Davis & Anor v. Federal Commissioner of Taxation
89 ATC 4377
Judgment date: Judgment handed down 10 April 1989.
Hill J.: The applicants in these proceedings, Mr and Mrs Davis have appealed against assessments of income tax for the years of income ended 30 June 1979 to 1981 inclusive. The appeals were originally brought to the Supreme Court of New South Wales in its Administrative Law Division and were transferred to this Court pursuant to the Jurisdiction of Courts (Miscellaneous Amendments) Act of 1987.
By these assessments the Commissioner included in the assessable income of Mrs Davis who was a beneficiary of a trust estate a share of the ``net income of that trust estate'' calculated on the basis that an assignment of income made by the trustee was ineffective. The assessments included as well additional tax under sec. 226 of the Act for omitted income. The assessment of Mr Davis treated as ineffective an assignment of interest for eight years in respect of a deposit made by him with a company, T.R.G. Loan and Finance Co. Pty. Limited, that deposit being for a period of eight years.
Mr and Mrs Davis together with Mr Cahill, a solicitor, were directors of Nelson Investments Pty. Limited (``the trustee'') which company was the trustee of a family trust established by a deed bearing date 29 June 1976, the discretionary beneficiaries of which included among others the applicants, their children, grandchildren and any charitable institution wheresoever situated, the income of which was for the time being exempt from income tax in Australia.
The trust as to income contained in the trust deed gave to the trustee in each year a discretion to divide the income of that year among the beneficiaries specified in the deed and in such proportions as the trustee determined and so far as is presently relevant in default of any effective determination being made by the trustee prior to midnight on 27 June in any fiscal year the trustee was obliged to accumulate the income and add it to the capital of the trust fund subject to other provisions not presently relevant.
On 28 April 1965 a company, the Mariner Shopping Centre Pty. Limited (``Mariner'') which company was the holder of a leasehold estate of certain land in Chester Hill under a headlease for the Commissioner for Railways agreed to sub-lease part of the Chester Hill site to Coles Food Markets Pty. Limited (``Coles'') for a term of 20 years from the construction on the relevant land of a shopping centre. That agreement resulted in a memorandum of lease being entered into between the parties for a
89 ATC 4381
term of 20 years computed from 28 April 1966. The lease is in a form not unusual for the lease of a shopping centre site to a major retailer. It provides for an annual rent of a fixed amount to be recalculated having regard to the turnover of the retailer and the rent reserved was payable initially by equal calendar monthly instalments which likewise escalated with rental increases.
As is usual in leases of this kind, the lease provides that in the event that the rent payable under the lease was in arrears for a period of 14 days, or certain other defaults occurred the lessor might re-enter upon the premises and determine the estate of the lessee without releasing the lessee from any liability in respect of the breach or non-observance of any covenant or provision thereof. Similarly, in the event of an entitlement to re-enter arising, the residue of the term might, at the option of the lessor, be reduced to one week and the tenancy thereafter become a weekly tenancy (see cl. 10(d) and 11).
Other leases were apparently entered into by Mariner with traders operating on the Chester Hill site for terms which did not exceed seven years.
At the time the trust was settled it would seem that the trustee acquired Mariner's interest under the lease acting as trustee of the Davis Family Trust and for another trust referred to as the P.M. Bester Trust. However, no transfer giving effect to this arrangement was ever registered. No evidence was adduced as to this transaction but the case proceeded on the basis that the agreement to assign the lease from Mariner to the trustee was effective and that at all relevant times the situation was that Mariner was but a bare trustee for Nelson Investments Pty. Limited, which company acted in the capacity as trustee of the two separate trust estates, namely that trust estate to which I have already referred established for the benefit of the Davis family and the other trust estate which was established apparently for the benefit of the family of Mr Cahill. The appeals proceeded therefore on the basis that as to one-half of both income and capital the trustee held the headlease from the Commissioner of Railways upon the trusts of the P.M. Bester Trust and as to the other half of both income and capital upon the trusts of the trust established for the benefit of the Davis family.
Throughout the term of the lease to Coles that company duly and punctually paid the rent reserved by the lease and there were regular rental increases presumably as turnover increased.
As a result of discussions between Mr Cahill and a Mr Wilson in Perth, Mr Cahill had become interested in assisting a charitable organisation then known as the International Foundation for the Prevention of Blindness Limited (``the Foundation'') which subsequently changed its name to the Australian Medical Research Foundation. Mr Cahill gave evidence before me and counsel for the Commissioner expressly disavowed any attack on Mr Cahill's credit. In these circumstances, I accept without question his evidence. Indeed, except for one matter of recollection to which I will later advert there was little cross-examination of Mr Cahill at all.
Out of the conversations in Perth as well as conversations with a Mr Picton-Warlow, a solicitor and director of the Foundation a proposal was evolved. The evidence suggests that the proposal was initially put to Mr Cahill rather than that it originated from him, although I do not think anything turns upon this. Certainly it seems that Mr Cahill enthusiastically adopted the proposal and put it to his clients so that in the event it was ultimately adopted not only by the applicants in these proceedings but also by five other groups of clients for whom Mr Cahill acted. Each of these groups of clients comprised long standing clients and friends of Mr Cahill and each entered into identical arrangements to those affecting Nelson Investments Pty. Limited. For this purpose Mr Cahill prepared pro-forma documentation with appropriate spaces for the insertion of the names of the relevant client and amounts and particulars unique to each group of clients.
Mr Davis' participation in the arrangement came about as a result of a conversation with Mr Cahill in the last quarter of 1978. In his affidavit filed in the proceedings Mr Davis deposes to the following as having been said by Mr Cahill:
``David, I have been trying unsuccessfully to raise funds for the International Foundation for the Prevention of Blindness Limited in New South Wales. This organisation does a lot of good work in its research and among other people it has employed the services of Dr Ian Constable,
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who is regarded in Western Australia as the premier eye surgeon in the Commonwealth. My efforts have been stymied by the Under-Secretary of State's Department as far as a lottery machine concept, which Lorrie Wilson, a director of the Foundation, has been trying to get established, is concerned. It has been suggested that I look for clients who may be prepared to assign income to the Foundation at a discount so that the Foundation will earn monies. I was thinking maybe Nelson Investments Pty. Limited in its capacity as Trustee of your family trust may agree to such a proposal.''
It is said that Mr Cahill then went on to explain in detail the documentation which would be necessary and that Mr Davis expressed his agreement to participating in the arrangement to assign 80% of the income ``subject to being assured by Queen's counsel that the assignment is valid and allowed by the Tax Act and that the Foundation is a charitable institution''. Mr Cahill agreed to obtain the opinion of senior and junior counsel and it would seem that such an opinion was obtained.
In the course of his oral evidence Mr Davis made it clear that he was not able to remember in detail the conversations with Mr Cahill although he was sure that what he had deposed to represented the gist of the conversation. He did, however, say that Mr Cahill had, in the course of the conversation, indicated that the benefiting of the Foundation was not going to be very painful from Mr Davis' point of view, or in other words, it was not going to cost him a great deal of money. Mr Cahill discussed with Mr Davis the income tax consequences and advantages of the proposal and it is clear from Mr Cahill's evidence that the tax consequences of the transaction were regarded by him as a matter of considerable significance even if not overwhelming significance. The advice taken from experienced senior and junior counsel as could be expected was advice concerning not only the efficacy of the steps involved but also the tax consequences of the arrangement. I find, if it be relevant, that the tax advantages of the proposal were also of considerable significance to Mr Davis.
There is no dispute between the parties that the whole of the arrangement entered into involving Nelson Investments Pty. Limited was prearranged and that all steps taken both initially and semi-annually were taken pursuant to the arrangement.
The arrangement initially entered into was comprised in six documents prepared in Mr Cahill's office in Sydney and handed to a Mr Davidson on or about 14 December 1978 who took them with him to Canberra where some of these documents were executed on 15 December 1978.
Before seeking to detail the steps proposed by Mr Cahill in the scheme, it should be mentioned that Mr Cahill's trust, which it will be recalled was the owner of half of the shopping centre lease, participated in a similar arrangement.
Where, as in the present case, there is a circular arrangement there is always a difficulty in determining the starting point of that arrangement. Having regard to its very circularity, it is in some ways irrelevant where that starting point is. However, in seeking to explain the arrangement proposed and in fact entered into, I have sought to approach the arrangement by setting it out in a logical order. To enable the arrangement to be easily understood, a diagram prepared by counsel for the applicant is here set out. It should, however, be noted that the diagram ignores two important matters: first, that there was a similar arrangement entered into by Mr Cahill, so that in that arrangement references to Mr Cahill in the diagram could be read as references to Mr Davis; second, the diagram ignores the capital distributions by the trust to Mr Davis hereafter referred to.
The first step in the arrangement so far as it affected the Davis Trust was that a sum of $300,000 was made available to a company, T.R.G. Loan & Finance Co. Pty. Limited, by two loans, one from Geoffrey Holdings Pty. Limited, a company associated with a Mr Davidson, an associate of Mr Cahill and one from W.D. Credits Pty. Limited, a company associated with Mr Cahill. T.R.G. Loan & Finance Co. Pty. Limited then lent $297,000 to the Foundation. The moneys lent were then used by the Foundation to purchase for $297,000 the rental stream of Nelson Investments Pty. Limited from the Coles lease and other leases entered into in respect of the Chester Hill site. The trustee then made a capital distribution under the trust to Mr Davis of $296,000 which enabled Mr Davis to make a
89 ATC 4383
loan to T.R.G. Loan & Finance Co. Pty. Limited which in turn enabled that company to repay on the same day the loans referred to euphemistically as ``daylight accommodation'' to Geoffrey Holdings Pty. Limited and W.D. Credits Pty. Limited.
P.L. DAVIS & D.E. DAVIS v. COMMR OF TAXATION
| NELSON INVESTMENTS | ASSIGNMENT | INTERNATIONAL |
| PTY. LTD. | FOR $297,000 | FOUNDATION FOR |
| TRUSTEE FOR |______________________\| THE PREVENTION |
| DAVID DAVIS FAMILY | /| OF BLINDNESS |
| TRUST | RE: SHOPPING CENTRE | |
/|\ /|\ /|\
LOAN $297,000 / | |
/ | |
/ ASSIGNMENT BY |
/ WAY OF GIFT OF | |GUARANTEE
/ INTEREST FROM C/D |
| T.R.G. LOAN & | DEPOSIT $298,000 | T.G. CAHILL |
| FINANCE CO. |/__________________________| |
| PTY. LTD. |\ | |
LOAN | \ LOAN $150,000
$150,000 | \________
| GEOFFREY | | W.D. CREDITS |
| HOLDINGS | | PTY. LTD. |
| PTY. LTD. | | |
It should perhaps also be mentioned that in the arrangement relating to Mr Cahill's trust, Mr Cahill had made a deposit of $298,000 to T.R.G. Loan & Finance Co. Pty. Limited, so that in one sense it is impossible to trace which funds were in fact used at a particular time. However, I do not think anything turns upon this.
The documents executed to carry into effect this arrangement were as follows:
- 1. A loan agreement between the Foundation and T.R.G. Loan & Finance Co. Pty. Limited (``T.R.G.'') under which T.R.G. agreed to advance to the Foundation the sum of $297,000. The loan agreement provides that the sum advanced (which is unsecured) is repayable by 16 equal half-yearly payments of $18,562.50 and interest is payable on the principal sum of $43,500 by 16 equal half-yearly payments of $2,718.75 payable on the same days as are set for the repayment of the principal sum.
- 2. A deed of assignment between the trustee and the Foundation which, after witnessing
89 ATC 4384
an agreement between the parties, provided relevantly as follows:
- ``1. In consideration of the sum expressed as the `purchase price' in the Second Schedule hereto which sum has been paid by the Assignee to the Assignor (the receipt whereof the Assignor hereby acknowledges) and in further consideration of the other covenants of the Assignee hereinafter set forth the Assignor hereby assigns to the Assignee all that the future income specified in the Third Schedule hereto to the extent of the percentage or proportion thereof therein expressed for the period of years nominated in the Sixth Schedule hereto commencing from the date on which such income is first paid to or applied or accumulated for the benefit of the Assignee by reason of the assignment hereby affected.
- 3. The Assignor undertakes that the percentage or proportion of the said future income stated in the Third Schedule shall not in respect of any annual period the subject of this assignment amount to less than the annual sum stated in the Fourth Schedule hereto.... If the same shall be less than the annual sum certain in respect of any such annual period then the Assignor shall on demand pay the amount of the deficiency to the Assignee.
- 4. If the sum received by the Assignee in respect of the percentage or proportion of the said future income hereby assigned shall in respect of any annual period the subject of this assignment be greater than the annual sum certain then the Assignee shall be obliged to pay as and by way of additional purchase price for the assignment hereby effected an amount equal to the excess of the former sum so received over the annual sum certain less seventeen and one half (17.5) per centum thereof.''
