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Published online by Cambridge University Press: 24 January 2025
Mr Justice Holmes' view that payment of taxes should not be begrudged-as they are the price of civilisation-is of course not shared by the vast majority of tax-paying citizens.
1 The text of s. 260 is as follows—
Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly—
(a) altering the incidence of any income tax;
(b) relieving any person from liability to pay any income tax or make any return;
(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
(d) preventing the operation of this Act in any respect, be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.
2 (1962) 36 A.L.J.R. 258, 259.
3 See per C.J Knox. in Deputy Federal Commissioner of Taxation v. Purcell (1921) 29C.LR. 464, 466.
4 (1921) 29 C.L.R. 464. And the Court in Jaques v. Federal Commissioner of Taxation (1924) 34 C.L.R. 328-the first case where the application of s. 260 was upheld by the High Court-also appeared to have similar principles in mind.
5 But note however the explanation of Fullagar J. of this case in Federal Commissioner of Taxation v. Newton (1957) 96 C.L.R. 577, 647-648 which was referred to by the Board of Review in 10 C.T.B.R. (N.S.) Case 33 at 217. In Newton's case on appeal, the Privy Council further explained Purcell's case, in order to reconcile it with the principles they expounded.
6 See also Jaques' case (1924) 34 C.L.R. 328 per Isaacs J. at 359-360, per Starke J. at 362. Cf. Molloy v. Federal Commissioner of Taxation [1925] R. & McG. 113 and v Tunley. Federal Commissioner of Taxation (1927) 39 C.L.R. 528.
7 (1932) 48 C.L.R. 56.
8 ibid. 77.
9 (1953) 87 C.L.R. 548.
10 [1958] A.C. 450; (1958) 98 C.L.R. 1.
11 Cf. per Kitto J. in v Hancock. Federal Commissioner of Taxation (1961) 108 C.L.R.258, 283-284.
12 [1958] A.C. 450, 465.
13 The Privy Council treated the words ‘purpose’ and ‘effect’ in s. 260 as being practically synonomous: cf. per Williams J. in the same case in the High Court: (1957) 96 C.L.R. 577, 630.
14 [1958] A.C. 450, 465.
15 See for example per J Menzies. in v Mayfield. Commissioner of Taxation (1961) 108 C.L.R. 303, 319 and per Kitto J. in Peate's case (1964) 38 A.L.J.R.164, 165.
16 [1958] A.C. 450, 466. Professor Ford, ‘Legislation Against Tax Avoidance: The Australian Experience’ [1961] British Tax Review 247, 252 has pointed out the excellent analogy of this test to that of proof of a criminal conspiracy. The difficulties inherent in the Privy Council's formulation have been ably demonstrated by Trebilcock, ‘Section 260: A Critical Examination ’ (1965) 38 Australian Law Journal 237, 241-242.
17 (1957) 100 C.L.R. 66.
18 Challoner, ‘ Arrangements to Avoid Income Tax: A Consideration of the Effect of Newton's Case’ (1958) 32 Australian Law Journal 109, 116-117; (1959) 3 Sydney Law Review 153, 161. See also the Keighery decision itself: (1957) 100 C.L.R. 66, 92-94 and cf Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd(1957) 100 C.L.R. 95. Challoner, op cit. however also suggests that the Privy Council's remarks may be taken either to support a restrictive approach as to the cases in which a court will be prepared to hold that a scheme was implemented to avoid tax, or that the section does not derogate from a choice of action contemplated by the Act itself: cf (1959) 2 Melbourne University Law Review 110, 113. It is suggested that the latter view is correct: in addition to the Keighery and Sidney Williams decisions referred to above, the High Court has on several occasions recognised the somewhat wider principle that where there are alternative courses, of which one will, and the other will not, expose the taxpayer to a liability (even though thedistinction may be one of form rather than substance), his deliberate choice of the latter course cannot readily be made a ground for ignoring the legaleffect of the transaction: see per Kitto J. in Hobart Bridge Co. Ltd v. Federal Commissioner of Taxation (1951) 82 C.L.R. 372, 384-386, Eisen v. Commissioner of Taxation (N.S. W.) (1930) 1 A.T.D. 73, the statement of Rich, Dixon and Evatt JJ. in Clarke's case (1932) 48 C.L.R. 56, 77 which was followed in War Assets Pty Ltd v. Federal Commissioner of Taxation (1954) 91 C.L.R. 53.
19 v Bell. Federal Commissioner of Taxation (1953) 87 C.L.R. 548, 572-573; and see also Clarke's case(1932) 48 C.L.R. 56, 77. For a case where even if the scheme had been avoided, the exposed set of facts would not have rendered the taxpayer liable see Dickenson v. Federal Commissioner of Taxation (1958) 98 C.L.R. 460.20.
20 (1957) 96 C.L.R. 577, 597. Professor Ford, op. cit. 256-257, has given some examples of difficulties that must attend a strict application of this principle. It has even been said that Newton's case isan example of a gloss on this principle—(1959)3 Sydney Law Review 153, 162–and see also the comment on Hancock's case in (1964)38 Australian LawJournal 31, 32.
