T-iX PLAXXING FOR T H E FAMIL\- 13USISESS IS QLTEEXSLAND "In these days, when rates of tax are high, it is natural enough for a man to seek ho to order his affairs that thc tax attaching undrr the appropriate Acts is less than it othvrwist~M-ouldbe".' The ol~jectof t a r planning is to givc effect to this natural desire 11y developing nnc~thod.~ carrying out tra~lsxctionsso that t l ~ c of total tax pa!-able tl~t~reori kept to a minimum. 'rhe eva1u:ltion is of the efficacy of any method proposed must olix.iousl~- bascxd he on its effect in minimising the impact of t a w > from all sources, State taxes as well as Con~monwealthtases, stamp, gift, and death duties ah well as income taxation. Of course, certain devices have been del,eloped so as to reduce the amount of particular taxes. and any tax planning scheme must take account of them. But a synoptic approach must be adopted. There is no great virtue in avoiding income tax, for example, only to attract a greater liability b y way of death duties. There is no advantage in avoiding stamp or gift duties a t the expense of a reduction in income tax which ~ould esceed the amount of duties so avoided. The basic concepts upon which all tax planning schemes are founded are quite simple. First, since the rates of income tax and social service contribution are highly progressive, the aggregate tax payable will decrease if a given total amount of income is divided among several recipients. One objective therefore will be to spread income as widely as possible. Secondly, since estate and succession duties are levied cither on thc estate of the deceased or on the beneficial interest passing upon the death of the predecessor to the successor, the amount of such duties may he reduced either hv itzter viztos dispositions2 or by the adoption of methods designed t o diminish the value of the property held by the deceased upon or prior to his death. Finally, since stamp duty is a charge upon i ~ l s t r u r n ~ n rather than upon transaction^,^ no liability to stamp ts duty will arise if a transaction is effected without an instrument having been prepared. IVhilst the\e three principle5 must be kept con~tantly mind in in tax planning, the development of a plan to meet the need> of a particular client will be affected by a multiplicity of conaiderations. 1. S e w t o ~ zu. F.C.T. 11958; A.C. 450, 463. 2. Subject however to the provisions of s. 8 (4) of the Estate Duty Assessment 4 c t 1914-1957, ss. 9 and 10 of the Succession and Probate Duties Act of 1892, and s. 4 of the Succession and Probate Duties Act of 1904. 3. Stamp Acts 1894-1958, s. 4. '111t. client's c';ipacit>- t o undt.1-,t:tnd anrl irnl)l(w~tmt l r c ~ l)l;in, liii t f.~nlil\hittiation, Iiib ashets, tlicx sourccls of Iii, incornc., tilt. 5ii.t. a ~ i t I 1" u,l)(~t, of growth of his I~uhi~~ttss, ;tg,. , u ~ d Ilis cwndition of Ircaltll. rn~ist;ill 1)e taken into acco~ult. (.le:rriy :I p!;tn ~vllicl~ 1nig11t IIL, 1x~ft.ctly.