- In the schedule to the agreement the purchase price is set out as $297,000, the description of income and source thereof is described as:
- ``Income earnt by the Assignor in its capacity as Trustee for the D.E. Davis Family Trust from the property known as the Mariner Shopping Centre Pty. Limited, Waldron Road Chester Hill with the exception of Lease Premiums received.''
- The percentage or proportion of income assigned was defined as 80% and the annual sum certain defined as $45,000. The term or period of assignment was defined as eight years from the time for commencement referred to in cl. 1 of the deed.
- 3. A guarantee of the obligations of Nelson Investments Pty. Limited was given. This document was not in evidence, but it would appear that guarantees were given in similar terms by both Mr Cahill and Mr Davis; the suggestion being that Mr Cahill guaranteed the obligations of the Davis Family Trust and Mr Davis guaranteed the obligations of the P.E. Bester Family Trust. Since the obligations guaranteed were those of Nelson Investments Pty. Limited and those obligations in respect of each trust were presumably identical nothing turns, in my opinion, upon the fact that Mr Davis did not directly guarantee the obligations entered into by the trustee acting as trustee of the Davis Family Trust.
- 4. A deed of gift between Mr Davis and the International Foundation for the Prevention of Blindness Limited was prepared whereby Mr Davis assigned the interest of $12,000 purporting to be payable to him pursuant to a deposit of $298,000 with T.R.G. Loan & Finance Co. Pty. Limited to the Foundation.
- 5. A power of attorney from Nelson Investments Pty. Limited to Mr Davidson was prepared to which was annexed a copy of the deed of assignment.
- 6. A power of attorney from Mr Davis to Mr Davidson was prepared to which was annexed a copy of the deed of gift of interest and the deed of guarantee.
Notice in accordance with the documentation was given by Nelson Investments Pty. Limited to the manager of Mariner requesting that company to collect and accumulate 80% of all the rental income in respect of the leasehold property at Chester Hill for and on behalf of the Foundation and account to that company for the income so collected and accumulated as and when requested by that company.
89 ATC 4385
The practical implementation thereafter of the scheme appears to have been that a company under Mr Davis' control by name, Technical Advance Company Pty. Limited (``T.A.C.''), collected the rents from tenants including the rental from Coles and these amounts were banked in the account of that company each month. At the end of each month a cheque was then drawn by T.A.C. to Mariner for the whole of the rent and that cheque was then given to Mr Cahill, presumably for banking on behalf of that company. As each six-monthly period arose there was an exchange of cheques between the Foundation and Mariner.
The procedure each six months was that a cheque was drawn by the Mariner Shopping Centre Pty. Limited in favour of the Foundation for, in the case of the present trust, $22,500 (this being the guaranteed rent for six months).
The Foundation in its turn would draw a cheque or cheques in favour of T.R.G. in repayment of the advance made by that company together with interest of approximately $21,400 leaving up to that point a small profit to the Foundation each six months of $1,100. Also at about the same time a cheque for interest of $750 payable by T.R.G. to Mr Davis was drawn by T.R.G. and paid at Mr Davis' direction to the Foundation, thus implementing the gift set out in the deed of gift. Further at irregular intervals cheques were drawn to the Foundation of an amount equal to 82.5% of the rent in excess of $45,000 per annum (the guaranteed annual rent). The end result, ignoring increasing rent, was that each six months the Foundation received $22,500 and paid back to T.R.G. an amount of principal of $18,562.50 and an amount of interest of $2,718.75, T.R.G. repaid principal to each of Mr Cahill and Mr Davis of $18,625, paid interest to Mr Cahill and Mr Davis of $750, which in turn was gifted to the Foundation pursuant to the deed of gift.
Counsel for the Commissioner pointed to two particular discrepancies in the documentation. First, in the deed whereby Mr Davis was to assign the interest income accruing on his deposit from T.R.G. there appears in the Second Schedule under the heading Particulars of Income Assigned the words ``income earnt by the Assignor in its capacity as trustee for the D.E. Davis Family Trust from the property known as the Mariner Shopping Centre Pty. Limited, Waldron Road, Chester Hill with the exception of Lease Premiums received''. These words are clearly out of place and obviously were intended to be inserted in the assignment of the rental income, but the insertion of the words in the particular document did not, in my view, affect the substance or effectiveness of the particular assignment because other words in the schedule and the document itself made it clear that what was assigned was the interest on the deposit. The second peculiarity of the documentation arose out of a power of attorney purported to be given by Mr Davis to Mr Davidson to execute the deed of gift. The copy of the power of attorney attached to Mr Davis' affidavit was blank in that it was unexecuted. The document annexed to it, that is to say, the deed of gift which ultimately was to be executed under the power, bore peculiarly the date 15 December 1978 but was completed showing the name of the donor of the power, Mr Davis, and his address and was a document different from that to which I have earlier referred, in particular it did not refer in the second schedule to the assignment of income from the Mariner Shopping Centre. Nevertheless, it is obviously clear that the document in fact executed was the document with the insertion of the unnecessary words in the Second Schedule.
Given the fact that some 10 years have passed since the documents were executed it was not surprising that Mr Davis was unable to recall the state of the documents at the time he executed them. Clearly, he relied upon Mr Cahill who was his solicitor and confidant. Mr Cahill, in evidence, made clear that searches had been made to find the original documents but that he has been unable to find them. He said that the affidavits had been prepared in part from a precedent file and to that extent it must follow that the documents annexed to the affidavits were clearly attempted reconstructions of the originals. In another copy of a power of attorney given by Mr Cahill the name of the donor of the power was not included. However, Mr Cahill deposed to the fact that he had inspected all the executed documents subsequent to the transaction and within a couple of months thereof and at that time that he had been satisfied that ``everything was 100% in order''. Notwithstanding the fact that at that time Mr Cahill would have inspected about 30 documents in total
89 ATC 4386
representing five separate transactions I am not prepared to infer contrary to Mr Cahill's sworn evidence that the documents were not in order at the time they were executed. It is clear enough that there has been some carelessness at some time, certainly at the time of preparation of the affidavits in these proceedings. However, as there has been no attack on Mr Cahill's credit I am satisfied on the balance of probabilities that the documents were in fact properly prepared and executed at the time in either Sydney or the Australian Capital Territory as the case may be in December 1978.
Before turning to the substantial matters in the appeal there is one important matter to which reference must be made.
During the course of evidence counsel for the applicants sought to tender a copy of the deed of assignment between the trustee and the Foundation. It is common ground between the parties that the original of that instrument was executed in the Australian Capital Territory and that it was never stamped. Indeed, from the evidence given by Mr Cahill it can be concluded that the original of this instrument never came into New South Wales but was kept in the Australian Capital Territory. However, the original cannot now be found, it having presumably been mislaid in the solicitor's office where it has been held for many years. Objection was made by counsel for the Commissioner to the tender.
Counsel for the applicants have proffered an undertaking to the Court to have the original stamped if it be found or to pay the relevant duty if I am of the view that the objection of the respondent to the tender should be upheld.
For the respondent it was argued that the provisions of sec. 29 of the Stamp Duties Act 1920 (N.S.W.) by their terms operate to prevent the instrument in question being admitted in evidence in any court in New South Wales. It is then said to follow from sec. 79 of the Judiciary Act 1903 that the provisions of sec. 29, being a law of the State of New South Wales are binding upon this Court exercising as it clearly is federal jurisdiction conferred upon it by the Income Tax Assessment Act 1936.
Section 79 of the Judiciary Act 1903 reads as follows:
``The laws of each State or Territory including the laws relating to procedure, evidence, and the competency of witnesses, shall, except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State or Territory in all cases to which they are applicable.''
Section 29(1) of the Stamp Duties Act 1920 provides:
``(1) Except as aforesaid, no instrument executed in New South Wales or relating (wheresoever executed) to any property situate or to any matter or thing done or to be done in any part of New South Wales, shall except in criminal proceedings be pleaded or given in evidence, or admitted to be good, useful, or available in law or equity for any purpose whatsoever unless it is duly stamped in accordance with the law in force at the time when it was first executed;''
Section 29 represents the traditional sanction for non-payment of stamp duty. That duty, as inherited by the Australian States from the United Kingdom proceeded initially upon the basis that the only consequence of failure to stamp was that the instrument could not be given in evidence and as a result was deprived, at least for most purposes of the force of law. Thus stamp duty charged on an instrument could not in the absence of specific statutory provisions be recovered from a party, nor could additional stamp duty charged for late stamping be so recovered. Cf.
Cobar Corporation Ltd. v. Attorney-General for N.S.W. (1909) 9 C.L.R. 378;
Clyne v. Commr of Stamp Duties (1966) 85 W.N. (Pt 1) (N.S.W.) 171. Not surprisingly the New South Wales legislature reversed the effect of each of these decisions with the result that stamp duty is now recoverable from the person referred to in the Second Schedule of the New South Wales Stamp Duties Act as the person ``primarily liable'', as is additional stamp duty payable as a result of the failure to stamp an instrument in time: see sec. 4, 38 and 25 of the Stamp Duties Act 1920 (N.S.W.).
In construing the provisions of the precursor to the present legislation (sec. 15 of the Stamp Duties Act 1898 (N.S.W.)) Isaacs J. delivering the judgment of the Full High Court in
Dent v. Moore (1919) 26 C.L.R. 316 said at pp. 324-325:
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``The Legislature by way of securing the payment of the impost for public purposes, which it placed on the instrument, provides in effect that the sanction of law shall be withheld from the acts of the parties until the revenue law is obeyed. It lies at the root of all contractual obligation that the mere convention of the parties creates no binding tie between them. It is the law operating on their compact - either the common law or some Statute - which creates the obligatory relation that one can enforce against the other. But here, acting impersonally on the bargain finally embodied in an `instrument', and therefore contained nowhere else, it strikes that instrument with sterility (to borrow an expression from another branch of the law) unless and until the public requirement of taxation has been complied with. Until that has happened, the instrument (except in criminal proceedings) is not `available' and not `effectual' - that is, it has no effect - for any purpose whatsoever at law or in equity: in other words, it cannot be considered as an instrument giving title, or as one which could be made the means of compelling anyone to give title. It is in the eye of the law a nullity, except for criminal proceedings and, of course, for the purposes of being stamped.''
Ash Street Properties Pty. Ltd. v. Pollnow & Ors 87 ATC 4609; (1987) 9 N.S.W.L.R. 80 the Court of Appeal of the Supreme Court of New South Wales considered sec. 29 in circumstances where the trial Judge had, while rejecting a tender of an unstamped instrument, found the existence of a constructive trust for reasons similar to those discussed in
Allen v. Snyder (1977) 2 N.S.W.L.R. 685, that constructive trust being found in the underlying transaction which was the subject matter of the unstamped instrument. In allowing the appeal Priestley J.A. with whom Samuels J.A. agreed and Mahoney J.A. saw no relevant distinction to be drawn between the language of the 1898 Act and that of the 1920 Act. While it is clear that there is a verbal distinction between sec. 15 of the 1898 Act and sec. 29 of the present legislation and while it may be possible to draw conclusions from that distinction it is I think clear that nothing said in the High Court in
Shepherd v. Felt and Textiles of Australia Ltd. (1931) 45 C.L.R. 359, a case decided on sec. 29, suggested that their Honours in the High Court saw any relevant distinction between the two Acts and there is certainly no reason to believe that sec. 29 was enacted with a view to altering the law as it stood prior to the 1920 Act. Accordingly, I would apply the law as to sec. 29 propounded by the Court of Appeal in New South Wales. I should say that even if I were to disagree with what the Court of Appeal had said I would regard it as appropriate for a single judge of this Court applying the law in the State of New South Wales to follow a decision of the Court of Appeal of that State without question.
Counsel for the applicants submit, however, that sec. 79 has no application to render sec. 29 applicable to the present proceedings. It is submitted first, that sec. 79 applies State law in accordance with its terms. With that proposition there can be no quarrel. However, it is said that sec. 29 when read in its context together with sec. 27 and 28 of the Stamp Duties Act 1920 applies only to a New South Wales court and thus is not made applicable to the proceedings before me.
Second, it is said that sec. 79 is applicable only to State procedural laws and does not operate to render State substantive laws applicable. It is then said that sec. 29 is wholly or in part substantive and is not procedural with the consequence that it is not made applicable.
The final argument advanced depends upon the relationship between sec. 25 and 29 of the New South Wales Act and I will defer consideration of that argument until after considering the first two submissions.
Section 79 has as its apparent origin sec. 34 of the United States Federal Judiciary Act 1789 which provides:
``That the laws of the several States, except where the constitution, treaties or statutes of the United States shall otherwise require or provide shall be regarded as rules of decision in trials at common law in the courts of the United States in cases where they apply.''
