinitely unless and until terminated by either party by one month's prior notice to the other''.

Upon the subject of superannuation, the minutes state:

``It was resolved that the trust establish a superannuation fund for its employees and that it be commenced from 1 June 1979.

It was resolved that the Trustee of the Superannuation Fund be Fund Fidelity Pty. Ltd.

It was resolved that the Trust Deed between Drs. S.H. Watson, E.J. England, A.I. Low, B.W. McGregor and T.A. Taylor as trustees of the W.E.L.M.T. Urological Unit Trust and Fund Fidelity Pty. Ltd. as trustee for the Fund be prepared and that the Deed be adopted and be executed by the trustees as the employers and also by Fund Fidelity Pty. Ltd. as trustee subject to the approval of the Deputy Commissioner of Taxation.''

For no obvious reason, the minute book contains a separate copy of a trustee's decision, very much to the same effect, and dated the same day, the 1st June 1979. This is consistent with the degree of care with which the minutes appear to have been kept.

The various documents in connection with the admission of the appellant as a member of the W.E.L.M.T. Urological Unit Trust Superannuation Fund were completed. Each is dated the 1st June 1979, but with so many of the dates on documents having been shown to be incorrect, this date cannot be relied upon as being that upon which the documents were signed. I am, however, satisfied that the documents were completed close to this date, probably on the 31st May 1979. They had been made available to the appellant some three weeks prior to that time.

The minute book contains a resolution as to contributions to the superannuation fund on behalf of each of the doctors, purporting to have been passed on the 26th June 1979. It follows, however, a minute dated the 4th July 1979 which was sent to the appellant for signature on the 6th July 1979, which gives rise to a serious doubt as to whether the resolution was in fact passed on that day. That doubt is strengthened by the list of procedures for the establishment of the fund, which indicates that the minute was prepared on the 28th June 1979. Whether or not this was so, the relevant cheques for the contributions were drawn on the 26th June 1979.

On or about the 7th June 1979, rubber stamps were obtained, containing the words: ``Please make cheques payable to W.E.L.M.T. Urological Unit Trust'' and ``Trustees for the W.E.L.M.T. Urological Unit Trust''. Both stamps were placed on accounts and the second of them on receipts. Accounts issued for services rendered by the appellant thereafter read:

``Stanley H. Watson

• M.B., B.S., F.R.C.S (Eng.)
• F.R.A.C.S.
• In association with
• Ernest J. England
• Antony I. Low
• Brian McGregor
• Trustees for the W.E.L.M.T.
• Urological Unit Trust''

What that would convey to a patient is not readily apparent. It might well suggest that those with whom he was in association, but not himself, were trustees of the unit trust. Similar accounts were sent out by the other doctors, the practice being to send out accounts in the name of the individual doctor. So far as the appellant was concerned, for some time after the implementation of the arrangement Mr.

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Taylor's name did not appear on his accounts, as he was using old stationery relating to the partnership before Mr. Taylor became a partner.

Receipts were also printed, the relevant details being:

``W.E.L.M.T. Urological Unit Trust

Trustees Drs. S.H. Watson, E.J. England

A.I. Low, B. McGregor, T.A. Taylor''

The print size in the first line is very much larger than that relating to the trustees.

No accounts for services rendered by the doctors in June were rendered until July 1979. This delay was quite consistent with the earlier practice. Cash receipts after the 1st June 1979 were banked in accordance with whether or not services were rendered before that date. It is said that, after the 1st June 1979, the partnership simply ceased to exist, except for the collection of outstanding debts and distributions of income. No evidence was, however, given of any formal termination of employment of former employees of the partnership. It may be that it was simply assumed that they became employees of the trustee of the service trust.

By letter dated the 14th June 1979, Mr. Stagoll referred the appellant to certain matters still requiring attention, including the transfer of the leases of the surgeries to the W.E.L.M.T. Urological Unit Trust, the transfer of workers' compensation policies the Urological Service Unit Trust, the transfer of other policies to the W.E.L.M.T. Urological Unit Trust and the arranging of workers' compensation cover ``for all the doctors as employees of the W.E.L.M.T. Urological Unit Trust''. Each of the doctors was also requested to approach his own insurer with regard to professional indemnity insurance cover. As to this, it was said that each practitioner would continue to arrange and pay his own cover, but that the Urological Unit Trust should be introduced as a co-insured.

