The law of contracts, trusts and corporations as criteria of tax liability.

• Jurisdiction: Australia
• Author: Gummow, William
• Date: 01 April 2014

The general law of contracts, trusts and corporations may be thought to provide clear and stable criteria for the operation of revenue laws. But experience suggests this expectation may be overoptimistic. This is not to urge increased legislative resort to criteria preferring substance over form, with the attendant temptation to impose what constitutional doctrine would stigmatise as arbitrary imposts. It is to urge legislative vigilance in the selection of particular criteria to implement policy objectives, and to reiterate the necessity for a good tax lawyer to keep up-to-date with the general law.

CONTENTS I Introduction. II The Constitution III Form and Substance IV General Considerations V 'Consideration VI What Is a 'Trust'? VII Assignments VIII Beneficial Ownership IX Executory Contracts X Trustee Income XI Temporal Issues XII Legislative Responses XIII Conclusion I INTRODUCTION

The theme of this paper is the imperative need for tax lawyers, including officers of the Commissioner and other revenue authorities, to maintain a well-grounded working knowledge of the general law as it applies from time to time and operates with tax law in its most specific sense. Some reference will be made to state revenue law but the principal concern is with federal taxation.

II THE CONSTITUTION

It is appropriate to begin with what, in Federal Commissioner of Taxation v Futuris Corporation Ltd, Kirby J called the constitutional moorings' which inform the meaning of federal legislation. (1) The power conferred upon the Parliament by s 51 (ii) of the Constitution is to make laws with respect to 'taxation; but so as not to discriminate between States or parts of States'.

The importance of criteria selected for the operation of the law imposing 'taxation' is immediately apparent. This is so, notwithstanding the proposition, expressed by Aickin J in General Practitioners Society v Commonwealth, that 'the tax power is not limited to old or well-known taxes but extends to any form of tax which ingenuity may devise'. (2)

The essential role played by legislative criteria appears from three steps in the reasoning of Gibbs CJ, Wilson, Deane, Dawson JJ in MacCormick v Federal Commissioner of Taxation. (3) The first step states the major premise:

where, as is ordinarily the case under the Commonwealth Constitution, the validity of the law depends upon its characterization as a law with respect to a particular subject-matter by reference to the criteria which the law itself fixes for its operation, the law cannot be so characterized if, in effect, it goes on to provide that it will have that operation regardless of whether those criteria are, in truth, satisfied. (4) The second step fixes upon the distinction between a tax and an 'arbitrary exaction':

For an impost to satisfy the description of a tax it must be possible to differentiate it from an arbitrary exaction and this can only be done by reference to the criteria by which liability to pay the tax is imposed. (5) The third step deals with the manner of application of those criteria and explains the term 'incontestable tax':

Not only must it be possible to point to the criteria themselves, but it must be possible to show that the way in which they are applied does not involve the imposition of liability in an arbitrary or capricious manner. In Giris Pty Ltd v Federal Commissioner of Taxation Kitto J pointed out that the expression 'incontestable tax' in the sense in which it is used in [Deputy Federal Commissioner of Taxation v] Hankin and [Deputy Federal Commissioner of Taxation v] Brown 'refers to a tax provided for by a law which, while making the taxpayer's liability depend upon specified criteria, purports to deny him all right to resist an assessment by proving in the courts that the criteria of liability were not satisfied in his case.' The purported tax is thereby converted to an impost which is made payable regardless of whether the circumstances of the case satisfy the criteria relied upon for characterization of the impost as a tax and for characterization of the law which imposes it as a law with respect to taxation. Such an incontestable impost is not a tax in the constitutional sense and a law imposing such an impost is not a law with respect to taxation within s 51 (ii). It is in this sense that an incontestable tax is invalid. (6) This third step has caused difficulty where the operation of the law turns upon the exercise of a discretion conferred by that law upon the Commissioner. However, it is settled that whatever the width of the discretion, its exercise is judicially examinable to determine whether the Commissioner has exceeded the limits which may be discerned from the legislation. (7)

The constitutional imperatives were succinctly expressed in the joint reasons of the whole Court in a transfer pricing case, W R Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation, (8) where their Honours said:

First, for an impost to satisfy the description of taxation in s 51(ii) of the Constitution it must be possible to distinguish it from an arbitrary exaction. Secondly, it must be possible to point to the criteria by which the Parliament imposes liability to pay the tax; but this does not deny that the incidence of a tax may be made dependent upon the formation of an opinion by the Commissioner. Thirdly, the application of the criteria of liability must not involve the imposition of liability in an arbitrary or capricious manner; that is to say, the law must not purport to deny to the taxpayer 'all right to resist an assessment by proving in the courts that the criteria of liability were not satisfied in his case'. (9) These constitutional imperatives may be seen to encourage the engagement by the legislation of criteria which have an appearance of clarity and stability because they are taken from the general law. So it is that many leading cases expounding concepts and institutions of the general law are revenue cases. They include Norman v Federal Commissioner of Taxation, (10) Bluebottle UK Ltd v Deputy Federal Commissioner of Taxation, (11) Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd, (12) Aid/Watch Inc v Federal Commissioner of Taxation, (13) to each of which further reference is made in this paper.

III FORM AND SUBSTANCE

Allied to this attraction of the general law, has been a canon of statutory construction which at one stage almost assumed the higher status of a constitutional imperative. Regard was to be had solely to the 'legal form' of a transaction, rather than to 'substance', end result' or 'economic equivalence'. This restriction was associated with Inland Revenue Commissioners v Duke of Westminister (14) and thereafter with the Europa Oil litigation, namely Inland Revenue Commissioner v Europa Oil (NZ) Ltd ('Europa Oil No 1') (15) and Europa Oil (NZ) Ltd v Inland Revenue Commissioner ('Europa Oil No 2'). (16) The Europa Oil litigation twice reached the Privy Council from New Zealand and was heard by Boards including Sir Frank Kitto in Europa Oil No 1 and Sir Garfield Barwick in Europa Oil No 2. Back in the High Court, Barwick CJ later described the reasoning in these cases as 'still basic in this area of the law'. (17) As is well-known, this approach contributed to the demise of s 260 of the Income Tax Assessment Act 1936 (Cth) ('ITAA 1936'), and its replacement by pt IVA. (18) As Lehane J observed in Richard Walter Pty Ltd v Federal Commissioner of Taxation, many tax schemes are designed to have an otherwise inexplicable legal effect precisely because of the fiscal objectives being pursued. (19)

This chain of events in Australia may be contrasted to what followed in the United Kingdom. The starting point appears to be W T Ramsay v Inland Revenue Commissioners. (20) Lord Wilberforce had dissented in Europa Oil No 2, and had stressed the distinction drawn by Dixon J in Hallstrom Pty Ltd v Federal Commissioner of Taxation between 'a practical and business point of view' and 'the juristic classification of ... legal rights'. (21) Lord Wilberforce, perhaps, as an equity lawyer, was inclined to prefer substance over form. He now led the way with the development of what has become known as the 'fiscal nullity' doctrine. (22)

In Australia, the constitutional considerations outlined above have encouraged the adoption of legislative criteria drawn from the general law; this practice is apt to emphasise the importance of legal form taken by transactions. The cases dealing with assignments of...