Of 'sham' and other lessons for Australian revenue law.

• Jurisdiction: Australia
• Author: Kirby, Michael
• Date: 01 December 2008

[In describing the issues arising in Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation ('Raftland'), the author examines what he sees as a general reluctance of Australian courts to embrace a more robust approach to designating documented transactions as 'shams', as the Supreme Court of the United States of America has effectively done for some time. He suggests that the reluctance derives from three sources: the parol evidence rule applicable where oral evidence is propounded to vary written evidence and the difficulties inherent in pleading and proving fraud; the enactment of specific legislation to invalidate designated tax avoidance 'schemes'; and the frequent need of the Commissioner to rely on propounded documents to support the asserted tax assessment. Various possible psychological and practical considerations are also mentioned. Nevertheless, the author proposes that greater use of 'sham' analysis should be used in the revenue context in Australia as, he suggests, was ultimately upheld in Raftland. He also refers to the later decision in Commissioner of Taxation v Futuris Corporation Ltd. He suggests that this case illustrates how revenue lawyers need to keep abreast of developments in judicial review and administrative law more generally. Finally, the importance of revenue law to the effective functioning of the Commonwealth is emphasised, and a tribute paid to the lawyers and others who work and teach in this field.]

CONTENTS I Tax Law and the Genius of the Constitution II Sham--The Reluctant Embrace III Three Reasons for Reluctance towards 'Sham' IV The Current Doctrine of 'Sham' V Keeping Abreast of the Law of Judicial Review VI The National Importance of Revenue Law I TAX LAW AND THE GENIUS OF THE CONSTITUTION

The starting point for a reflection on Australia's revenue law must necessarily be the Constitution. In that document, the power to enact laws imposing taxation is expressed in very wide terms. (1) However, from its earliest days the High Court of Australia has insisted that, to be a law with respect to 'taxation', the law must not be arbitrary. (2) It must be based on an ascertainable criterion and susceptible to judicial scrutiny. (3) Whereas in other polities laws with respect to taxation may be substantively and procedurally arbitrary, in Australia the contrary is the case.

My purpose is to draw attention to two recent decisions of the High Court of Australia that have touched upon these dual features of our federal taxation law. Basic decisions as to whether the constitutional criteria have been met belong not to elected politicians nor to officials but to the courts and, ultimately, to the High Court.

Any attempt to render a tax imposed by federal law incontestable in Australia would take the law concerned beyond the legislative power granted to the Parliament by the Constitution. (4) This insight imposes distinctive features on our revenue law, three of which I intend to explore. I will do so by reference to Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation ('Raftland') (5) and Commissioner of Taxation v Futuris Corporation Ltd ('Futuris'). (6) I will close with observations of a general kind addressed to the important contribution that revenue law and revenue lawyers make to law and governance in Australia, and thus to the nation's economic and social success.

The Law School of the University of Melbourne, which sponsors this annual lecture, has long enjoyed particular strengths in the fields of corporations, business law and revenue law. To those subjects Professor Ross Parsons of the University of Sydney--my own alma mater--made a specially important contribution from the 1950s to the 1970s. It was Professor Parsons who introduced me to the challenges of revenue law, which was then contained in statutory provisions that seem tiny and very simple by contrast to the laws of today. Ross Parsons taught Murray Gleeson, Mary Gaudron, William Gummow, Graham Hill, me and many others to search for legal principles in the mass of statutory detail. Great is the debt owed by judges and other lawyers, as well as by accountants and taxation administrators, to the scholars and teachers who accept the obligation of bringing order and discipline to this vital area of the law.

Because, ultimately, federal revenue laws must be susceptible to judicial examination to ensure 'compliance with the constitutional limits upon that power', (7) the substance and procedures of federal taxation laws must be capable of coming under the scrutiny of courts. In this respect, the development and exposition of Australia's taxation law comes eventually to a judicial bench that is not necessarily specialist in experience but generalist in its composition and function.