So far as the lease is concerned, prior to the arrangements of May and June 1979, the partnership had moved its rooms to the First Floor of Bible House, 167 St. George's Terrace Perth from another portion of the same building. No formal lease had been prepared at this time, apparently by reason of the impending changes in the structure of the practice. Eventually, however, a lease was entered into between the Bible Society in Western Australia Inc. and the W.E.L.M.T. Urological Unit Trust. It is dated the 22nd February 1980, but it purports to operate from the 1st January 1979, which, of course, antedates the existence of the trust.

So far as insurance is concerned, it appears that some at least of the suggested transfers of policies were effected, and these prior to the 30th June 1979.

The personal return of the appellant for the year ended the 30th June 1979 appears to have been signed by the appellant on the 31st December 1979. It may be accepted that it was lodged shortly after that date. Very little information in relation to the arrangements entered into in May and June 1979 is contained in the return. Under item 1, relating to gross salary shown on group certificates, there is set out gross income of $1,683 as having been received from W.E.L.M.T. Urological Unit Trust, the period of employment being shown as 1/6/79 to 30/6/79. Another entry under the same item indicates that the appellant was employed by Sir Charles Gairdner Hospital from the 1st July 1978 to the 30th June 1979, but a note to the return further indicates that this income was derived as a partner, and that it had been returned as income of the partnership. The inference is that the partnership was still operating to the end of the financial year. An amount of $400 appears under item 6 relating to allowances. No other relevant information is contained in the return.

It was conceded that an amount of $11.06, being interest earned on a savings bank account, was overlooked by the taxpayer and was not returned by him, as it should have been, as part of his income.

The partnership return for the five doctors appears to have been lodged on the 9th November 1979, prior to the lodging of the appellant's personal return. The notes to the accounts, which are attached to the partnership return, set out in the current account of each of the partners, sale of goodwill amounting to $6,000. They also indicate that fixed assets, comprising all the firm's office equipment, were disposed of during the year.

In addition, the return contains a note as follows:

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ATC 4347

``Sale of Business

On the 1st June, 1979 the medical practice of Drs. Watson, England, Low, McGregor and Taylor was sold to the W.E.L.M.T. Urological Medical Trust. The purchase price paid was $51,450, being $7,125 for equipment, furniture and fittings, $14,325 for Leasehold Improvements and $30,000 for goodwill of the practice.''

The trust return of the W.E.L.M.T. Urological Unit Trust was, it would appear, lodged with the respondent on or before the 13th December 1979. Certain details in relation to the W.E.L.M.T. Urological Unit Trust Superannuation Fund had already been supplied in June 1979. It appears that a copy of the trust deed of the unit trust was lodged with the return, together with financial statements for the period from the 29th May 1979 to the 30th June 1979.

The notes attached to the trust return provide particulars of the settlor and of the beneficiaries under the trust. Under the heading ``Purchase of Business'', it was stated that, ``[o]n the 1st June, 1979 the trust acquired the business of a medical practice from Drs. Watson, England, Low, McGregor and Taylor for $51,450, comprising goodwill of $30,000 and fixed assets of $21,450''. A copy of what purported to be a resolution in relation to the application of trust income for the period ended the 30th June 1979 was also attached, although the financial statements disclose a loss of $13,532 after allowing for superannuation of $23,471.

The financial statements also show patients' fees of $33,905 in the income and expenditure account. The balance sheet, under current assets, sets out debtors in the same amount. This represents fees for services rendered, in relation to which no accounts had at that time been rendered. The partnership of the five doctors had previously returned its income on a cash receipts and payments basis.

On receipt of the appellant's return, it was assessed on the basis that it was correct in every way, and an assessment was issued accordingly on the 29th January 1980. Then, on the 5th May 1980, the respondent issued an amended assessment, adding to the taxable income returned by the appellant an amount of $5,484, identified in the adjustment sheet accompanying the amended assessment as constituting ``income adjusted as a result of variation in partnership distribution''. This amount represented the appellant's share of the adjustment made to the partnership income by the addition of the superannuation contributions for the five doctors, less the net loss shown in the trustees' accounts. The amended assessment was based upon the application of sec. 260 of the Income Tax Assessment Act 1936 to the arrangements entered into by the appellant.

By notice dated the 23rd June 1980, the appellant objected to the amended assessment and claimed that the assessment should be varied by excising the added amount. That objection was disallowed and the appellant thereupon requested that the objection be treated as an appeal and forwarded to this Court.