~iit:il)lc in the c;i-t\ of a happily m;i~-rid man \\-orlld I)<, cl~iitts1lnsuitaltl(s ivhr:re prococclingi for dih.olutio11 of ~narriagc,or for maintenances ;i~-c. being contemplated. ll:~ttclr.;\vhicll ~niglitbe ~ ~ f ~ t i n inn tl~cxc;tse of :L client operatin,q .i la-gcs manufacturing e t l ) ~ i ~ i n t might Ila\~elittlc rclrvancc in the c ~ ~ w client who ~ss of a own, ;i small Ii;~rd\rare 401-c. or a dairy farin. 7'1~.ol)jc,ct of t1li.i articlt, is t o stxt out ccrtain t;r?;atio~~ con.-id(xr:itio~is\vllicll ;II.L' rt,lca\.;~ntin drafting a tax plan for a p ~ ~ ~ ) i \vho is c.ontc,rnl)l:tti~~g starting a hu>inchs or \vlio \vi.\hes to rc,organi~e ,I l)~i.hare of the inc:ome deri\.ctI from flih I)rl-irlrs.;, and t o 1t.ai.r his j ~ r o l ~ t ~ it - t y o thc.111 ul)on hi5 dt,ath. I t i, f11rt1lr.1ahsumed that the fou11dt.r of tile. I)u,inei.; dciirri to rr.tai11 cwntrol of it for o long as ht. wishes and t o ha\.(. tht. 1o:vt.r to t!i,\po-t~ of it n.licm h e t h i n l i tit. 111 thtx\ct c i r c l ~ n ~ . ; t a ~ ~ c e s :~pplicatitxl ot tl~cltir.-t ili-i~lcil)lt~ tlie -tatcd aho\.cb n1:tkr.s it clmr that tllc. choicc i. i1c.tw~er.11 org;ini\ilic: 01- real-gani,in;: t i l t . I)l~sinc,?a t i :L partnerzliip ur ah a conll):in! ; in \\.l~ic.l~ n~c,rnl)c~~., thc, i;imil~thts of arc ;idrnittL.d :L.; partnrr, or -liart~hol(1cr~, c~itlic~r directl!. i)r by t l ~ cintc~r\.rntion of t~-u>tec~>. - i n c,sa~ninatioli n11ist tlic,rc,fort, bc rn:tdc of rlit. taxation co11sitlc.r~ition> which rn11.t 1it.l)t in niind in thc forr1i;ition of a partnc.1-41il) or coml>ariy, and of tllr cornl);trati\-c:rd\-antagc.b and di+ad\.ailtagri fi-om the tasatiun \.it.wpoint of tlltbhc, tivo methorls of conclncting ~r 1111,;iness. ( a ) I ~ o n n a t i o io~ it l'clrtr~~~us~z,i~,--'l'iit~ f 1':irtncrship Act of lS!j1 dc.fincs partnersllil) :I.; the re1;rtion u-l~icl~ iril~.i,ts hetwcr.11 l)t3i-so~i.; c;i~-r\.ing ;I lnisirie>s in coIninorl u.itt~ ;r virw to profit. 4. (iof on 'J'fic Inconic. Tax ;t~itl5oci;rl Srr\-ice. Contri1)ution ;Is,w+~ni-ntAct 1!)3(i-l!)5!)(hclrc8i11aftr.rrefr.1-rt.d t o a tlir. Income Tax .lb?t..>mt'nt .lc.t) c.xtc-11c1stlii? cletinitio~~ i~lchicltc;In ;~,>ociation i)er>on>in to of rc,t-taipt of i11comc jointly. \Tit11 that t:sccl)tion, tl~c. qucstiou \\-ht.tlrt.~;I 1';irtnvrship exists or not will I)c (1rte1-ini11t.d I)!. tlltl ol-di~i:tr\ \)cincil~lt,h the law of y;irtiu.r,liil). 111 p;trtic.~~l;ir, fact tli:lt ;t of tlir 1)vr\o11i-(~r(.i~.c~\ a Il;u-c of tl~ts11c.t ~ ~ r o f i of tlic, I)usinc--, i, i,1'7tiitl t, iili'i'c' t~\~iclt~nc.c~ tliat i i ;I 11a1-tnt.1-. 5i11cc~ ~ ; ~ I - t ~ ~ c~i. i.c>1:1tio11 ~ 1, r~lli~~ i.c.-r~ltil~;: fi-on1 a c-onti-;let,t11c~ l);trtnc~i~,liii~ ,;~.;-c~t~rncnt rcicj~ii~-c2.. (:or::itlcr;itio~~ orc1c.r t o 1,cx hintling. l.l~ib~ ~ o i i ~ i ~ ! ni:i;,. - ~ 1)~-o-~ ~ in t ~ ~ !I(, ~ t i o vid(.(l i)!. ;t coiltl-il,tltion of c-nl~it;~l lal?our, 01- h o t l ~ . 01. l i ( y It iollonc lion1 thi- t l l ; ~ tif 21 wife andjnr- chil(l].c~n (whrtlltxladult or minor.) \$.orli ill the. h~l,int>>s Ilona fidc j ) c ~ r t n t ~ r > l ~ i l ~ a agrcvmerlt m,L>-11 c~ritt~rrd 11:. thc~ x illto nir>rnt)crsof tllcl f:inlil!. 5o crnp1oyc.d. Tllr. Sarnc, positioli \\.i?l ulltairl if the). 