Traditionally, some members of the High Court, in their legal practices and professional backgrounds, will have had close familiarity with revenue law. But not all. This too is part of the genius of the Constitution. Specialists can sometimes become too close to the assumptions and doctrines of the past. They may adhere to legal theories long after they have lost their usefulness. They may cling to the ideas in apparent disharmony with the attempts of the legislature to introduce new concepts. They may be blind to changes in the economic and social context within which the law operates. Such blindness may influence even their reading of comparatively clear statutory provisions, the meaning of which appears plain to the non-specialist.

Justice Gummow pointed this out in his recent essay, 'Form or Substance?'. (8) It was the error that once beset the High Court of Australia in its exposition of the meaning and operation of ss 90 and 92 of the Constitution: (9)

the ever-shifting, ever-unsatisfactory case law construing both s 90 and s 92 of the Constitution had been blighted by the refusal of the court to look behind the form provided by the text of s 90 and s 92 to an appreciation of the nineteenth century political and economic theories and debates upon free trade and protectionism which preceded the adoption of the Constitution.... [T]o read s 92 in its historical context (10) is ... [to give] s 92 a reach beyond the elimination of discriminatory burdens of a protectionist kind upon interstate trade and commerce. Here then, in matters of the highest law in our system, are differing applications of notions of form and substance. Inspired though I was by Ross Parsons's instruction on revenue law, chance considerations took my legal career on a different path. (11) Perhaps my fate was sealed by the Pope's line that the young Murray Gleeson and I so nonchalantly drew in our early law school days: dividing our shared burdens among the topics we studied. If to him we assigned revenue law, to me we assigned jurisprudence and legal theory. Upon this division of the legal subjects may have hung the special focus of our respective legal interests in the decades that were to follow. If, in revenue law, he had the particular knowledge and expertise, perhaps it was for me to feel a need to scrutinise the outcomes more critically, in accordance with deep-lying principles and to question received wisdom. This is what I take the Constitution to require.

Thus, whereas in the United States of America the Supreme Court, hearing taxation and other appeals, is not a court of general appellate jurisdiction, the highest court in Australia (as earlier in Canada) is such a court. The High Court of Australia decides cases on a whole range of legal problems, including those from state courts. The obligation of revenue lawyers to submit and argue their contentions before an ultimate national appellate court of general jurisdiction is, I suggest, a healthy corrective against over-specialisation, self-satisfaction and professional hubris. (12) This is one of the reasons why, below the High Court, I favour the continuation of the role of the Federal Court of Australia in taxation appeals. I disagree with the idea of creating a specialist court of taxation appeals which would run the risk of divorcing taxation law from the invigorating stimuli of general legal developments--a subject to which I will return. (13)

II SHAM--THE RELUCTANT EMBRACE

Against the background of this introduction to my three themes, I turn to the first. It concerns the potential role that reasoning by reference to an opinion that transactions constitute a 'sham' can play in Australian revenue law, as illustrated by the recent decision in Raftland. Self-evidently, nothing that I say in these or any other remarks expands the matters for which that decision (or any other) stands, in terms of legal doctrine. The ratio decidendi of Raftland, as of any other case, can only be derived from the judicial reasons offered to support the Court's dispositive orders. (14)

The facts of the Raftland case were complex. The broad circumstances were that a company, Raftland Pty Ltd, was a member of a group of companies involved in real property development and leasing. In 1995 and in subsequent tax years, it sought to minimise its income tax by channelling profits through an entity with substantial accumulated tax losses. An unrelated loss bearing unit trust was 'acquired' through a firm of accountants. The loss bearing trust was designated as the 'tertiary beneficiary' of a discretionary trust within the group. Raftland was the trustee of that trust. Ostensibly, the tertiary beneficiary was entitled to receive distributions from the discretionary trust. Group profits for the 1995 tax year were distributed to Raftland. In turn, it passed resolutions to distribute its entire income to the loss bearing trust in two transactions. In fact, the second and much larger transaction was never paid.

The Commissioner of Taxation disallowed Raftland's objection to an amended assessment he made relying initially upon Part IVA of the Income Tax Assessment Act 1936 (Cth)...