It is pointed out by French J. in
Pavich v. Bobra Nominees Pty. Ltd. (unreported 31 October 1988) that when the Judiciary Act was enacted, sec. 34 of the United States legislation had been judicially construed as confined in its application to State Statutes and decisions
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construing them and as thus not covering the general State common law:
Swift v. Tyson (1842) 41 U.S. (16 Pet.) which decision was subsequently overruled in
Erie Railroad Co. v. Tompkins (1938) 304 U.S. 64. Such a restricted interpretation has never been given to sec. 79 nor could it be and indeed it seems clear that the section in the Australian Act is to be given a liberal interpretation:
Huddart Parker Ltd. v. The Ship Mill Hill and her Cargo (1950) 81 C.L.R. 502 at p. 507 per Dixon J.
Underlying sec. 29 are three related principles and policies. First the section assures that State substantive law will apply where courts, be they State or federal, exercise federal jurisdiction. Were it otherwise a question could perhaps arise as to whether there could exist, when federal jurisdiction was invoked, a legal vacuum. In one sense this may be thought to be self-evident. For example, if a taxpayer were to assign a share of a partnership interest to another person and the issue arose on an appeal under Pt V of the Income Tax Assessment Act whether that assignment was effective for income tax purposes, the validity of the assignment for general law purposes would be tested in accordance with State law (there being no federal law directly impinging upon the matter) and the same result would follow whether the court hearing the appeal was, as until recently, the State Supreme Court or as now, this Court.
The second principle is reflected in what Windeyer J. said in
Suehle v. The Commonwealth of Australia (1967) 116 C.L.R. 353 at p. 356, where speaking of sec. 79 and 80 of the Judiciary Act, his Honour said:
``The policy which they reflect is, I assume, that when this Court exercises jurisdiction in a State in a matter which might have been litigated in a court of that State the law which it is to apply should be the same law as the State court would apply in like case. Sections 79 and 80 thus attract the State law (including the rules of private international law applicable as part of the State law), and make it govern the proceedings in this Court. But those sections apply only when the laws of the Commonwealth do not otherwise provide.''
Third, the section ensures, subject to the limitations inherent in it, that adjectival laws of the States governing, in particular, procedure and evidence will apply in courts, State or federal, exercising federal jurisdiction. Absent a section such as sec. 79 adjectival laws of a State will almost invariably be construed as applicable only to the courts of that State. For example, the Evidence Acts of each State govern competency and compellability of witnesses and admissibility of evidence applicable to legal proceedings in a court (cf. sec. 3 of the Evidence Act 1898 of New South Wales where ``legal proceeding'' is defined in sec. 3(1) as meaning ``any civil or criminal proceeding or inquiry in which evidence is or may be given, and includes an arbitration'').
As a matter of construction the Evidence Act 1898 (N.S.W.) would clearly be held to be applicable only to a New South Wales State court. The question of construction would no doubt be resolved against the constitutional background that the legislature of a State would infringe the legislative power of the Commonwealth and exceed the competence of the legislature of the State to legislate for the peace, order and good government of the State if the State legislation purported to apply to courts established by the Commonwealth to exercise federal judicial power.
It has seldom been doubted, at least until recently, that the Evidence Acts of the relevant States would apply in courts exercising federal jurisdiction, be those courts State or federal. Without comment, Windeyer J. in
Elsey v. F.C. of T. 69 ATC 4115 at pp. 4118-4119; (1969) 121 C.L.R. 99 at p. 105 hearing in Queensland an income tax appeal in the High Court applied the provisions of the Bankers' Books Evidence Act 1949 (Qld) and State Evidence Acts have been applied equally without question by State courts when those courts heard appeals under Pt V of the Income Tax Assessment Act 1936.
The question of the application of State Evidence Acts has arisen recently in this Court and it has been held, consistent with past practice in
McGarry v. Boonah Clothing Pty. Ltd. (1988) 80 A.L.R. 284 and in
Multi Modal Ltd. v. Polakow (1987) 78 A.L.R. 553 that provisions of the relevant State Evidence Acts were applicable in proceedings in this Court on the basis that those provisions were made applicable by sec. 79 of the Judiciary Act.
The starting point for the respondents' first submission might be thought to be the concluding words of sec. 79 viz. ``in all cases
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to which they are applicable'', words drawn, it will be seen, from the United States predecessor of the section. These words, it might be said, draw attention to the fact that the State law has to be applied in accordance with its terms so that if the State law were, for example, restricted explicitly to a New South Wales State court (or perhaps, by necessary implication) the State law could have no operation in a federal court exercising federal jurisdiction.
Some support for this view is to be found in
Pedersen v. Young (1964) 110 C.L.R. 162 at p. 165 where Kitto J. said:
``It is, I think, in accordance with the received opinion as the operation of s. 79 and 80 to hold that, subject to the Constitution and to the laws of the Commonwealth, all Queensland laws must be treated as binding in this Court, as federal law if not by their own force, whenever the Court is exercising jurisdiction... But in my opinion the defendant's reliance upon s. 5 of the Queensland Act would necessarily fail even if the action were to be tried and decided in Queensland, because the Judiciary Act does not purport to do more than pick up State laws with their meaning unchanged:
Commissioner of Stamp Duties (N.S.W.) v. Owens (No. 2) (1953) 88 C.L.R. 168.''
What his Honour meant by the last sentence in this passage is, however, explained in the next sentence viz.:
``It (i.e. s. 79) cannot give s. 5 a new meaning, converting it into a provision limiting the time for the commencement of actions outside Queensland; and for that reason s. 5 does not, even by force of the Judiciary Act afford a defence to an action commenced, as the present action was commenced, outside the time it allows but in New South Wales.''
An illustration of this same principle is to be found in Commr of Stamp Duties v. Owens (No. 2) (supra) to which Kitto J. had referred in Pedersen. The issue in Owens was whether sec. 6 of the Suitors' Fund Act 1951 (N.S.W.) which authorised the grant by an appellate court of a certificate which entitled a respondent to an appeal which succeeded on a question of law to be reimbursed for the costs incurred by him, applied by force of sec. 79 of the Judiciary Act to the High Court. In concluding that it did not the Full High Court said at p. 170:
``Section 79 has, in our opinion, no bearing on the matter. The function which s. 6 imposes upon State courts forms a step in the machinery provided for indemnifying an unsuccessful litigant in respect of costs out of a fund set up and administered by the State. That is outside the scope of s. 79. The purpose of that section is to adopt the law of the State where federal jurisdiction is exercised as the law by which, except as the Constitution or federal law may otherwise provide, the rights of the parties to the lis are to be ascertained and matters of procedure are to be regulated.
Whether or not s. 79 applies to the appellate jurisdiction of this Court, it is no part of its purpose to pick up, so to speak, a provision of State law imposing on State courts such a function as that assigned to them by s. 6(1) and convert it into a provision imposing a like function on federal courts. The circumstance that an application for a certificate of indemnity is made consequential upon the litigation does not alter the character of that proceeding and certainly is not enough to bring it within s. 79. It forms no part of the subject matter with which s. 79 deals.''
John Robertson & Co. Ltd. v. Ferguson Transformers Pty. Ltd. (1972-1973) 129 C.L.R. 65 at p. 80 Menzies J. explained the words ``in all cases to which are applicable'' in sec. 79 as meaning:
``cases in which this Court is exercising federal jurisdiction in the State and to which the State law would in terms apply were it not that the proceedings are in the High Court.''
That case concerned, inter alia, the question whether an action commenced in the High Court under the Australian Industries Preservation Act 1906-1950 (Cth) was barred by force of sec. 37 of the Limitation of Actions Act 1936 (S.A.) the matter having been commenced in the South Australian registry of the court. McTiernan J. found it unnecessary to consider sec. 79 because his Honour was of the view that as a matter of construction of the South Australian Act, the action could not fall within it. The other members of the court split on the question whether sec. 79 of the
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Judiciary Act made sec. 37 of the Limitation of Actions Act applicable.
Mason J. with whose judgment on this point Menzies J. agreed said at p. 95:
``The broad purpose of s. 79 is to ensure that the laws of the States are applied by courts in the exercise of federal jurisdiction. In general that purpose is achieved by the application of a State law according to its terms. Indeed, s. 79 contains no express provision which would enable a court exercising federal jurisdiction to alter the language of a State statute and apply it in that altered form. However, the presence of the words `including the laws relating to procedure evidence and the competency of witnesses' exhibits a clear intention that State laws relating to those topics should apply to federal jurisdiction. This purpose would fail partly in its objective if State laws on these topics are to be given a literal application under s. 79 by courts other than State courts. State laws dealing with matters of procedure, as the earlier consideration of s. 37 of the Limitation of Actions Act has shown, are often expressed so as to apply to State courts only, and in some instances they refer to particular State courts.
To ensure that State laws dealing with the particular topics mentioned in the section are applied in the exercise of federal jurisdiction by courts other than State courts, it is necessary that State laws be applied according to the hypothesis that federal courts do not necessarily lie outside their field of application. Section 79 requires the assumption to be made that federal courts lie within the field of application of State laws on the topics to which it refers, at least in those cases in which the State laws are expressed to apply to courts generally. This departure from the general principle that the section requires a State law to be applied according to its terms is justified, indeed demanded, by the clear requirement that State laws on the topics mentioned are to be applied in federal jurisdiction. Whether that requirement supports the broader view that a similar approach is to be taken in applying s. 79 to substantive as well as procedural laws it is not now necessary to determine.''
Gibbs J. said at p. 88:
``It is also settled that s. 79 does not give a new and more extensive meaning to State laws which it renders binding on a court exercising federal jurisdiction; it applies those laws with their meaning unchanged... To that last proposition it is, however, necessary to add a qualification. Section 79 may render applicable in a court exercising federal jurisdiction a State statute which either by its express provisions or upon its proper construction is limited in its application to the courts of the State: see per Menzies J. in Pedersen v. Young [(1964) 110 C.L.R. at pp. 167-168]. If the laws of a State could not apply if, upon their true construction as State Acts, they related only to the courts of the State, it would seem impossible ever to find a State law relating to procedure, evidence or the competency of witnesses that could be rendered binding on courts exercising federal jurisdiction, because most, if not all, of such laws, upon their proper construction, would be intended to apply in courts exercising jurisdiction under State law. In spite of the doubts that have been expressed, I consider that s. 79 would require this Court, sitting in original jurisdiction in a State, to apply a State statute of limitations... or a State Act giving a court power to stay proceedings on the ground that the parties had agreed to submit the matter to arbitration... or a State Act regulating procedure... notwithstanding that those Acts, on their proper construction, were intended to apply only to the courts of the State, but provided that they were otherwise appropriate to the circumstances of the case.''
Walsh J. who agreed with Gibbs J. in the result said at p. 83:
``When s. 79 applies it `does not purport to do more than pick up State laws with their meaning unchanged': see Pedersen v. Young, per Kitto J. (supra at p. 165). The extent of the operation of State laws governed by s. 79 is, of course, changed. Its purpose is to extend their operation so that they apply in courts exercising federal jurisdiction in that State. If a State law imposes a time limit for the commencement of actions of a kind which may be heard by the court of that State, and if s. 79 is held by a court exercising federal jurisdiction in that State to apply, then the law of the State
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operates in the same way in whichever court the action comes on to be heard and whether the court hearing it is exercising federal or State jurisdiction. But in accordance with the terms of s. 79 itself, State laws are binding on the court exercising federal jurisdiction `in all cases to which they are applicable' and it is necessary first to determine whether a State law upon which reliance is placed is applicable.''
In the circumstances of the case both Gibbs and Walsh JJ. were of the view that the case before them was not a case in which the Commonwealth law had given a right of action leaving the remedy to be enforced in a State court but was one in which under the Australian Industries Preservation Act the legislature had confined to the High Court the power to give effect to the remedy. Thus as a matter of construction sec. 37 of the Limitation of Actions Act 1936 was held as inapplicable to the proceedings. Mason and Menzies JJ. on the other hand were of the view that sec. 79 had made sec. 37 of the Limitation of Actions Act (S.A.) applicable.
It is clear enough that sec. 29 of the Stamp Duties Act 1920 is expressed in complete generality as applicable to all courts although as a matter of construction in the absence of sec. 79 it would be evident that the section was intended, at least in its reference to evidence, to be limited to New South Wales State courts. But even on the view of sec. 79 expressed by Gibbs and Walsh JJ. and a fortiori on the view expressed by Menzies and Mason JJ. in John Robertson & Co. Ltd. if the State Act is such that it is not expressly or perhaps by necessary implication to be limited to a State court, then sec. 79 will operate to make the State law applicable. It is not in the present circumstances necessary to consider the problem of whether sec. 79 could make sec. 29 of the Stamp Duties Act applicable if that section had expressly restricted the operation of the section to a State court.