11a\-c~ cal1it;il of tllt,ir- O\\.II \vhie:?i they contribute. to tilt. partnvrship cxpital. If t l q . :L:(~ rlnnl,lr t o colitril>uti. c.,~l)ital, ma!. I)c ~lect,.i;rr\. for the, fi~tht.1it ot ti\(, famil\- to 11rox-itlr.t!rtym with this n c ~ ~ i . ; a rt.;~pit;~J. \'l.ilik I T I C ~ I * . t;ikr, they form of ; I gitt I ) \ - tht. fathc,r, i l l \vl~icl~ gift elutj. nl:i.,t.;~.c, I)c attracttd. iiiit tint\ \$.ill 1x2 i11111oc.tl tile, cli\i)oiitio11 1,). tlic, if f:itI~cr ih g r ~ t u i t o u . 01-f t i ! - a11 i l ~ ~ i ~ l t v lc o l a t~ i c;1ti011,1)ut ~~ ~ o lc~~ IIILI~, IL~;L~;L. t1iil)obitioli for- fill1 c.o;liideratim tlroligh 110 nlolic,\, passe,tc, lliril from tilt. tli-l~oiic~v-. 111 l;~i~lcit,ji, . I * . I , C ~ L T(~iinzttz~~ss1011~~r 7 IL~ (I/ I t i f t ; ~ t < . dl o \ v t d that 1; o\vntd s11;lrr~hl l colnl i 1);1ny :tnd that IIY >o1<11.073 illarcs t o each of hi- foul- c.11ild1-c.n :it '1 prict. of iL'/3,'- iwr sl~arv. So rno1ir.y \v:i in f;tct paid 1)y tliv c l ~ i l d ~ - eand t i l r t : ~ n, j.ral-s 1att.r tile Federal C'omrnis~ioner callsr~da11 ai\e..rili,nt to gift cllltj. t o I t ( , niade in rr>iltcct of tl~t.t r a ~ ~ s a c t i o n > . I t \\.:I\ admittctl that tllc~transaction.: \vi'ri. ~rla(lt, Ilon;~fitlo. I'Iit~ High ('oul-t set ;~sidi.tilt. a--c,i~nent, oil t l ~ t , I~:ti.-, t11;lt the. ~ ) r o ~ n i > c to ;):I;. t t ! ~adtnittc,d 11111\.allli> of the ,\llarc>i,Ijt.ing imnic.diatc,l\. crlforci.al,lt~, \va\ gooti consiilt2ration f11r ttic. tr :trisfcr of iliai-c-." ,. I l~txrrforrif a fatI11.r t r a ~ i > f e ~ ~ - > property to ~ncn~l,ei-h his famil!- to of c.~ial>le them to ma!;(: a c o i ~ t r i l ~ u t i ofr ~ o capital in the formation of a partnr.r.-hip and rect i\.e, from then1 :L ~)rornise 1 ~ ) thc full val~lt, to . of the 1)~01)ert\- tra~i.~fc~rred,liability to gift duty will ari.;t>.l; so 110 CL \ I l ~ c t h e rs t a l n ~ tdut?. will I ) c x attracted on the formation of a partnc.r.;hip d e l ) e ~ ~ d \ ulwn ivhetfler an instrurnc.nt in writing is rccluiretl t o tr;~n.;fcr acsetb from one partner to tllc otl1t3r.; or to 1)1xchasi-assctz from ;I thir(1 ti;irt\.. Arl in-trun~c,nti l l \vr-iti~ig i> rc.ckuirctl to tra~i\fcir c ~ i prc)pcltt!-, but it is not nt,ct3+ar>,to transfer l c'llrrttc~l\. I r i 5 ~ ) 1 i i , . >~ ; I I , > - oi ;\u.;tr-alia it is t l ~ r r t ~ f u rposiiblc to ? c rt.cili~.t.irarnjl clut!. I)!- a \vi-ittcn conveyance. of t l ~ c rcal property it11e1 ;UI o1.;11 itgrcc>rn~nt transfer chattt~ls hut in (2ueensland ;I to : ~lro\,i,oto .. 1!) t l ~ t 'tanll) Acts pror.itlt:> that ;I conx.c!.ance 01. ctf , tr;lil.f~ r of :in\. i)1-ol)t'rt>-!la11 tol- the pllr[u+?. of thcb.let 1)c tlett~llc,tl to c.oii~ltri-e lil.:. toc!; ;~11tl otlicr ~ n o \ - ; ~ lc~ l c 11i~ttc.li~i:.Iud('(i i l l tli~s t .-I. (1:)4;8 7 0 1'111 ' 7 1 :;rtllnt>e ( .I-. I<, .,.8 -5- li i l l ;111y t u n e t o ~.clea>c tile t i ~ , l ~5 1t1 illat t l i t , \ \ c ~ u l ~ l$ >i ! ~ j k c . i ! t3 t . ~ ~ l ~ ~ ~ - ;I e a l ~ l tlrllci.c3nt -et ol crrcilllln l r c111itcc , ! , c . < a i ~t l t ~r~t,lt!ase 01 a tielrt i. ~ ~ inclutlctl I I I t l ~ c t i c - i ~ n ~ t l o o if c l i s p ! ) - . ~ t ~ o ilt~ [II.o[)cs~!.a ~ ~niay tlrerrl~~rc. a g~It" i ( tl l)c pct i ~ , . t I ~ ~ ( r . jr , i ~ 1). .'