21 Trebilcock, op. cit. 244-246.
22 The apt term used by Williams J. in Newton's case (1957) 96 C.L.R. 577, 635. Another possible solution to the dilemma is of course to float the company as a public company. This method has not commended itself to taxpayers because of the risk of their losing control, but by adopting a Keighery scheme of arrangement, this can be averted.
23 This is usually termed the ‘milking’ operation.
24 (1953) 87 C.L.R. 548, 573.
25 By virtue of a special resolution, the original shares carried a special dividend right,but after this had been paid they reverted to ordinary preference shares.
26 [1958] A.C. 450, 468. The Privy Council's decision on this point was applied in Hancock's case and Mayfield v. Commissioner of Taxation [No. 2] (1961) 108 C.L.R.323. It has been cogently criticised: Trebilcock, op. cit. 245.
27 (1959-1961) 108 C.L.R. 258: this decision has been applied by the Board of Review in 10 C.T.B.R. (N.S.) Cases 32 and 33.
28 Note that the third party shareholders were subsequently held by a Board of Review not to be caught by s. 260, as there was no evidence of a scheme on their part to avoid tax: see 10 C.T.B.R. (N.S.) Case 31.
29 Whereas in Newton's case the transformer company's finance came substantially from the ‘expected ’ dividends.
30 [1958] A.C. 450, 468.
31 (1961) 108 C.L.R. 258, 281-282. This passage was approved by Menzies J. in Mayfield v. Commissioner of Taxation [No. 21 (1961) 108 C.L.R. 323, 334; but in Mayfield v. Commissioner of Taxation (1961) 108 C.L.R. 303, 321 he noted that the reasoning of Dixon C.J. (with whom Windeyer concurred) in Hancock's case was not identical with that of Kitto J., and both differed from that of Fullagar J. whose judgment was affirmed.
32 (1963) 111 C.L.R. 106.
33 Affirming a majority Board of Review decision–see (1961) 12 T.B.R.D. Case No. M29; 10 C.T.B.R. (N.S.) Case 64 especially at 390-391 and 398.
34 Which thus has a double significance in the interpretation of s. 260: see also the Privy Council's fifth proposition in Newton's case.
35 Notwithstanding such other phrases as ‘absolutely void’ and ‘in regard to any proceeding’ relied on by ChaUoner and Greenwood, Income Tax Law and Practice(Commonwealth) (1962, 2nd ed.) 1207 to support a contrary conclusion. See also Trebilcock, op. cit. 247.
36 [1958] A.C. 450, 468.
37 (1961) 108 C.L.R. 303.
38 As nothing was avoided by the distribution itself: cf. Newton's case [1958] A.C.450, 468.
39 (1964) 37 A.L.J.R. 445.
40 (1962) 36 A.L.J.R. 65, 6.
41 However in the intervening period it had been followed by a decision of a Board of Review: see 10 C.T.B.R. (N.S.) Case 88.
42 See per Menzies J. (1964) 37 A.L.J.R. 445, 446.
43 (1949) 78 C.L.R. 47.
44 Ibid. 60. Cf. the statement of Rich, Dixon and Evatt JJ. in Clarke's case (1932) 48 C.L.R. 56, 77.
45 (1962) 108 C.L.R. 336.
46 Ibid. 342.
47 (1962) 36 A.L.J.R. 258; on appeal (1964) 38 A.L.J.R. 164; 13 A.T.D. 346. The Privy Council has granted special leave to appeal.
48 Apparently, most of the patients did not know of this agreement, so applying normal contractual principles there would have been no binding contract between the patient and Westbank: see Gibson, , ‘Income Tax and Companies Formed by Medical Practitioners’ (1958) 32 Australian Law Journal 144, 145.Google Scholar
49 The Commissioner might even be able to argue that-irrespective of s. 260--this was income derived by the practitioner: see Gibson op. cit. 145-147.
50 Gibson, op. cit. 144-145 also points out that the doctors would also be disentitled to certain other payments; and in the High Court it was noted that payments from institutions had been made to the doctors personally.
51 (1962) 36 A.L.J.R. 258, 265. Italics added.
52 See (1963) 4 Melbourne University Law Review 275, 278-279; Gibson op. cit. 144.
53 Taylor, J. expressly agreed with this on appeal. A literal reading of Newton's case might suggest a contrary conclusion as the Privy Council spoke of a liability‘ about to fall’ on the taxpayer: see (1959) 2 Melbourne University Law Review 110, 113Google Scholar; Gibson,op. cit. 148 and Challoner, op. cit. 119.
54 The decision of Owen J. was reversed on appeal, but not on this point.
55 (1964) 38 A.L.J.R. 164, 166. 5.
56 Ibid. 168.
57 Ibid 169.
58 Ibid.
59 Ibid. 170. Italics added.