Subsequent to the John Robertson & Co. Ltd. case, Stephen J. in
Scotland v. Bargen (1982) 41 A.L.R. 65 held that sec. 11 of the Limitation of Actions Act 1974 (Qld) was not rendered applicable in proceedings in the original jurisdiction of the High Court arising out of an accident in Queensland since as a matter of construction the relevant Limitation Act had to be construed as limited to prescribing a time limit for the commencement of actions in Queensland. Again, in
Adams v. Anthony Bryant & Co. Pty. Ltd. and Ors (1986) 67 A.L.R. 616 at p. 619, Wilcox J. expressed the view that provisions of the Rules of the Supreme Court of New South Wales relating to summary criminal trials in the Supreme Court could have no application in proceedings in the Federal Court, it being clear that the Supreme Court Rules were limited in their application to proceedings in the Supreme Court under the Supreme Court (Summary Jurisdiction) Act 1967 (N.S.W.).
Section 79 was further considered in this Court in
Bond Corporation Pty. Ltd. v. Thiess Contractors Pty. Ltd. (1987) 71 A.L.R. 125, French J. in that case was concerned with the issue whether the provisions of sec. 53 of the Commercial Arbitration Act 1985 (W.A.) empowered the Federal Court to grant a stay of proceedings until an arbitration was concluded. His Honour held, sec. 53 of the Commercial Arbitration Act 1985 (W.A.) applying as it does to courts generally, although as a matter of construction, limited in its direct application to Western Australian courts, was picked up by sec. 79 of the Judiciary Act and made applicable to the proceedings before him.
As I have earlier said, sec. 29 is expressed in general terms and there is no particular reason from the section itself to read it as requiring that it be restricted in its application solely to a State court. Reference was made in the course of argument, however, to sec. 27 and 28 of the Stamp Duties Act 1920 as requiring the conclusion, at least by necessary implication, that sec. 29 was restricted to a State court. Sections 27 and 28 are in the following terms:
``27 Terms on which unstamped or insufficiently stamped instruments may be received in evidence
(1) On the production of an instrument chargeable with stamp duty as evidence in any court of civil judicature, the officer whose duty it is to read the instrument shall call the attention of the Judge to any omission or insufficiency of the stamp thereon; and if the instrument is one which may legally be stamped after execution it may, on payment to such officer of the amount of the unpaid duty and the fine payable by law, be received in evidence, saving all just exceptions on other grounds.
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(2) Such officer shall detain and immediately transmit to the Chief Commissioner the instrument, together with the duty and fine so paid thereon, and the payment thereof shall be denoted on such instrument accordingly.
28 Secondary evidence of unstamped instruments
In proceedings in any court secondary evidence of an instrument may, saving all just exceptions on other grounds, be admitted notwithstanding that such instrument is subject to stamp duty and has not been duly stamped, if the amount of the stamp duty or the amount of the deficiency of the stamp duty and any fine imposed by this Act are paid to an officer of the court and if the instrument is one which may legally be stamped after execution.''
It was argued that the reference to the officer having a duty to read the instrument in sec. 29 and the reference to the officer of the court in sec. 28 (presumably the same officer) made it clear either expressly or certainly by necessary implication that these sections were applicable only to a State court and were not applicable to the federal court. Clearly enough there would not seem to be any officer of the federal court whose duty it was to read an instrument. It was then said that as sec. 27 and 28 were limited to State courts so too was sec. 29 as together the sections form a code.
While it can be conceded that there is no person in the federal court who satisfies the description ``officer whose duty it is to read the instrument'', it can also be said that there is no such officer in any State court either. Yet, it has clearly not followed from that that sec. 29 was inapplicable to a State court.
The origin of sec. 27 is to be found in sec. 28 of the Common Law Procedure Act 1854 (U.K.), which provided:
``Upon the production of any document as evidence at the trial of any cause, it shall be the duty of the officer of the court whose duty it is to read such document to call the attention of the judge to any omission or insufficiency of the stamp; and the document, if unstamped or not sufficiently stamped, shall not be received in evidence until the whole or (as the case may be) the deficiency of the stamp duty, and the penalty required by statute, together with the additional penalty of £1 shall have been paid.''
As explained by Cozens-Hardy J. in
Re Coolgardie Goldfields Ltd. (1900) 1 Ch. 475 at p. 478, a cause of Jennings v. Christopher came on before Sir John Romilly on 20 July 1855. As appears from the Registrar's minute an objection was made on the grounds of non-stamping and money was tendered by the solicitor to the Registrar of the court. The court noted that there was no officer of the court who answered the description of the officer of the court whose duty it is to read the documents and that certainly that officer could not be the Registrar. In the particular circumstances of the case the court accepted an undertaking of the solicitor to pay the duty and I shall return to the question of an undertaking later.
Whatever may have been meant by the legislature in its reference to an officer of the court in both sec. 27 and 28, in my view, neither of those sections affects the construction of sec. 29 and as a result I see no reason why sec. 29 should be construed as necessarily confined to a State court so that sec. 29 could not be made applicable by sec. 79 of the Judiciary Act.
The second submission, namely that sec. 79 is applicable only to State procedural laws and not to State substantive laws purports to rely upon what was said by Mason J. in John Robertson in the passage I have set out earlier in the judgment.
It is clear enough that sec. 79 is not by its terms limited in application to procedural matters even if sec. 29 of the Stamp Duties Act 1920 can be said to be other than procedural. Indeed, sec. 79 is expressed to apply to ``any laws''. However, the reliance upon what was said by Mason J. misconstrues the comments made. His Honour was not expressing a view that sec. 79 could have no application to a statute applying substantive and non-adjectival law but was rather leaving open a question whether the same principles should be applied in interpreting the words ``in all cases to which they are applicable'' where what was involved was the application of a substantive law to that which his Honour had discussed in relation to procedural laws. In my view, it is quite clear that sec. 79 would operate to make sec. 29 of the Stamp Duties Act 1920 applicable if it were
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correct to categorise that section as a substantive rather than a procedural law. I would add that it is in any event arguable that sec. 29 is properly to be seen as a procedural law albeit that it, like a limitation section, may have substantive consequences.
The final submission sought to rely upon the opening words of sec. 29: ``save as aforesaid''. As Dixon J., as his Honour then was, pointed out in Shepherd v. Felt and Textiles Pty. Ltd. at p. 383:
``The words `except as aforesaid' qualify the whole section, and it is evident that whatever is comprised within them is not vitiated by its provisions. The words refer to the preceding sections including sec. 25, which allows instruments to be stamped after execution and upon payment of a fine if more than a month has elapsed, and sec. 27 which authorizes the reception in evidence of an instrument although there is some omission or insufficiency of the stamp thereon, if the amount of the unpaid duty and the fine payable by law is paid to the officer of the Court.''
It is said that his Honour's reference to sec. 25 brought about the result that, in the case of an instrument executed before 1982 where it was signed outside the State and never came into the State so that a penalty for late stamping did not arise until the expiration of two months after it came into the State, sec. 29 had no application until the instrument came into the State. It was accepted by both parties for the purpose of this argument (although there may be room for debate as to the matter) that under the New South Wales Act even prior to its amendment in 1982 duty was charged as and from execution, irrespective of the place of execution or the presence of the instrument in the State.
In my view, however, the submission is erroneous. First, when Dixon J. referred to sec. 25, his Honour did so in support of an argument appearing later on the page that under sec. 25 an instrument could be stamped out of time and then become duly stamped. Thus his Honour was of the view that although an unstamped instrument had no force and effect it received full force and effect ab initio when it was stamped under sec. 25. There is nothing in his Honour's judgment which suggests that sec. 29 had no operation in the period from execution until the expiration of the time for stamping without penalty under sec. 25. Further, the argument produces a somewhat bizarre result. If it be correct, it would seem to follow that an instrument could be tendered and received in evidence as having full force and effect the day after it came into New South Wales, having been initially executed and left out of the State, but upon the expiration of the two months period, and perhaps before judgment had been given the instrument would have ceased to have any full force and effect so that while admitted in evidence it would presumably be irrelevant. A similar bizarre result would arise in respect of instruments executed in the State and always kept in the State in the period of two months from the date of execution.
In my view sec. 29 is as applicable to instruments kept out of the State as it is to instruments executed in the State, the only qualifications to the section being, that the instrument be one chargeable with duty (clearly sec. 29 could not apply to an instrument not chargeable with duty) and one which fulfils the statutory description in sec. 29, that is to say, that it be executed in New South Wales or relate, wheresoever executed, to any property situate or to any matter or thing done or to be done in any part of New South Wales.
It follows therefore, in my view, that subject to the giving of any undertaking as to payment of stamp duty, if this Court can accept such an undertaking, the tender of the unstamped copy of the deed of assignment must fail. It falls therefore to be considered whether this Court can accept such an undertaking.
In considering the issue two situations must be distinguished: that where the tender is or an original instrument which is unstamped and that where what is sought to be tendered is an unexecuted copy of the original instrument the original being unable to be located, in circumstances where, subject to the stamp objections, secondary evidence of the original could be admitted.
In the former case, and notwithstanding the provisions of sec. 27 and 29, it has long been the practice, originating in the United Kingdom and adopted in State courts in Australia for the court to accept an undertaking from the solicitor of the party seeking to tender the original. The original form of undertaking, as
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appears from the decision of Cozens-Hardy J. in Re Coolgardie Goldfields (supra) was an undertaking that the document be stamped before the order is drawn up although it may be noted that in Jennings v. Christopher referred to by Cozens-Hardy J., the undertaking was merely ``that the proper stamp shall be paid and affixed''.
A requirement in the undertaking that the original duly stamped be produced to the court prior to the order being entered would presumably satisfy two matters: first it would show that the undertaking had been complied with and second it would ensure that the original document as tendered was stamped so that while at the time of tender it might have been inadmissible and legally ineffective, the stamping operated to give to the instrument prior to the order being drawn up, full legal force and effect retrospectively. Cf. the decision of the High Court in Shepherd v. Felt and Textiles Pty. Ltd. (supra).
The practice of accepting such an undertaking would seem to owe nothing to sec. 27 and indeed, to be somewhat in conflict with it. Rather the practice would seem to have evolved out of the inherent jurisdiction of the court to regulate its own proceedings and an undertaking was more convenient than either adjourning the case until the instrument was stamped or following the procedure in sec. 27, assuming it was possible to identify the officer referred to in that section.
In more modern times, the form of undertaking generally accepted has been merely that the solicitor undertake to pay the proper stamp duty and fine, if any, assessed on the instrument in question, although at times the undertaking has been expressed as being an undertaking to cause the instrument to be duly stamped and pay the duty assessed, which would seem to me generally to be the preferable form of undertaking. The point, however, is that a requirement that the stamped original be produced to the Court seems to have not at least in recent times been insisted upon.
Where a copy is tendered by way of secondary evidence of a lost document the procedure, as I understand it, applicable in State courts is to accept an undertaking from the solicitor to pay the appropriate duty as determined by the Commissioner. The procedure under sec. 28 of the duty and fine being paid to an officer of the court has never, so far as I am aware, been availed of, no doubt for the same reason that duty is not paid to an officer of the court in respect of original documents. Clearly, it would not always be easy to settle at once what the amount of stamp duty is and moreover as was said by Cozens-Hardy J. in Re Coolgardie Goldfields Ltd.:
``... it may well be that when the amount required is known the cash is not at the moment in court.''
For these reasons it is no doubt convenient for the court to extract an undertaking from the solicitor as an officer of the court to pay the relevant duty. In so doing justice can be done not only as between the parties but also as between the parties and the revenue.
I see no reason why that procedure cannot be adopted by this Court in a case where secondary evidence is sought to be given of an unstamped instrument in a matter involving federal jurisdiction. In my view, the State practice could be adopted either by virtue of the inherent jurisdiction of the court or perhaps even by the application of sec. 79 of the Judiciary Act to what is essentially a procedural rule.
Accordingly, I expressed the view in the course of the hearing that I would accept a tender of the copy of the unstamped assignment upon a proper undertaking being given to the Court by the solicitor for the applicants. I indicated, with the concurrence of the parties, that I would give my reasons for so doing in due course, which I have now done.
The form of undertaking which the solicitor in this case was prepared to give and which I have accepted is as follows:
- 1. That the proper amount of stamp duty is determined by the Commissioner of Stamp Duties under the Stamp Duties Act 1920 in respect to the original deed of assignment be paid to the Commissioner.
- 2. That a photocopy of the original signed deed be produced to the Commissioner.
- 3. That the original of the deed as and when found be produced to the Commissioner to enable the duty to be denoted upon it.
- 4. That the solicitor do all things necessary to cause a search to be instituted to locate the original instrument.
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I note also that counsel for the respondent indicated to me that without conceding the point his client instructed him not to advance submissions in opposition to the Court having power to accept such an undertaking.