>\. i'~ t 11 - i ~ o t i I t l ljc rc~111ii1~I;eii tlidt tltc I I . ~ of t l i i h ~ ~ i c t l i t ~Ic:l \ - re5i1lt 111 : I I ~ I I ~ iricrc.a~c~n tlit, totcti t a x pa!-ablr. i It tlre transtrros cl~esthree year> a l t e r tit? pronltie t o +)a!. I. nlatlt., and the promibr hai not I)e~>rl fulfillccl, tire c l i o i c ~ 111 a c t ~ o nc ' o i ~ ~ t ~ t u t f)!. l t h c 1)romiie n111 lt)rrii part of ! I ] > et ~-t;itct o s c!cath t i ~ ~ tparpc,\ei, ~\.herea- l ;I gitt rrc. matlc ant1 g ~ f t ! i ( l u t y paid, tile j ~ r o p e r t y ts:ii~sterrctl \ \ o u l t l not ;itttrr tl1rc.e year, I J ~ ~ n c l r ~ t l citn tlic t 1 c ~ ( . c 2 ; ~ ~ c ' ( r '~ t a t e . l 1~ t l ~ ei ! ) p ( ~ l I i i ~ l : I\(.:? i -!arlcc-- \ i c , i ~ l c i .ir-~.(-. 7(i The U~ziz~ersity Queensland Law Journal o f transaction, notwithstanding that tlte same arc. not inc1udt.d in tllc, instrument of conveyance or transfcr but pas.; upon or by delivt~r-v or 1)y or pursuant to another writing or instrument, or in any otltcr manner, and notwithstanding that the same are not a t the date of tlic execution of the instrument upon such pro pert^-.^ I t may be re~narked that this proviso will not include in a conveyance an oral agreement by a sole proprietor of a business that debts due to him shall form part of the partnership property. Thc formation of a partnership may also involve a crrtai11 Iial~ility income tax. S. 36 of the Income Tax Assessment . k t to ~~ro\'ides the inclusion in the assessable income of a taxpayer for of the valne of trading stock, standing or growing crops, crop-stools, or trees which ha\^ been planted and tended for the purposes of sale wlten they constitute or constituted the whole or part of the assets of a business which is or was carried 011 by the taxpayer, and urhere they ha\.? been disposed of otherwise than in the ordinarv course of carrying on that business. In Rose 7:. F.C.?'.a the High ('olirt held that 5. 36 was not applicable to tlit. transfer of an ~individcd fr;lctional interest in the assets di;jiosed of: it \vas "directed at thc disposal of the entirety of ownership in thc :<\icLts and not the, convt.r>ion of single ownership into col1ccti1-e owners h i l ~ " . ~ T l cxff(,ct of this dt,cision has, howel-er, been rerno~.~tl y tc l~ tht, rnactmr1nt of 5 . 3(iX, so that upon the formation or dissolution of a partnership, or a variation in the constitution of a partnership or in tht: interests of the partners, b. 36 applies as if the perhon or persons who owned the property before the change had. on the. day on which the change occurred, disposed of the whole of t h e property to the pcrsons by whom the ~ ~ r o p e r is owned after the ty change. S. S!)A also provide> in the same circumstances for the excess or deficiency in the real value of an asset upon which depreciation has been allowed to be brought into account in the a-certainment of the tasnlde income of the transferor. (b) Formntiol~ o a Comjany.