During the course of the hearing, counsel for the respondent indicated that the adjustment sheets issued in relation to the partnership and to the appellant required amendment. So far as the partnership was concerned, the net income, it was said, should be increased by the sum of $29,106 (and not, as previously, $19,939), being described as ``net income purportedly derived by the unit trust''. That sum was made up as follows:

                                               $
      Gross fees                            33,905
      Salaries                               3,120
                                           -------
                                           $37,025
                                   $
      Less deductions
        claimed                 40,557
      Less disallowed
        salaries                 9,167
          Superannuation        23,471       7,919
                                            ------
                                           $29,106
                                           -------
      

The reason for this amendment was the fact that the original adjustment sheet, in relation to the partnership, had failed to take into account the ``salaries'' paid to the doctors in addition to their superannuation.

As a consequence, the adjustment sheet relating to the appellant required amendment by deducting the salary and allowances from

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ATC 4348

the trust, totalling $2,083, and by adding the increase in the appellant's share of the adjustment to the partnership income. This was said to be subject to the same two qualifications as were referred to in
Gulland v. F.C. of T. 83 ATC 4352. The same comments apply in relation to those qualifications, namely, that the appropriate method of accounting was that based on cash receipts and payments and that no issues as to any of the deductions allowed to the trustees were identified.

As a matter of convenience, although the evidence was heard separately, this appeal was argued at the same time as the appeal in Gulland's case and it is unnecessary here to restate the views which I have expressed on the various issues and matters which are common to the two appeals. The principal distinction between the facts in the two appeals is that, in Gulland's case, an outside trustee was introduced to join with the practitioner in ``employing'' the practitioner, whereas in the present case the trustees and the ``employees'' are identical.

As in Gulland's case, the first question which arises in this appeal is whether the arrangements amounted merely to a sham. In my opinion, they did not. Two contracts, the contract of sale of the partnership practice and the contract of employment, were central to those arrangements. All the evidence points to the conclusion that the five partners were of the firm belief that these contracts, and the four other contracts of employment, would be operative according to their tenor and that they would each be bound by them. So far as the contract of sale was concerned, there was considerable discussion amongst the partners before agreement could be reached on the inclusion of a figure for goodwill, and it was not included without any intention that it should bind the partners. So far as the contracts of employment were concerned, it took some eighteen months and a number of drafts before all the provisions were finally settled. Questions as to salaries, allowances, leave and restraint of trade were all debated, some of them at length. Here again I have no doubt that the discussions involved took place because the parties believed that they were binding themselves. In my opinion, notwithstanding the artificial nature of the arrangements, and the fact that the practice, so far as the patients were concerned, continued to be conducted outwardly in the same manner as it had been under the partnership, the former partners intended to enter into binding legal arrangements. They relied on their advisers to provide the legal structure to achieve their objects.

In this appeal, as in Gulland's case, the contract for sale of the practice and the contracts of employment are of primary significance.

In relation to the contract of sale, in this case, in contrast to the position in Gulland's case, the vendors and the purchasers are identical, although they were, as purchasers acting in the capacity of trustees. That does not, however, in my view, lead to the conclusion that there has not been an effective sale. It was, it appears to me, simply a case of trustees purchasing from themselves under a power to do so conferred upon them by the relevant deed of trust. Even if this were not so, the fact is that the appellant and his former partners, as trustees, have taken over the practice and they have conducted it as such. The premises from which the practice operates are leased by them in their capacity as trustees.

I am satisfied that the terms of the contract of sale were agreed to on the 31st May 1979, although the formal agreement was not executed until the latter part of June 1979.

In relation to the contracts of employment, there appears to me to be no significant difference from the position with respect to the contract of employment in Gulland's case, because, although the present appellant was purporting to act both as a trustee and in his individual capacity when entering into the contract, there were four co-trustees who were parties to the contract. It does not matter that they may also have been separately engaged as employees. For the reasons expressed in Gulland's case, the appellant's contract is a that, if it is not a contract of employment, the income produced by the appellant in the practice is income derived by him as a trustee and it is assessable as such.

It was argued for the respondent that no contract of employment was concluded before the 30th June 1979. Although it is clear enough that not all the terms of the

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ATC 4349

contract were agreed until towards the end of 1980, I am satisfied that the essential terms were agreed on the 31st May 1979, they being that the appellant and his four partners were to be employed in the practice as from the 1st June 1979 at an annual salary of $25,000 or, in the case of three of them, $20,000.

For the reasons expressed in Gulland's case, I am also of the view that the appellant did not, in his individual capacity, derive income from the practice. The income produced from the carrying on of the practice was relevantly income of a trust estate.

It is necessary now to turn to the application of sec. 260 of the Act.