Subsequently, objections were made to the tender of copies of documents, being powers of attorney from T.G. Cahill and Nelson Investments Pty. Ltd. to G.R. Davidson, with respect to assignments of future income to the Foundation. Upon the solicitor for the applicant giving an undertaking in the same terms in respect of each of these documents I accepted the tender of these documents for the same reasons.
I might add that, subject to objection, oral evidence was adduced of conversations that led up to the execution of the unstamped instruments which evidence it was intimated would be sought to be relied upon in the event that I rejected the tender of copies of the unstamped documents. Since I have admitted the unstamped documents the receipt of this evidence is immaterial. However, I would indicate that had I rejected the tender of the unstamped instruments I would have then rejected the oral evidence as being an attempt to give secondary evidence of the transactions embodied in the unstamped instruments.
Counsel for the Commissioner advanced three independent submissions in support of the assessments issued to Mrs Davis.
First it was said, as a matter of construction of the assignment that it amounted to a covenant to pay to the Foundation out of the income derived by the trustee an amount equal to 80% of the net income. It was said that as that net income could not be determined until after the year of income the assignment in each year was therefore ineffective. The second submission was that Div. 6A of Pt III of the Income Tax Assessment Act 1936 as amended (``the Act'') applied to the assignment and it being one that fell within the terms of sec. 102B of the Act it was ineffective with the result that for the purposes of determining the net income of the trust estate of the Davis Trust the assignment was to be treated as ineffective. It followed it was said from sec. 97 of the Act that the share of net income represented by the ineffective assignment was included in Mrs Davis' assessable income and that the assessment was correct. The third submission was that the assessment of Mrs Davis could be supported by sec. 260 of the Act. I shall consider each of these submissions separately.
1. Was the assignment an assignment of gross or net income?
Counsel for the Commissioner conceded that this question was a question of construction. The assignment which I have sufficiently set out earlier in this judgment did not specifically say that it was an assignment of gross income or net income; rather it was stated to be an assignment of ``future income''. The argument that the assignment was to be construed as an assignment of net income depended upon the fact that title to the sublease was in the name of Mariner so that Nelson Investments Pty. Limited, the assignor under the deed of assignment, was itself merely a beneficiary in a trust estate. It was submitted that Mariner as a bare trustee, while it collected and paid the rents to Mariner, had as the legal owner of the leasehold estate the obligation to pay rent to the head tenant and perhaps other amounts under the head lease. Therefore, it was said, Mariner had a lien over the rents with a correlative right to retain funds sufficient to pay the rents and other outgoings. Reference was made to the decision of the High Court in
Octavo Investments Pty. Ltd. v. Knight (1979) 144 C.L.R. 360 at pp. 369-370.
So much may be conceded.
It was said, however, to follow from this that it was only when Mariner had ascertained what it was that it had available after discharging its liabilities that the income due and payable to Nelson Investments Pty. Limited could be ascertained. Thus it was said to follow that the proper construction of the assignment was that it was an assignment of this net income ascertained after the year had been completed rather than an amount of gross income.
It was accepted by the Commissioner, and rightly so, that ultimately the question was one of construction and that there was no impediment as a matter of law in Nelson Investment Pty. Limited agreeing to assign 80% of gross income if that was what was intended.
It is clear that in construing a contract the Court is entitled to look at surrounding circumstances. See
Prenn v. Simmonds (1971) 1 W.L.R. 1381;
Air Great Lakes Pty. Ltd. v. K.S. Easter Pty. (Holdings) Ltd. (1985) 2 N.S.W.L.R. 309 at p. 334.
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In particular regard may be had to the commercial or business object of the transaction ``objectively ascertained'' although evidence of the actual intentions and expectations of the parties will not be receivable;
Codelfa Construction Pty. Ltd. v. State Rail Authority of N.S.W. (1981-1982) 149 C.L.R. 337 at p. 352.
In my view there is no reason to infer merely because Nelson Investments Pty. Limited was a beneficiary of a bare trust that the word ``income'' should thereby be construed as net income. The deed of assignment was prepared in the context of an arrangement which to be effective had to require the assignment of gross income rather than net. There is no reason to give to the instrument an interpretation which would render that purpose nugatory when there is equally available an interpretation of the instrument which would give effect to its evident purpose.
There is, however, a further and compelling reason why the instrument should be construed as involving the assignment of gross rather than net income. It is clear from the evidence of Mr Cahill that the consideration for the assignment was calculated by taking the expected gross income of $45,000 in respect of each trust and multiplying that by the eight years of the assignment. That is to say the surrounding circumstances themselves point in a most compelling way to the fact that the parties intended the assignment to be of gross income rather than net income.
Finally, the trust being a bare one it could have been put to an end at any time. Once it was put to an end there clearly would be no reason to read ``income'' as meaning net income rather than gross income. While of course it is obvious that the word ``income'' must have at all times the interpretation that it has at the commencement of the deed and that that interpretation could not vary with events, the interpretation which clearly seems most to give effect to the intention of the parties as objectively ascertained is the interpretation which regards the assignment as being an assignment of gross rather than of net income.
For this reason I am of the view that the Commissioner's first submission should not succeed.
2. The sec. 102B argument
On its face the assignment purported to be an assignment in absolute terms for the period of years nominated in it, namely eight years. Section 102B(1) treats an assignment as ineffective:
``where a right to receive income from property is transferred... for a period that will, or may for any reason other than the death of any person or the associate becoming under a legal disability, terminate before the prescribed date.''
The prescribed date is defined in sec. 102A(1) in the following terms:
``The `prescribed date', in relation to a person who transfers to another person a right to receive income from property, means the day preceding the seventh anniversary of the date on which income from the property is first paid to, or applied or accumulated for the benefit of, the other person by reason of the transfer.''
Prima facie sec. 102B does not appear to have been attracted by the transfer so far as the income transferred was that arising under the sublease to Coles having regard to the period of the assignment and to the fact that the sublease to Coles was a lease for a term expressed to continue for a period at least longer than the relevant seven-year period. So far as the assignment related to income arising under other leases of a duration less than seven years it was conceded for the applicant that the decision of the High Court in
Booth v. F.C. of T. 87 ATC 5100; (1987) 164 C.L.R. 159 requires the result that for income tax purposes the assignment will be ineffective to bring about the result that the rents from such leases are excluded from the calculation of ``net income'' of the trust estate of the trustee and thus from the assessable income of Mrs Davis.
The Commissioner, however, draws attention to the terms of the sublease between the trustee and Coles and in particular cl. 10(d) of that sublease. Clause 10(d) provides as follows:
``In case the rent or any part thereof is in arrears for fourteen (14) days although no formal demand therefor has been made or in case default is made in the fulfilment of any covenant or provision hereof and on the part
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of the Lessee to be performed and observed and such default is continuing for fourteen (14) days or in case the repairs required by such notice as aforesaid are not completed within the time therein specified or in case the Lessee becomes bankrupt or assigns its estate or enters into a deed of arrangement for the benefit of creditors or being a company, goes into liquidation other than for the purposes of reconstruction or amalgamation or if the terms or interest of the Lessee therein or in the premises is attached or taken in execution or under any legal process immediately or at any time thereafter and without notice or demand to or on the Lessee and notwithstanding prior waiver or failure to take action by the Lessor in respect of any such matter thing or default whether past or continuing [the Lessor shall have the following power] to re-enter upon the premises or any part thereof in the name of the whole and thereby determine the estate of the Lessee and remove all goods and effects found on the premises but without releasing the Lessees from any liability in respect of the breach or non-observance of any covenant or provision thereof.''
It is said that because the sublease might in certain circumstances involving default of the lessee be terminated by the lessor prior to the expiration of the seven-year specified period as defined in sec. 102A(1) it must follow that the assignment itself is one which although expressed to be for a period of eight years and incapable of being determined as between the assignor and the assignee in that period, nevertheless might, prior to the expiration of that seven years, determine. Therefore, it is said, the provisions of sec. 102B apply to render the assignment inoperative.
Reference was made both to the decisions in this Court and in the High Court in the case of
F.C. of T. v. Booth, see 86 ATC 4612; 87 ATC 5100; (1987) 164 C.L.R. 159. In Booth's case Mr Booth for consideration executed three deeds of assignment, each of which was expressed to be of a right to receive a part of rents from specified premises, the assignment to continue for the unexpired period of a particularised lease and thereafter to a date more than seven years from the date of the deed. At the time of each assignment the premises had been leased for a term that would expire prior to the seven-year period. The Commissioner regarded the assignment as being ineffective having regard to the provisions of sec. 102B.
In this Court the Commissioner was successful in his appeal from the decision of the Victorian Supreme Court, Burchett J. dissenting. Northrop J. spoke of the subsection as creating a fiction ``namely, that income, which in reality is not the income of the taxpayer, is, for the purposes of the Act, deemed to be the income of the taxpayer''. His Honour then continued at p. 4614:
``The second limb of subsec. 102B(1) is not concerned with matters of necessity. The second limb is concerned with possibilities. This arises from the use of the word `may' when used in contradistinction to the word `will' in the first limb. Thus, where there is a possibility that the transfer may terminate before the expiration of the seven year period, the fiction arises. But there are two exceptions to that possibility, namely `the death of any person or the other person's becoming under a legal disability'. If the only possibilities that could have the effect of terminating the transfer before the expiration of the seven year period come within one or other of those exceptions, the fiction does not arise. The express reference to those exceptions makes it difficult to imply other exceptions to the second limb of the subsection.
In my opinion, the second limb of the subsection operates to prevent the fiction arising where and only where, apart from the exceptions, there is no possibility that the transfer may terminate before the expiration of the seven year period. In other words, the second limb is concerned with possibilities. In this respect, the second limb is similar to the concept of the rule against perpetuities, a concept well-known to the law even though it might not be as well-known today as it was in the past. Stated broadly, the rule against perpetuities was that any future interest in any property, real or personal, is void from the outset if it may possibly vest after the perpetuity period has expired, the perpetuity period consisting of any life or lives in being together with a further period of 21 years and any period of gestation. In applying the rule, the Courts
89 ATC 4398
were concerned with possibilities, not with waiting and seeing what happened.''
Jenkinson J. did not express an opinion upon the construction of this second limb of sec. 102B. His Honour pointed out the difficulty of a case where a transfer was expressed to be for a greater period than that specified in sec. 102B(1) although the income derived from the property continued for a lesser period and expressed the view that the language of sec. 102B(1) was ``apt to comprehend any transfer, however expressed, the operation of which is to bring the period during which the transfer is to subsist within the description contained in the subsection''.
Burchett J. adopted a more liberal interpretation of sec. 102B(1). His Honour was generally of the view that provided the period of assignment was expressed to be in excess of the period referred to in sec. 102B then the fact that there was a possibility that income may flow for a shorter period and then dry up or may never flow was of no significance.
The High Court unanimously affirmed the decision of the majority of the Full Court of this Court. Mason C.J. while pointing out that the words ``that will, or may... terminate before the prescribed date'' govern the period for which the transfer of the right to receive income is to subsist rather than relate to the right which is the subject of the transfer, was of the view that it did not follow that so long as a right to receive income from property was transferred for a period which would not terminate before the prescribed date the transfer was immune from the operation of sec. 102B(1), even if the right to receive income itself would or might terminate before that date. His Honour said at ATC p. 5104; C.L.R. p. 169:
``Moreover, there was simply no point in excluding a transfer for seven years or more which was not susceptible of earlier termination if the right to receive income thereby transferred would terminate or was itself susceptible to termination within the stipulated period. That the object of Div. 6A was to strike at alienations of the right to receive income for less than the stipulated period appears not only from the terms of sec. 102B(1) but also from the heading to the section... Once this is accepted, it is inescapable that the present assignments fall foul of sec. 102B(1). At no time could it be said that a right to receive income was transferred for a period which would or might not terminate before the prescribed date.''
The nub of his Honour's judgment would seem to be the following passage at ATC p. 5104; C.L.R. p. 170:
``In order to escape the destructive operation of the subsection, the transfer must necessarily vest in the assignee a chose in action for the stipulated period. The assignments in the present case did not have this effect.''
Wilson and Deane JJ., while indicating agreement with the judgment of Toohey and Gaudron JJ., stipulated also their agreement with the analysis of the Chief Justice of the provisions of sec. 102B. Their Honours pointed to a distinction between the ``right to which the section refers'' and the ``period to which the section refers''. In Booth's case the ``right'' was the right to receive income from the leases actually entered into. The relevant period was the period for which the right to receive income was transferred. Their Honours continued at ATC p. 5105; C.L.R. p. 170:
``In one sense, it could be said that an absolute assignment of a right to receive one week's rent is a transfer of the right forever and that, that being so, the period for which the right is transferred cannot terminate before the prescribed date. Construed in context however, the period to which the section refers is the period to which the transferred right relates. That period will be inadequate if, as a matter of fact, it will, or may for any reason other than those allowed by the section, terminate before the prescribed date. In other words it will be inadequate if the right which is actually transferred may be exhausted or may otherwise come to an end before that date. If that be so the transfer will be of a right to receive income from property for what may be some lesser period than the minimum period contemplated by the section.''