-If f the execution of a 11-ritten instrument is necessary to transfer assets to a newly forlnecl conlpany, stamp duty will be charged as upon a conveg-ancc on bale. I t sl~ould remarked that where the device is employed of incor-pol-atbe ing both an operating or subsidiary company and a holding company,1° a simple means of avoiding the operation of the first proviso to s. 49 of the Stamp Acts is available. If the real propertv is 1-cbted in the Ilolding-company, and the remainder of the ayscth 7 . There is a departure in this proviso from the principle t h a t s t a m p d u t v is a charge upon instruments; t h e charge is clearly imposed upon the transaction. 8. (1951) 84 C'.I..H. 118. 9. 84 C.L.R. 124. 1 0 . The taxation advantanes oi t h e use of such a device are discussed later in this article. ~ - - i l l t h e opc~r;~tinq cornj>:tiiy, t1)c.i.i. arc. two cll~itc,c!i.tii~ct "trarl,\actions". ('on\.c\-;lncc. of the. prol)c i-t! \rill ~ i o inclucle ;in? li\x t htock and other mo\xh!t. chlrttc.l<, alitl tilcl~~glrt , ~ m pd u t y must hc p;~itl on ~ u c l ~ I-onveyai~cc~, may IN, a~oiciclc! .;o f,i:- ;I- thcl it tri~n.nction of \-?itin: tlic rno\.al>Ic pri)~)t>rtyl l tlltx ol)vr;lti~~g i coInpany is conce~~-nee! if thi. iy d o ~ 1)). t ,111 i1r;11;~,q.ccxnlc~nt. 'l.11(, ~ ~ lioldillg cornl'an\. ln;t\- t11c.n orall!. 1ea.t~ tl~c, - ( . : i l l)i-opci-t\- t11c. ~ to o])t,~-;iting c-r)ni~)x~i~.. 1rt8;iI \i:l~rrc. tiles ~ n i , ~ n l , o. ~ -~);;rtn~,r.hil, iE n con\,c)~-t into a cxlliri).tri\. it tranyfcrrir~gthe, ~~;irtnt.r.;llil> 1)rol)e'rty tc) t1. c'ol~ll);iIi\i l l coilI1 t -idc:ration of t!:c nIli>tment oi .l~:~rcz- tht3 c~oni!);ii~y i)!.oj)o!-tio~l of in t o ttl~.ir ro:,j'c~cti~-~~ intc1rc.t-, tllc tr;t!i>fer iriii i,ct c:h:~rgt,;il~!c' \\.it11 ern' i . n l r ~ r ~duty a, cun\,e!-nncci on sale, C , \ . ~ > I i h o ~ i g i ~ 11:irtncrh m I the kvho C O I I I T ~ C Y ~tl~fsj~~-ol)t,rtt.c t11(8 i11cIivic111:~l~ cc)~l.tit~it(~(l ;r \rl\o t h com~lan\-.~~ l~i\. ' T l i ~ tran>fcr of tlitx ; ~ . y c t y to tl~c.c0111;~;111\. 1nu.t of caul-5,. 1~ for an ;iclccluatc. conidrr,ction, ol- t1ic.i-(3\\.ill I>(, ,Lgift to t l ~ ico1ri1);111\.. . l-htx con.irlcration will ~lorm;illvt;il.:i% tlic. form of tllc. ;il!otrilc,~'tof -hares iir tht. cornp.nj.. T h e allotlnc>nt of -11ai-c.3fall.. \vitilii~ :[I<, tl(2finition of a diq)ositiori of propt3rty 111it1t.rhot11tlic>C'o1nlllo11w:alttl a11t1 Stat(. gift dut \ l<,gis!ation. Hcncc, an itllot~nr,nt of ;liarcx> \~.itl~out f11lly acle,luate con;ideration in nloi1c.y or mor~c\\.'i Ivorth ~'r~+ing frorn the allotl-txc t o t l i ~ disponor coml)any :\.ill constitute a . qift. If, therefore, a o l e propl-ietor of a l > u i i n r ~ s \viy!~txb to rcorganise it as a company and t o ;id!nit rnt,~r~l)ers hi3 family of a.; iharrhulclers, gift duty \\,ill 11e a t t r a c t t d , cit11f.r if he tranhfcarh thl; 1x-oj)erty t o the company for an inxdi~il~lntc~ coi~sider,~tioii if orthe- company allots sliarcs to rnrmlwrs of thi, fxmiiy iron^ wiiorn it h,~.;recci\,erl an in:idecluat<, con-idt~ration.'~ Thcre arcx .;e\.c,~-al way. o11t of this clificlllt~.. The ,\implv>t i. for thtl >ole propi-ietol- t o trar~sfrrthc a55ct- to thy cornpan!. for full \-;,lrlc:, thc co1i;itlc,!