Birchstone Insights
This week we focus on two cases that were decided by reference to what an ordinary business or family dealing is, albeit in the context of section 260 of the Income Tax Assessment Act 1936 (Cth).
An analysis of the decisions in Peate v FCT (1966) 116 CLR 38 and Jones v FCT (1977) 77 ATC 4058 serves as a useful lead in for our upcoming series on cases decided by reference to the general anti-avoidance provisions contained in Part IVA (which is now celebrating its 40th anniversary) of the Income Tax Assessment Act 1936 (Cth).
The facts of Peate can be summarised as follows:
- a group of nine doctors practised in partnership for some time;
- following the retirement of one of the partners, the partnership was dissolved;
- each of the eight doctors incorporated a family company for themself and their family;
- a medical company (Westbank) was formed, with the family companies of the doctors as its shareholders;
- each family company entered into an agreement whereby the services of the doctors were to be provided to Westbank in consideration of a fee payable;
- as a result, the individual doctors only received a salary from their family company and did not receive any fees directly from the patients (these were collected by Westbank).
Once again returning to the dichotomy of section 260, the Court found that the intent of the restructure was the avoidance of tax, meaning that it could not be explained by an ‘ordinary business or family dealing’. Section 260 was held to apply to the arrangement, with Windeyer J stating at page 478 of the judgment that:
Whatever may be said of the company Westbank Pty. Limited separately regarded, the combined and inter-related activities and purposes of it and its companion Raleigh Pty. Limited are certainly remarkable and out of the ordinary.
In Jones v FCT, a pharmaceutical chemist sold his pharmacy business to his wife, while retaining the relevant land and fittings. The chemist was then employed as a salaried manager by his wife.
The Court held that section 260 did not apply because the transactions were capable of explanation by reference to ordinary family dealings and were not labelled as a means to avoid tax. The Court accepted that the primary reasons for the sale of the pharmacy business was the redistribution of family assets, to provide security for the wife and to save death duties. Although the Court accepted that the saving of income tax was present in the mind of the parties, they held that it was not the major reason behind the sale.
As prefaced by Gibbs CJ in Gulland v FCT, standards of ‘ordinary and acceptable conduct’ have changed significantly since the decision in Peate (1966). While the incorporation of a medical practice in the 60s may have been seen as a radical attempt to avoid tax, it is now standard practice and very much ‘ordinary’.
ATO Update
Class Ruling
The ATO has issued Class Ruling CR 2021/62 which sets out the income tax consequences of donations made to a deductible gift recipient using a Donation Point Tap device.
ATO draft protocol: Legal professional privilege (LPP)
The ATO has released a draft protocol which sets out the ATO’s recommended approach for identifying communications covered by LPP and claiming LPP, and what taxpayers can expect from the ATO when LPP is claimed.
Other News
ACNC Register: Charities removed
The Australian Charities and Not-for-profits Commission (ACNC) has cancelled the registrations of 420 Australian charities for failing to submit two or more mandatory Annual Information Statements.
Cases
CUB Australia Holding Pty Ltd v FC of T (No 2) [2021] FCAFC 171 – Full Federal Court dismisses appeal
The Full Federal Court has dismissed the applicant’s appeal against the decision in CUB Australia Holding Pty Ltd v FC of T [2021] FCA 43 and ruled in favour of the Commissioner.
In 2018, the Commissioner issued a section 353-10 notice to the applicant requiring that certain documents be provided. The applicant refused to provide some of the requested documents to the Commissioner, claiming legal professional privilege (LPP). The applicant did not provide additional details (authors, titles etc.) to the Commissioner which would allow the Commissioner to decide whether LPP had been correctly claimed. Subsequently in 2020, the Commissioner issued a second section 353-10 notice requiring production of these additional details. The applicant then sought judicial review on the basis that the second notice issued by the Commissioner was not for a proper purpose and was not authorised under section 353-10.
At first instance, Moshinsky J ruled in favour of the Commissioner and dismissed the application for judicial review on the grounds that the section 353-10 power was broad and wide-ranging and the second notice, despite relating to a claim of LPP, still related to the administration of a taxation law. In the decision at hand, the Full Federal Court upheld Moshinsky J’s decision, rejecting the applicant’s argument that his Honour had failed to consider whether there was any substantial or improper purpose. The Court found that his Honour had correctly considered the purpose point, and on the basis that he found only one purpose, it was unnecessary to consider whether there was any other substantial purpose that was improper.
Legislation
ACT: Bill introduced
The ACT Legislative Assembly has introduced and passed a Bill which permanently introduces tax relief measures taken in response to the COVID-19 pandemic and extends other measures designed to assist businesses.
Exposure Draft Regulations
The Government has released exposure draft materials in response to the 2018 Strengthening for Purpose: Australian Charities and Not-for-profits Commission Legislation Review.
Amongst other things, the regulations are designed to reduce the regulatory burden on registered charities and increase public confidence.