Toohey and Gaudron JJ. were similarly of the view that as the existing leases were themselves for a term less than the nominated seven-year period, the transfer fell within sec. 102B:
89 ATC 4399
``In each case, as far as existing leases were concerned, there was a right to receive income from property that was transferred by force of the assignment. The right so transferred was a right that would terminate no later than seven years hence the transfer was within the operation of sec. 102B of the Act.''
(at ATC p. 5108; C.L.R. p. 176)
Counsel for the applicant sought to meet the argument by saying that there was no conceivable form of chose in action that was not capable of being brought to an end, even if only by way of release. However, arguments by way of reductio ad absurdum often fail to address the significance of that which is argued against.
Clearly, sec. 102B must be given an interpretation which does not render ineffective an assignment expressed to be for a period greater than the relevant seven-year period of a chose in action, being a right to receive income from property where the chose in action itself continues in excess of the seven-year period, merely because the parties to the transaction might ultimately revoke the assignment. To achieve this result, however, it is only necessary that the word ``may'' in the section refer to a power contained in the assignment or inherent in the chose in action transferred which permits either the assignment or the chose to be brought to an end before the relevant seven-year period. The word ``may'' does not apply to any possibility no matter how fanciful.
Once, however, the interpretation of sec. 102B is adopted which requires an assignment to be ineffective if either the assignment itself is for a period of less than the requisite seven years or the chose in action assigned is to enure less than that seven years, as in Booth's case it must inexorably follow that an assignment will equally be ineffective if the assignment itself may come to an end before the seven-year period. Subject to the qualification that the possibility of termination must be one dealt with in the assignment or in the terms of the underlying chose in action assigned, it seems to me to follow from Booth's case that if there exists a possibility that the chose in action (in the present case the right to receive income under the Coles' lease) is such that it may come to an end prior to the seven-year period (e.g. by action of the lessor under cl. 10(d)) then the assignment will attract sec. 102B and be ineffective.
I reach this conclusion with some reluctance for I am conscious of the fact that it will follow that no assignment of income under a lease will ever be effective having regard to sec. 102B(1). This is so because in practice all leases would contain provisions equivalent to cl. 10(d) in the present case. Cf. the provisions of the Conveyancing Act (N.S.W.), sec. 85(1)(d). However, what is said by their Honours in Booth's case compels me to this conclusion when taken to its logical conclusion. It follows that the Commissioner's assessments of Mrs Davis in the relevant years are correct. I should say that it was not suggested that if I accepted this argument that the assessments relating to Mrs Davis could be otherwise attacked.
3. Section 260
It would be idle to pretend that the course of decisions on sec. 260 is either consistent or reconcilable; cf. per Barwick C.J. in
Slutzkin v. F.C. of T. 77 ATC 4076 at pp. 4080-4081; (1976-1977) 140 C.L.R. 314 at p. 321. The difficulties of interpretation which beset sec. 260 stem largely from the imprecision of language which the section employs. The contract, agreement or arrangement which the section directs the Commissioner to disregard because it is absolutely void must be one which has or purports to have in some way, whether that way be direct or indirect, one of the four characteristics referred to in the alphabetical subparagraphs of the section. However, the meaning of each of these subparagraphs is itself somewhat obscure.
Section 260 as in force in 1978 was in the following form:
``Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -
- (a) altering the incidence of any income tax;
- (b) relieving any person from liability to pay any income tax or make any return;
- (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
89 ATC 4400
- (d) preventing the operation of this Act in any respect,
be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.''
Of the four subparagraphs attention is generally directed only to para. (a), (b) and (c). Indeed, it is difficult to see how any arrangement could have an effect which prevented the operation of the Act so that little attention has ever been given to para. (d). There are also obvious difficulties in applying para. (b) not only so far as that paragraph relates to relieving a person from liability to make a return but also so far as that paragraph concerns the relief of a person from an actual income tax liability.
The difficulty of any general anti-avoidance section is to adopt a construction which, on the one hand, places the section in a proper perspective vis-a-vis the other provisions of the Act while on the other hand giving the section work to do in an appropriate case. It is clear enough that it can never have been the legislative purpose that sec. 260 should be the most important or significant provision in the Act. Its role is more limited than that. In a loose sense, for example, it might be said of any transfer of shares cum dividend that such a transfer altered the incidence of tax of the transferor or perhaps even relieved the transferor from liability to pay income tax or avoided a liability which otherwise would be imposed upon him to pay that tax. However, to apply sec. 260 to such a simple case would be to give to the section a prominence far beyond its perceived legislative purpose of acting within the limits of its language to defeat tax avoidance. However, once the process begins of attempting to read down sec. 260 and give it a proper place in the Act there are difficulties in seeing where that reading down should end. The history of the decisions on sec. 260 reveals fluctuating views as to the extent to which the section should be read down.
While in the present case prominence is given by the Commissioner to para. (a) of sec. 260 (the alteration of the incidence of income tax), it must be noted that the decision of the High Court in
F.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363; (1986-1987) 163 C.L.R. 199 decided almost eight years after the events with which the present appeals are concerned, arguably produces the result that no matter what the purpose of the arrangement may be seen to be its effect was not to alter the incidence of income tax but perhaps to accelerate the liability of Mrs Davis to tax.
While it is not completely clear whether the Court in Myer would have reached the same conclusion had the assignment of the rental income not been part of an arrangement designed to produce a profit the rejection by the Court of the authority of
I.R. Commr v. Paget (1938) 2 K.B. 25 in the event that that case was indistinguishable, certainly lends considerable force to a submission that there was in the present case a purpose of the arrangement which, as it turned out, was ineffective.
The Commissioner did not seek to argue that if I should consider Myer's case as applicable I should remit the matter to the Commissioner to reassess the tax payable in the year of the assignment (cf.
Kwikspan Purlin System Pty. Ltd. v. F.C. of T. 86 ATC 4602) that tax then being greater than assessed in the 1979 year to Mrs Davis and in effect equal to the tax payable over the years in question.
However, it seems to me unreal to conclude by reference to Myer that a scheme evidently entered into in 1978 for the purpose of altering the incidence of income tax, having regard to the law as understood at the time the scheme was entered into, was not within the statutory concept where at the time the matter came before the Court the Commissioner was, prima facie, precluded by sec. 170 from amending the assignment to give effect to the law as pronounced in 1986.
Notwithstanding the difficulties which bedevil the interpretation of the section, there are a number of propositions which are now clearly established. First, it is clear that it is necessary to identify the contract, agreement or arrangement which the Commissioner seeks to render absolutely void under the section. Indeed, it is critical that a taxpayer faced with a submission by the Commissioner as to the application of sec. 260 knows in advance the case that he has to meet and in particular knows in advance what it is that is said to be the contract, agreement or arrangement rendered void by the section. Thus the High Court in
Bailey & Ors v. F.C. of T. 77 ATC 4096; (1977) 136 C.L.R. 214
89 ATC 4401
ordered the Commissioner to supply to the appellant particulars identifying the contract, agreement or arrangement alleged to be void as against the Commissioner and the parties to or participants in it. In the present case the Commissioner identified all of the steps taken on or about 15 December 1978 in implementing the scheme and the steps taken thereafter six monthly whereby Mariner paid sums of $22,500 to the Foundation and the Foundation paid sums of $21,281.25 to T.R.G., and additional rent and additional consideration passed between M.S.C. and the Foundation on the one hand, and the Foundation and Nelson Investments Pty. Limited on the other, as comprising the scheme. He also identified the present applicants as parties to that scheme.
Second, it seems clear that the contract, agreement or arrangement (these expressions being presumably in a descending order of enforceability) must be at the very least bilateral, that bilaterality being found in the very nature of the words, contracts, agreements or arrangements. As to arrangements see particularly
F.C. of T. v. Lutovi Investments Pty. Ltd. 78 ATC 4708 at p. 4712; (1978) 140 C.L.R. 434 at p. 443; and also
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p. 7; (1958) A.C. 450 at p. 465. This requirement is present here.
Third, it is now clearly established that where the section refers to purpose it is not concerned with the subjective motivation of a particular taxpayer. As a matter of syntax the purpose of which the section speaks is the purpose of the contract, agreement or arrangement and not the purpose of some person. Cf.
F.C. of T. v. Gulland 85 ATC 4765 at p. 4771; (1985) 160 C.L.R. 55 at p. 65 where Gibbs C.J. said:
``The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect.''
Thus it is not relevant for me in the present circumstances to determine what the particular motivation of Mr Davis or any other person including Mr Cahill was in entering into the arrangements. If it were necessary I would find that Mr Davis had two motivations; the first was a genuine interest in assisting the Foundation but the second, and at the very least, equally significant and in all probability more significant purpose, was to reduce the incidence of income tax payable overall by his family, or that would be payable by the trustee under sec. 99 and 99A of the Act if income from the Coles rents and other rents were accumulated by the trustee.
Fourth, it is now clearly established by the decision of the High Court in Gulland that the tax avoidance purpose (meaning thereby the purpose that falls within one of the four alphabetical paragraphs of the section) need not be the sole purpose nor indeed, even the principal purpose. It would seem now to be sufficient to attract the operation of the section that tax avoidance was a purpose at least so long as it was not merely an incidental or unessential purpose. See per Gibbs C.J. at ATC pp. 4771-4772; C.L.R. p. 67, and per Dawson J. at ATC p. 4793; C.L.R. p. 105.
Looking at the objective steps planned to be taken and indeed, implemented, I would have no difficulty in concluding that the arrangement was one which bore on its face the indicia that it was entered into for a tax avoidance purpose, that is to say, one of ensuring that overall the tax payable either by the trustee or by the beneficiaries of the trust would be reduced. It remains to be considered of course whether such a purpose is one falling within the alphabetical paragraphs of the section. While no doubt it is clear that the Foundation in fact benefited and was intended to benefit, that benefit can clearly be seen in money terms to be subordinate to the tax benefit. By giving away a relatively small amount over a period of time to the Foundation there was secured an immunity from tax of a far greater amount. Indeed, that which reached the charity can well be seen as in substance a fee exacted by the Foundation for its participation.
Fifth, it is to be noted that the section directs attention alternatively to the purpose and the effect of the arrangement. In Newton the Privy Council defined purpose and effect in the following terms (at p. 8 of 98 C.L.R.):
``The word `purpose' means not motive, but the effect which it is sought to achieve - the end in view. The word `effect' means the end accomplished or achieved.''
89 ATC 4402
Notwithstanding that the section refers to purpose and effect as alternatives the Privy Council in
Ashton & Anor v. Commr of I.R. (N.Z.) 75 ATC 6001, in discussing sec. 108 of the New Zealand Act, then in substantially identical terms to sec. 260 suggested that there did not seem to be any real difference in meaning between the two expressions. Their Lordships then said at p. 6005:
``If an arrangement has a particular purpose, then that will be its intended effect. If it has a particular effect, then that will be its purpose...''
It is easy to see in the ordinary case why little significance is given to the dichotomy between purpose or effect, for it will seldom be the case where an arrangement will be found to have the relevant purpose so that sec. 260 applies to it, that it does not have in fact the relevant effect. For if the relevant tax avoidance effect be not present as in the present case (where I have found that the assignment was ineffective) then sec. 260 will have no operation for the simple reason that the same consequence will follow whether or not the assignment is treated as void. Likewise, if a transaction be found to have the relevant tax avoidance effect it will generally be inferred when the arrangement is looked at objectively that the effect was an intended effect so that the arrangement can be seen to have the necessary tax avoidance purpose. Cf. per Dawson J. in Gulland at ATC pp. 4792-4793; C.L.R. pp. 104-105. After all a person would in any event be presumed to intend that which is the natural consequence of his acts, so too the purpose of an arrangement will ordinarily be presumed to be that which the arrangement effected.
Finally, while the application of the principle may from time to time leave room for doubt, it is clearly established that the section is an annihilating section only and does not permit the Commissioner to reconstruct a new and fictitious set of facts creating a liability for a taxpayer: Gulland per Gibbs C.J. at ATC pp. 4771-4772; C.L.R. p. 67. Thus when sec. 260 is applied and the arrangement struck down by the section there must be left exposed sufficient facts which lead to the conclusion that a particular amount is included in assessable income or in a deduction case that no deduction is available. In the application, however, of the section in
Peate v. F.C. of T. (1962-1964) 111 C.L.R. 443; (1966) 116 C.L.R. 38; (1967) 1 A.C. 308 and perhaps in Gulland it may be argued that the courts applied some elements of reconstruction while playing lip service to the principle that no such reconstruction was possible. Be that as it may, the taxpayer's liability to income tax must as a matter of principle clearly be found in what Brennan J. in Gulland (at ATC pp. 4779-4780; C.L.R. p. 81) referred to as the hypothetical situation left after sec. 260 had done its work: ``the situation that would have existed had the arrangement not produced the specified effect''.