-atior1 rc~ct~i\.cd him I)oin:. lcft as a dt,l>t dutt Ily to him from k11t. C O I T I ~ ) ; I I ~ ~;I~.;LII~v . tlli~tthe \.;~luc. tilt. :~sic,ts of ,o transferred i:, cJ.'O,OOO, anc1 t h a t tlit company rc.cl~~ircls 00 \rorliiiig (1 c;~l~ital, which it I)rol,obtx; t o r;~iit'1,y tile i.;.;uc. of one hui~tlri~tl ollr. pound -;hare*. l'i:~, -h:rrcs arc, ~ ~ u ! - c h , l s tt~tl~c'irnomiir;~l\.:~IIIc. I)!. a ~l tlic memilers of the. famil!-. 'fi~itbalailcc~ihc:,t of the ci)~n;~:trri. IxzEorc it comrn1.nc:i.. ui)c~ratio;~y stztntl ;ts foilou,-: wi!l 11. , / o h t ~ 1--(1.~t?v (5. ,hal.~,:rllottc,l to then? \\-as in tact made in 1!)3(i; but the ('c~tnmissioner i ~ u i , lnot c , ulltll reach t h i ~ yincc t h e (;iit Ilntv \ssessment .let \\a, not e~~ncte(l 1'311. l l u l i i ~ z c~~I ~> C ? (4X Y Z Co. Z>ty. Lid. . / L Iaial)iliticts ;Isacts 1':tid up (a1)ital .. &I00 Buildings, Plant, etc. A10,000 ( rc,clito~- t I ;in,tc~~-o! . . ( ) 20.000 Cash . . .. .. 100 In t l ~ t ~ cli-i,1nnstanccs it is submitted tlicit tllere will be no si~ gift fr-orn t h t ~tra1lsfcror t o the company, since the transfer was for fully adc.cluatc5 consideration, nor from the company t o the allottet.5, since, tlrc. full valu(\ of tile sllares a t the time of allotment is the clificrcncc I)cltween the value of the assets transferred and the debt d u r t o the transfvror, and this has bee11 provided in cash by the allot t c c ~ . ' ~ 1 Ilc fornlation of a comp;ln>- may involve the transfero~. in incolnc, t;is liability Lq. virtue of ss. 36 and 50 of the Income 'Tas ,\bscssmelit Act in respect of disposals of trading stock and a d j u ~ t nlcxnts in the depreciable value of plant. 7 . (c) Ir~,%lzt l'trrtilrv.: uliti Shareholders.-,L\n infant may hc, a p;irtner or a sharciholtler. ! and unnlar;.ic.d, t1.c ( ' ~ ) n ~ n ~ i i , i iIII:I\i ~i>~ - ~ tilt, t!.ubtee to l~a!. i~icon~c,x , 1111dei)~ r ~ s s ta tl~i-. bc,ctio~i~ t l ~ i t ! ~i.-tt%< 1~ lii~11l~~ ~ : L Jt11c t a x so ;~sses.,t~l. i,112 > s!~:~li to , ( 2 ) '1'11(, alllorlilt of thts t ; ~ s payable in l ) u r ~ u a n cof this scctioi~ t~ sliall I l i . t11~. :inlorint I)!- wllicii the tax actually 1)ayable on his own I t \\.ill iw oi1-t.r\.(.:1 t!l,tt ti!i, -c.:.tii,~i: l I i l ) \ i t , - t o , ~ I - L I , ~ , i!i !,I\IJLII' ~ ) i 1!111n~i1~rit~(I lnino!-- o ~ i l j -f t \ \ o c o i ~ ( l r t i o :i!.,,~ ~ t ~ i l i l l c ~ ~ I!,, ti~-,t i ~i I l. c ~ ~ ~ ~ c i i r iti1:it tli, , I , ~ : ~ O I . rr-111-t , L ] L I I . , , ! I I of t l l ~1,, 1 1 i I i \ 01 I , \ I ~ t~ i(~! I i, o n ' in ( l ~ l r ~ t i o r i : . c ~ o ~ i l l tIl:- a\ oitl tl~c, to cq)v: iitior~of t l i i ~>cctioi~ a~-ranping t11~. , 1,y fortrllit to bc crt,,ctcd I)\. -c~rnc.oni> other tlia11 tile, par-cxts of tlie int~nc!td I~eneiii.i,ir-ic>.~~ I t i-. hul~mitted that thc iuitial trust fmid m:lh \ub.;rc]~ic,ntl\. IIY incrc,;lbed by contrihntio~~.; frorn the parent. \vittlout attrai.ting tllca olwration of G. 102, ~~rovi(1ed t1:c. trustc'c (wllo In;l!- I x a ~x;\rc~nt) that n i h ot~!i,ecd o liolcl theit, contri1)utioil~ t up or^ c r ; ~ c t l y h r . ;L ~ I It~ ' ~ s t - . t a-. ;ippIy t o the initial fnnd. 1 1 1 ~ 8 . Hoii/,s 7.. E;.C.7'.1S ill~lstratv:: Ilo\v tl~c, -;c~.oi;ti condition in;lv 1-i1, cli,fcatcd. .A iettlol- directerl t r ~ ~ s t c to lioltl c,crt:tin .il~ar-!