The Deputy Crown Solicitor particularised as follows the contracts, agreements or arrangements which, the respondent contended, were wholly void as against himself:

``(i) the formation of the W.E.L.M.T. Urological Unit Trust

(ii) the formation of the Urological Service Unit Trust

(iii) the formation of the S.H. Watson Family Trust

(iv) the employment agreement made between the trustees of the W.E.L.M.T. Urological Unit Trust and the appellant

(v) the employment agreements made between the trustees of the W.E.L.M.T. Urological Unit Trust and the following

• (a) Ernest James England
• (b) Antony Irving Low
• (c) Brian William McGregor
• (d) Theophilus Anthony Taylor

(vi) the management services agreement made between the trustees of the W.E.L.M.T. Urological Unit Trust and Beates Nominees Pty. Ltd. as trustees of the Urological Service Unit Trust

(vii) the sales agreement made between the appellant, Ernest James England, Antony Irving Low, Brian William McGregor and Theophilus Anthony Taylor as vendors and the trustees of the W.E.L.M.T. Urological Unit Trust, as purchaser, for the sale of the vendor's medical practice.

(viii) the agreement or arrangement whereby the trustees of the W.E.L.M.T. Urological Unit Trust purported to take on lease the practice premises at 167 St. George's Terrace, Perth

(ix) the issue of the following units in the W.E.L.M.T. Urological Unit Trust

• (a) 10 units to Stanley Henry Watson and Jill Dorothy Watson as trustees of the Watson family trust
• (b) 10 units to Ernest James England
• (c) 10 units to Antony Irving Low and Joan Marie Low as trustees of the Antony Low family trust
• (d) 10 units to Brian William McGregor and Dianne Patricia McGregor family trust [sic]
• (e) 10 units to Adonis Nominees Pty. Ltd. as trustees for the T.A. Taylor family trust

(x) the establishment and operation of a superannuation fund for the purported employees of the W.E.L.M.T. Urological Unit Trust.''

If it be relevant, the appellant had a clear understanding of what was being sought to be effected by the arrangements. The assets of the partnership were to be sold to the unit trust, which would then employ the former partners at salaries being considerably less than their former earnings. A superannuation fund would be established to enable the appellant and his former partners to secure what he regarded as the provision of reasonable superannuation. He strongly believed that his superannuation would be inadequate unless he could become an employee, although he accepted that he could otherwise make provision for it. The entitlement to a tax deduction for contributions to the fund was a key matter. In addition, the service trust would run and organise the practice. He accepted that the arrangements, assuming them to be legally effective, gave scope for income splitting between himself and his family trust, which he himself largely controlled. Initially, he indicated that he was against the income splitting aspect of the arrangements; but he subsequently changed his attitude, and then he accepted it. Had he not, he could himself have been the unit holder in the unit trusts, as

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ATC 4350

was Mr. England in the W.E.L.M.T. Urological Unit Trust. The magnitude of the income splitting may readily be assessed by comparing the appellant's earnings from the partnership for the tax year in question with the amount of the salary he was prepared to accept as an employee.

As in Gulland's case, it is a material consideration that, so far as the patients were concerned, the practice continued just as it had previously. Referrals, no doubt, continued to be made to the individual surgeons. The only apparent indication to the patients of the existence of a trust was to be found in the forms of accounts and receipts which they appear to have received long after the services to which they related were rendered. There was no change in the letterhead used by the appellant. A business name was registered; but it seems never to have been used. In fact, because the trustees were carrying on the practice in their own names, there was no necessity to register a business name.

No business purpose has been sought to be identified for the arrangements and none is apparent to me, apart from the avoidance of income tax. No limitation of liability, for example, was achieved, nor any advantages in the structure of the practice. The arrangement whereby the appellant who, alone, so far as his family is concerned, is generating the income in question, becomes an employee of himself and of his former partners so that a substantial part of the income which would otherwise have been his income becomes available for distribution, at the discretion of his wife and himself, between the members of his family, those members not having any real entitlement other than to be considered as potential beneficiaries, does not appear to me to be explicable on the basis of ordinary family dealing. The extreme artificiality of the arrangements tells against them.

Subject to the final question, concerning the power of the respondent to issue an amended assessment, in my opinion, I am bound by Peate's case (
Peate v. F.C. of T. (1964) 111 C.L.R. 443; (1966) 116 C.L.R. 38) to hold that sec. 260 operates to avoid the arrangements, as particularised, as against the respondent, their purpose being to avoid tax. The annihilation of the arrangements, during the year in question, leaves any income or loss of the trust in the partnership.