No particular difficulty arises in the present case from the inability of the Commissioner to reconstruct. The arrangement ultimately that, if sec. 260 applies, would be set aside in the present case will include the assignment by the trustee to the Foundation. Once for the purposes of income tax that assignment is disregarded the net income of the trust estate will include the totality of the rents. Division 6 will then operate so that, to the extent that Mrs Davis was presently entitled to the income (that is to say the trust law income and not the ``net income'' of the estate) there will be included in her assessable income the whole of the net income.
There is no dispute that with the exception of the 1979 year of income, Mrs Davis was presently entitled to 100% of the trust law income, from which it would follow in my view pursuant to sec. 97 of the Act that if sec. 260 applies there would be included in her assessable income in these years the whole of the net income of the trust estate calculated by ignoring the assignment.
In the 1979 year of income, however, as appears from the trust tax return for that year, the trust income was divided between Patricia L. Davis as to $11,708 and Technical Advance Co. Pty. Limited as to $9,733. The resolution of the trustee effecting this division was not in evidence; however, it appears from the evidence that Technical Advance Co. Pty. Limited was in a loss situation in that year of income so that it can be inferred that the greatest tax advantage would have been obtained by distributing to that company the maximum that could be distributed having regard to the losses available in that company to offset the distribution and that the balance of the amount available for distribution would have been distributed to Mrs Davis.
89 ATC 4403
In every case where the income for trust law purposes differs from the net income as calculated under sec. 95 a difficult question arises as to the application of sec. 97 of the Act. In a case, such as would be here the case if sec. 260 applied, the ``net income'' calculated under sec. 95 of the Act including the income otherwise purported to be assigned might be seen to be greatly in excess of the income for trust law purposes calculated without regard to the provisions of sec. 260. The tax consequences where the trust law income exceeds the tax law income have been the subject of much academic debate cf. L.G. Priddle, ``Trusts & Income Tax Concepts of Income'' (1978) 8 A.T.R. p. 91; R.F. Edmonds, ``The Taxation of Trusts'', (1981) 15 Taxation in Australia 398 at pp. 410-411; T.W. Magney, ``Pitfalls in the Future Operation of Trusts in Tax Planning'', (1978) 12 Taxation in Australia 650 at pp. 797-799; Munn, ``Contemporary Issues of Concern'', (1983) Taxation in Australia 362 at pp. 372-376; Woellner, Vella and Chippendale, Australian Taxation Law (1987) CCH Australia Ltd., ¶10-270 to ¶10-290; G.L. Davies, ``Developments in Taxation of Trusts'', Taxation in Australia, July 1979, 3 at pp. 14-16; M.M. Liebler, ``Distributions of Trust Income - Some Selected Problems'', Tax Essays, Vol. 1 R.E. O'Neill (ed.) (Butterworths 1979), among others. As is pointed out by all commentators there has never been a court decision in which it was necessary to decide between the two competing views which have been put forward, although the matter has enjoyed the attention of Boards of Review: Case C36,
71 ATC 156; Case R32,
84 ATC 298.
The different views are best understood by considering the terms of sec. 97 as it stood prior to its amendment in 1979. It will be recalled that these amendments followed upon the Taxation Review Committee, Full Report, 1975 (Asprey Committee Report) and were largely concerned to overcome the problem exposed by the decision of the High Court in
Union Fidelity Trustee Co. of Australia Ltd. v. F.C. of T. 69 ATC 4084; (1969) 119 C.L.R. 177. Although these amendments do not affect the construction of sec. 97 for present purposes they obscure the simplicity of the section by what for the present analysis is unnecessary verbiage.
Section 97 read as follows:
``(1) Where any beneficiary is presently entitled to a share of the income of a trust estate and is not under any legal disability, his assessable income shall include that share of the net income of the trust estate.''
Under the ``proportionate view'' the opening words of sec. 97(1) require a calculation of the share or proportion of the trust law income to which each beneficiary of a trust estate is presently entitled. Once that share or proportion is calculated then the second half of the subsection operates to include in assessable income that same share or proportion of the ``net income''. Under this view, provided that there is a beneficiary or there are beneficiaries who are alone or together presently entitled to the whole of the trust law income of a trust estate the net income for tax purposes will be distributed among those same beneficiaries proportionately and there will be no amount upon which the trustee will be liable to pay tax under the provisions of sec. 99 or 99A of the Act.
The alternative view, while accepting as it must that present entitlement can relate only to trust law income and not to tax law income for the simple reason that the composition of ``net income'' is merely a matter of computation and may include amounts which have no correlation with assets at all (e.g. an amount that might be included in the net income under sec. 36 of the Act) would construe sec. 97 as directing specific attention to a taxpayer's share of trust law income and requiring the inclusion in assessable income only of that part of the net income of the trust estate as is represented by the proportionate part of trust law income. Thus if one assumes that trust law income is to be divided equally between two beneficiaries A and B and the trust law income is $100, where the net income is $200 of which only $100 is represented by the trust law income only that $100 is distributed equally between A and B under sec. 97 leaving there to be a balance undistributed in respect of which the trustee is to be assessed and liable to pay tax under sec. 99 or 99A.
It is quite clear that neither interpretation of sec. 97 produces a desirable result as a matter of tax policy and the scheme of Div. 6 calls out for legislative clarification, especially since the insertion into the Act of provisions taxing
89 ATC 4404
capital gains as assessable income. On the proportionate view a taxpayer may be assessed on amounts he neither did nor could receive; on the alternative view a taxpayer could be taxed on less than he received if the share of trust law income exceeded that part of the net income as is represented by trust law income, and the maximum rate of the tax under sec. 99A would be applicable to the balance. However, the proportionate view does seem to me, as a matter of language, to be the better construction of the section and in the absence of any authority compelling me to adopt the alternative method, I propose to accept it. It was not argued by either side that the proportionate method was incorrect.
On this basis the effect of sec. 260 applying is in all years, but the 1979 year, to include the whole of the ``net income'' in the assessable income of Mrs Davis and in the 1979 year to include in her assessable income a proportion of net income being the same proportion to which she was entitled to trust law income, that is to say, $11,708/$21,441. I was advised by counsel that this was in fact the basis of assessment used by the Commissioner in the 1979 assessment.
One area of great difficulty in sec. 260 has been the application of what came to be known as the ``choice doctrine''. That doctrine is often traced to the decisions of the High Court in
W.P. Keighery Pty. Ltd. v. F.C. of T. (1956-1957) 100 C.L.R. 66 and
F.C. of T. v. Sidney Williams (Holdings) Ltd. (1956-1957) 100 C.L.R. 95 in both of which cases an artificial arrangement was entered into no doubt with the subjective purpose of ensuring that less tax was ultimately paid. The arrangement entered into was entered into to ensure that the taxpayer company was a public company for the purposes of Div. 7 of the Act, as it then stood, with the consequence that failure to make a sufficient distribution to shareholders gave rise to no additional tax under that Division. In the course of their joint judgment in Keighery, Dixon C.J., Kitto and Taylor JJ. said at pp. 92-93:
``Whatever difficulties there may be in interpreting s. 260, one thing at least is clear: the section intends only to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them. It is therefore important to consider whether the result of treating the section as applying in a case such as the present would be to render ineffectual an attempt to defeat etc. a liability imposed by the Act or to render ineffectual an attempt to give a company an advantage which the Act intended that it might be given.''
Having considered the structure of Div. 7 their Honours then continued at pp. 93-94:
``Because this is so, an attempt by the Commissioner to rely upon s. 260 in the present case in order to avoid only the applications for and allotments of the redeemable preference shares would be an attempt to deny to the appellant company the benefit arising from an exercise which was made of a choice offered by the Act itself. The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act.''
Subsequently, the Privy Council in Newton's case referred to Keighery's case as being an example of a case which clearly fell outside sec. 260, thus, impliedly at least, adding support to the reasoning of the High Court in that case.
More recently the choice doctrine was applied in cases such as
Mullens & Ors v. F.C. of T. 76 ATC 4288 at pp. 4303-4304; (1975-1976) 135 C.L.R. 290 at p. 319;
Cridland v. F.C. of T. 77 ATC 4538 at pp. 4541-4542; (1977) 140 C.L.R. 330 at p. 339 and even the decision of the High Court in Slutzkin v. F.C. of T. (supra) was thought to depend upon the choice principle. Further, the principle was thought to support an extremely wide proposition encapsulated in the following passage from the judgment of Barwick C.J. in Slutzkin at ATC p. 4079; C.L.R. p. 319:
``... the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do.
I.R. Commrs v. Duke of Westminster (1936) A.C. 1,
89 ATC 4405
too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see
Commr of I.R. (N.Z.) v. Europa Oil (N.Z.) Ltd. 70 ATC 6012; (1971) A.C. 760.''
The logical extension of the choice doctrine in the manner suggested by Barwick C.J. led to the conclusion that there was little room for the application of sec. 260 at all, and indeed, it was popularly thought that this was the case before the decision of the High Court in Gulland.
In Gulland the High Court examined the choice doctrine in some detail. Gibbs C.J. was of the view that in most cases the practical tests for deciding whether an arrangement is one to which the section applies was that set out by Lord Denning in Newton at p. 8 where his Lordship said:
``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.''
However as his Honour explains in that case, what is said by Lord Denning must be understood subject to a qualification that ``An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides'' (at ATC p. 4771; C.L.R. p. 66). However, in his Honour's view the choice principle was but an example of the principle of construction expressed in the maxim generalia specialibus non derogant; in other words sec. 260 is a general provision which, if it comes into conflict with a specific provision, for example as in Mullens' case sec. 77D of the Act, sec. 260 cannot be seen as derogating from the specific provision. This principle in Mullens' case resulted in the taxpayer being entitled to a deduction.
Brennan J. who agreed in substance with Dawson J. dealt specifically in his Honour's judgment with the choice principle and was, like Gibbs C.J. of the view that it should be restricted. As his Honour said at ATC p. 4779; C.L.R. p. 81:
``The choice principle should not be applied where there is no occasion to invoke the rule generalia specialibus non derogant on which it is founded. If the choice principle were applied to deny the operation of sec. 260 on arrangements which do not depend on a specific provision of the Act, the choice principle would annihilate sec. 260 itself. The true reconciliation between the choice principle and the Newton test of purpose is to limit the former to cases depending upon a specific provision of the Act. It is not necessary now to consider the boundary between the two classes, but in principle only those arrangements or parts of arrangements which depend upon specific provisions fall outside the scope of sec. 260.''
Dawson J. with whose judgment Wilson J. agreed (his Honour also agreed with the judgment of the Chief Justice and did not suggest there was any difference between them) may be thought to have taken a different view altogether of the choice doctrine. The problem, as his Honour states at ATC p. 4794; C.L.R. p. 107, is a problem of ``construing the Act as a whole to determine where the incidence of tax was intended to fall. Only by this means might it be discovered whether or not a particular transaction falls within sec. 260''. After considering in particular Peate's case his Honour at ATC p. 4796; C.L.R. p. 110 said:
``Section 260 is not explicitly directed at contrived arrangements or arrangements which are out of the ordinary, but the fact that an arrangement is of that nature is a circumstance which, when the purpose or effect of the arrangement is to do any of those things which are referred to in para. (a) to (d), may indicate that as a matter of construction the arrangement is one for the avoidance of tax to which sec. 260 is intended to apply. It may indicate that the choice or choices made by the taxpayer are not available by reason of the presence of
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sec. 260 in the Act, however much they may have been available in the absence of that section. It is in the end a matter of construction whether the section applies in a particular case. It must be conceded that to say as much is not to lay down a test of any great precision, but the reconciliation of sec. 260 with the other provisions of the Income Tax Assessment Act is of its very nature an exercise which may have to be performed whenever a contract, agreement or arrangement is impugned by reference to it. The result is to preclude the formation in advance of rules with any more exact application.''
While there is certainly a difference in emphasis between the judgment of Dawson J. on the one hand and that of the Chief Justice on the other, I think it is perhaps clear from the judgment of Brennan J. that the divergence between the two positions may be more apparent than real. Perhaps that is the reason why Wilson J. found no difficulty in agreeing both with the judgment of the Chief Justice and with the judgment of Dawson J. The ultimate difficulty which has to be faced and which is acknowledged by Brennan J. will lie in determining whether a taxpayer is really seeking to rely upon a specific provision in the relevant sense so that that provision will ultimately prevail over the general provisions of sec. 260. The question of whether the provision in the relevant sense is a specific provision will often be a difficult one and will involve construing the Act as a whole to determine where the incidence of tax was intended to fall.
It was put for the applicant in the present case that the provisions of Div. 6A were to be regarded as ``specific provisions'' within the meaning of the choice doctrine so that a taxpayer was entitled by any means that he wished to employ, no matter how artificial, to bring himself within the provisions of Div. 6A. Having done so, it was submitted, the provisions of sec. 260 could have no operation.
While it is clear that Div. 6A and in particular sec. 102B strike down what would otherwise be effective assignments of income where those assignments are or may be for a period of less than seven years, it does not seem to me to follow as a matter of logic that Div. 6A expresses a legislative policy that all assignments of income provided that they are in excess of a period of seven years, are to be treated as effective.
Where an arrangement consists of no more than an assignment of income the arrangement could not fall within the provisions of sec. 260. That would follow from the decision of the High Court in
D.F.C. of T. v. Purcell (1920-1921) 29 C.L.R. 464 where a mere transfer of income-producing property to a trust by a declaration of trust was held to fall outside sec. 260. Gavan Duffy and Starke JJ. commenting on the predecessor of sec. 260 (sec. 53 of the Income Tax Assessment Act 1915-1916) said at p. 473:
``The section as the Chief Justice says, does not prohibit the disposition of property. Its office is to avoid contracts, and etc., which place the incidence of the tax or the burden of tax upon some person or body other than the person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. But any agreement which directly or indirectly throws the burden of a tax upon a person who is not liable to pay it, is within the ambit of s. 53.... The incidence of the tax as regulated by the Act is not altered, the respondent is not relieved from tax which he should pay, and he does not defeat, evade or avoid duty or liability imposed upon him by the Act, nor does he prevent the operation of the Act in any respect.''
However, the present arrangement is in any event much more than a mere assignment of income. The way in which the arrangement was both proposed and implemented was intended to bring about the result that the trust continued to have available to it, in the form of capital rather than income, the majority of the rents which were derived, so that, subject to the amount which was agreed between the parties to be paid to the Foundation, the money representing the rents continued to be available to the trustee albeit that the moneys then had the character of purchase money so that in essence that which was income was converted into capital available for distribution by the trustee at the same time as otherwise the
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income, in the absence of assignment, would have been available.
In my view when the whole arrangement is considered it becomes clear that Div. 6A cannot be seen as a specific provision ousting the possibility of the application of sec. 260. Rather Div. 6A can be seen as a specific anti-avoidance provision acting upon assignments of income which, after sec. 260 has applied, can be seen as still effective.
Once the applicants' argument as to the application of the choice doctrine is rejected there is no difficulty when the Newton test is propounded in saying that it can be predicated by looking at the arrangement as a whole that it was entered into and carried out in the way it was so as to avoid tax. If the somewhat more concise test propounded by Kitto J. in Peate v. F.C. of T. (1964) 111 C.L.R. 443 at p. 469 be adopted the present arrangement with its circular flow of funds and conversion of income into capital ``bears ex facie the stamp of tax avoidance''. As to the significance of the circular flow of funds which will often be present in a tax avoidance arrangement to which sec. 260 clearly applies, see the decision of the Full Court of this Court in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 at p. 4729 and cf. the comments in Gulland per Dawson J. at p. 110 as to the relevance to sec. 260 of an arrangement being contrived or out of the ordinary. The avoidance of tax is constituted by the alteration of the incidence of tax and the conversion of an income receipt into a capital receipt.
It follows from what I have said that but for one final argument of the applicants I would be of the view that, if sec. 102B were inapplicable, sec. 260 applied in the present circumstances to render Mrs Davis assessable to tax as if the assignment of income had not taken effect.
It is, however, argued on behalf of the applicant that the present is a case where as a matter of fact Mrs Davis was not a party to the steps that were taken by the trustee, the Foundation, Mr Cahill and her husband, among others, which led to the assignment. The argument is said to be based in particular on what was said by Pincus J. in
Stamp v. F.C. of T. 88 ATC 4803.
Mrs Davis gave evidence before me. Her evidence, which was not challenged, was that she was aware of the existence of the company Nelson Investments Pty. Limited; that she may have seen documents bearing that company's name on her husband's desk but so far as she was aware that she had done nothing for that company and that her husband never consulted her concerning transactions or discussed transactions with her but rather that she was ``just an ordinary housewife''. Her only understanding so far as the Mariner Shopping Centre is concerned was ``that it is a shopping complex and we collect rents and that is what we live on''. She indicated that she had no solicitor notwithstanding that Mr Cahill appeared for her in the proceedings, but that Mr Cahill was acting for her husband and was her husband's friend.
Mrs Davis was in fact a director of Nelson Investments Pty. Limited along with her husband and Mr Cahill but it does not appear that she actively participated in board meetings. However, clearly she signed tax returns prepared for her by an accountant (presumably her husband's accountant) which disclosed income from the trust, which returns she had presumably declared as being true and correct in every detail in accordance with the printed form of declaration contained on the return form in which she disclosed her entitlement to income from the trust estate, even if that income was not in fact received by her in her hand but was controlled by her husband. Further, it was clear that Mrs Davis had placed her affairs in the hands of her husband and his adviser.
Given the factual background which I have set out above the question is whether it is possible in these circumstances to apply sec. 260 to annihilate an arrangement of which Mrs Davis was not conscious.
In Stamp's case the appellant had the right under a discretionary trust deed to share in income of a trust in so far as that income was not distributed by the trustee to others in the exercise of distribution. An elaborate scheme was entered into whereby the trustee made a distribution of income to another trust and subsequent distributions were made through a series of trusts where the ultimate benefit of the distributions was to a Mr McCracken who it would seem was a clear participant in the arrangement. The consequence of the trustee making the distribution was effectively to deprive the appellant of any right to share in it.
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The Commissioner claimed that sec. 260 operated to avoid the distribution with the consequence that the appellant was deemed to have received a share of the income by virtue of being a default beneficiary. In the circumstances of the case the appellant swore that she did not even know that she was named in the deed. In these circumstances Pincus J. said at pp. 4804-4805:
``Another way of putting the Commissioner's point is that the effect of sec. 260 can be to avoid an arrangement `so far as it has or purports to have the purpose of effect of' reducing or eliminating tax liabilities, even as against persons who have nothing to do with either the purpose or the effect. If, for example, a borrowing of money from a stranger to a scheme takes place as part of it, then the Commissioner may if his contention is right ignore that borrowing for the purposes of the tax affairs of the innocent lender.
In my opinion this is not what the section is intended to achieve. If, of two parties to a contract caught by the section, one can say there is a tax-avoiding `purpose or effect' as to one but not the other, the section works only so far as the contract has or purports to have that purpose or effect - i.e. only so far as it relates to the party avoidance of whose tax is in question. That proposition appears to me to have the support of the decision of the Full High Court in
Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106.''
It should be noted that Pincus J. did not say in that passage that it was necessary for the taxpayer personally to be a party to the tax avoidance scheme itself; what his Honour did say was that it was necessary for the scheme to have the purpose or effect of avoiding the tax of the taxpayer. That is a quite different issue.
However, it must be conceded that later in the judgment his Honour said [at p. 4806]:
``It appears to me that the dispute just mentioned reflects a deeper one, namely, whether the avoiding effect of sec. 260 may be relied on by the Commissioner against people (like the appellant) who have in no sense participated in the impugned scheme, nor in any transaction forming part of it. But if sec. 260 had indeed such a universal effect, then it appears to me that the Commissioner's argument on the construction of the proviso would have to be accepted. Putting that point another way, the assumption on which the Commissioner's contention about the proviso is based is that the avoiding effect of sec. 260 operates against all taxpayers, whether or not taking part in the scheme; if that is so, then it would appear to follow that, as against the appellant, the trustee must be deemed not to have exercised the discretion referred to in the proviso (although it did so in fact). As appears from what is written above, I do not accept the correctness of the assumption.''
It may therefore be said that there were two reasons why, in his Honour's view, the applicant in Stamp's case should have succeeded although they were related in that case. The first was that the arrangement entered into was not on the facts of that case entered into to avoid the applicant's tax. That reason was sufficient in my view and, with respect to his Honour, to lead to the conclusion that the applicant's appeal must succeed. The second reason may be thought, while not coupled to the first to be more controversial. In its application to the present case it raises the issue whether sec. 260 might not apply in a case involving a trustee and a beneficiary where the purpose of the arrangement was, in part at least, to avoid the liability of the beneficiary but where the beneficiary remained unaware of the scheme put into play by the trustee and others.
In the present case, while the applicant was not a party to the transaction in the sense that she consciously participated in it, it is quite clear that the purpose of the transaction can be inferred as being to avoid either the tax that would be payable by the trustee in the event that there were an accumulation (the liability of the trustee arising under sec. 99 or 99A of the Act) or to avoid the liability for income tax of the beneficiaries including Mrs Davis. Since it would seem in all but one prior year that Mrs Davis was the sole beneficiary of at least the rental income of the trust I have little difficulty in saying in the present case that the purpose of the arrangement included a purpose of avoiding Mrs Davis' tax. Cf.
Hancock v. F.C. of T. (1961) 108 C.L.R. 258 at p. 276 where the purpose of the arrangement was said to be to avoid either the tax of the company under Div.
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7 or of its shareholders upon the dividends that would be declared if there were a sufficient distribution.
Nevertheless there remains the point, even if it was not decisive in Stamp's case that Mrs Davis was not as a matter of fact conscious of the scheme. Is it necessary for the operation of sec. 260 that the taxpayer in question know of or participate in the scheme?
In many cases it may well be critical that a taxpayer either alone or through an agent participate in the scheme as a whole albeit that it will quite often be the case that a taxpayer is not conscious of each and every step in the scheme. In one sense, such a distinction may well underline the differing results in Slutzkin on the one hand and
F.C. of T. v. Gregrhon Investments Pty. Ltd. 87 ATC 4988, see e.g. in Gregrhon per Fisher J. at pp. 4996-4997, per Lockhart J. at pp. 5007-5008 and per Spender J. at p. 5012. However, with respect to Pincus J., I would be of the view that sec. 260 of the Act could apply in a case such as the present where the trustee entered into and carried out a scheme having a purpose or effect of avoiding the tax of a beneficiary without the participation of the beneficiary. There is, in the language of sec. 260, no requirement that a taxpayer necessarily be a party to the scheme provided that it is correct to characterise the scheme as a whole as one having a purpose or effect of avoiding the tax of the taxpayer. Slutzkin can be in fact explained as a case where the broader scheme, to which Mr Slutzkin was not a party but in which the stripper participated, could not properly be characterised as one having a purpose or effect stipulated in sec. 260. The narrower scheme to which the taxpayer was a party in the circumstances of that case did not bear on its face the stamp of tax avoidance and so fell outside the section.
In the present case, however, it is not necessary to resolve the point. Mrs Davis adopted the position of placing her affairs in the hands of her husband and Mr Cahill. In these circumstances if it were necessary that she be a party to the arrangement I think that her reliance upon her husband and Mr Cahill and her deliberate attempt to thereby distance herself from business transactions led to the conclusion that she was sufficiently a party to the arrangements engineered by her husband and Mr Cahill for sec. 260 to have application to her. In so saying, I do not suggest that it would be correct to characterise all acts of Mr Davis as being acts of Mrs Davis through an agency.
Counsel for the applicants referred me to the decision of the New South Wales Court of Appeal in
Metal Manufacturers Pty. Ltd. v. Lewis (1988) 13 N.S.W.L.R. 315 where it was held that for liability to attach to a director under sec. 556(2)(a) of the Companies (New South Wales) Code that director must have given express or implied authority or consent to incurring the particular debt and that the mere fact that a company director acquiesces in another director running the business does not constitute of itself a relevant authority or consent. The statutory context in which this case is decided is so remote from that in sec. 260 that I find the case to be of no assistance at all.
The assessments of Mrs Davis also included additional tax under sec. 226 of the Act. No material has been placed before me to enable me to know what matters were taken into account by the Commissioner in remitting additional tax and I am unable to see that there has been any error of law. Accordingly, there is no ground upon which I could intervene, it being clear that the Court has no power itself to exercise the discretion contained in sec. 226(b) but is limited to judicial review only. It follows that I would dismiss the appeals of Mrs Davis.
The only item in dispute in Mr Davis' appeals, as I understand it, is the interest which Mr Davis assigned to the Foundation pursuant to the deed of gift. Counsel for the Commissioner conceded that if I found the powers of attorney effective, pursuant to which the deed of gift was executed, and the deed of gift itself properly executed, the assignment was effective and was not one vitiated by sec. 102B of the Act. Indeed, it was in effect conceded that as Mr Davis ensured that cheques were drawn each year to the Foundation for this interest, there would in any case have been a ratification.
For the reasons already discussed I find that on the balance of probabilities the instruments executed on or about 15 December 1978 in Sydney and in Canberra were properly completed and executed. In these circumstances it is unnecessary to consider the effect of ratification. It follows, however, that the appeals of Mr Davis in respect of the relevant years will be allowed.