It may be accepted, for the present purposes, that, had the service trust arrangement stood on its own, it would not have been struck down by sec. 260. In the present circumstances, however, it appears to me that it must fall as part of the general arrangements, depending, as it does, upon the conduct of the practice by the former partners as trustees.

This brings me to the final question in this appeal, which relates to the power of the respondent to issue an amended assessment, one of the grounds of objection being that, the appellant having made a full and true disclosure of all the material facts necessary for his assessment prior to the original assessment having been made, the respondent is not authorised to amend the assessment. The relevant provisions in the Act are to be found in subsec. (1), (2) and (3) of sec. 170, which provide as follows:

``170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.

(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may -

• (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
• (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,

amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax as the case may be.

(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his

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ATC 4351

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 3 years from the date upon which the tax became due and payable under that assessment.''

The respondent submits that the amended assessment is authorised by sec. 170(2). Whilst it may be accepted that an amended assessment in the present case cannot be sustained unless the conditions expressed in sec. 170(2) are fulfilled, as it was expressed by Dixon C.J., McTiernan and Webb JJ. in
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 269:

``[T]he onus probandi lies on the taxpayer if his objection is that he did make a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax.''

On the question of whether there has been an avoidance of tax within the meaning of sec. 170(2), it is sufficient if the absence of full disclosure has in fact resulted in less tax being paid than ought to have been paid - see Fullagar J. in
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 88 C.L.R. 23 at p. 34. That, as I have already held, is the present case.

So far as the full and true disclosure of the facts by the appellant is concerned, it is not, in my opinion, sufficient for the respondent to point to the admitted omission by the appellant from his return of the small amount of interest accruing in his savings bank account, for there is no connection between that omission and the tax which, by the amended assessment, the respondent claimed was avoided. The omitted income is not even included in the assessment. I accept that I must follow the decision of Aickin J. in
F.C. of T. v. Maurice Estate 77 ATC 4462 at pp. 4470-4471; (1977) 52 A.L.J.R. 1 at pp. 7-8, supported as it is by the decision of Windeyer J. in
W. Thomas and Co. Pty. Ltd. v. F.C. of T. (1965) 115 C.L.R. 58.

In my opinion, however, the appellant otherwise failed to make a full and true disclosure of all the material facts to the respondent within the meaning of sec. 170(2) of the Act. As Stephen J. indicated in
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T. 74 ATC 4001 at p. 4011; (1974) 130 C.L.R. 159 at pp. 174-175, in the case of disputed amended assessments involving the first limb of sec. 26(a), the taxpayer would seldom be able to rely on having made a full disclosure. That appears to me to be very much the case also with amended assessments based, as is the present assessment, upon sec. 260. Even if the taxpayer is not required to disclose the objective purpose of the arrangement under sec. 260, as distinct from his subjective intention under the first limb of sec. 26(a), he must disclose the whole of the arrangement and this he did not do. If, as is the case, the purpose under sec. 260 is the purpose of the arrangement itself, and if, in this respect, regard may be had to the overt acts by which it is implemented, it will be appreciated at once that the disclosure of facts in this case was inadequate. In particular, the appellant did not produce to the respondent a copy of the sale agreement nor did he provide particulars of the five employment agreements, bearing in mind that the written agreements had not at that time been executed. The minutes were not supplied and there was no information given as to how the change from a partnership practice to a trust practice was effected. The failure to supply other facts was also adverted to, but it is not necessary for the present purposes to refer to them. The same conclusion, that the disclosure was inadequate, is arrived at by having regard to the test suggested by Menzies J. in
Austin Distributors Ltd. v. F.C. of T. (1964) 13 A.T.D. 429 at p. 433:

``If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom that advice was sought have required more information than this return disclosed to the Commissioner?''

As Fullagar J. indicated in the Australasian Jam Co. case at p. 33 it is not enough for the appellant to suggest that enough information was conveyed to put the respondent on notice. The omitted information to which I have referred was not merely explanatory matter confirmatory of a conclusion that the respondent could and should have reached on the facts before him

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ATC 4352

- see per Windeyer J. in W. Thomas and Co. Pty. Ltd. v. F.C. of T. (supra) at p. 75. In my opinion, the respondent was authorised to issue the amended assessment. In reaching this conclusion, it is unnecessary to have regard to the extent to which the returns of persons other than the taxpayer may be relied upon by him as disclosing facts to the respondent.

In this case, as in Gulland's case, the assessment issued in the mistaken belief that the income of the trust, as returned, was calculated on a cash receipts and payments basis, which is clearly the proper basis. Subject to any question which arises in that regard, the appeal should, in my opinion, be dismissed.