-ri upon t r i l ~ tfor 11c.r infant child sul~jcctt o and upon his attaini~lg tlic. age, of t\verlty-ii\~i.year:: or marrying under that q c . l'ower n - : i ~ xiveil t o thr: trnstt'cs in the meantirnc to pay or appl!- the ~vhclleor part of the incornr for the maintenance and advarlcc>nlent of thc c~liiltl ;I, tt1c.y ir, their alxo111te discretion >ho~ild think fit, ailtl thc trastcc. \j-crc, directed t o accumulate all irlcolnr dcri\-etl from the corpus of the tru\t '.tat? or so much thcreof a< \Vai not applied for thi. pur~xjwhexprc.;scd. In tlie >-ear of income, income \?-as receivcd by tile trustcei which wa-. not applied for the infant's bencfit but zcci~mulated. Tile H i ~ hCourt lirld that 5 . 102 (1) (h) did not al)1)1~,. 'To fulfil the col~tiitioil "it must be ~~ossiljle >a)- of the irlcome that under tlw trust to it must in the !.Val- of ii~comehe pa!-able to or acc~iinulated for or applical,le for t11e cliiltl or ciiildrerl and to deal n-it11 it othcr\vi-ts i- not \ ~ i t l l i nt?rc>tru>t. T11e fact t11;it tlic, l~il(l!. i otil: conti:~gi.ently tritit1c~:i ~nal;c,-this i r n ~ ) o s ~ i l ~ l e " . ~ ~ ?ince p;lrcrit:, coiltemplati~ig formation of tile ship or company nouicl prol);thly bc willing or ;I t3\-cs~1 ansioil\ family 1)artric.rto 8( The lJi~i;~i~rsit>'( ) U E C I I S ~ L X Lax ,loirvilirl id I~~ make tht. i:esting of the cliild's interest contingent ul)on his attaining a certain age or marriage, and to give the trustees (who may be themselves) considerable discretion as to the application of the interim income, Hobbs' case shows how effect may be given to their wishes without entailing the high rate of tax imposed by the application of s. 102 (2). (a) 7 1 1 ~Operat ion o a f'nrtrzt'rship.--The taxation consideraf tions relcl-ant to tlic. formation of a business are, as we have seen, mainly concerned with the impact of gift and stamp duties. Once thy business has bcen formed, however, the incidence of income taxation and deatli duties becomes of primary concern. The principal advantage of the partnership form of enterprise from the viewpoint of income taxation is that tlie income t a s legislation accepts the principle of the common law that a partnesship is not a legal entity distinct from the persons who comp~-ise the partnership, and consequently income tax is not levied upon the partnership as sucll. Instead, the individual interest of a partner in the nct income of the partnership of the year of incon~e is inclucled in Ilis asiessahle income, and his individual interest in a partnership loss incurred in the year of income is an allowable deduction. To this principle there is one exception. S. 94 of the Income Tax Asxcssmrnt Act provid~s(ir1te.r alia) that where a partnership is bo constituted or controlltld, or its 0perations:are so conducted, that a n - partner Iias not the real and effective control and cli~posal of his sl~are the net income of the partnershil), tlie Co~nmissioner of ma\- assess the additional aniount of tax that would be payable if the share of that partner, or of all such partners if more than one, hail bc.l.11 recei\rt.d 1)y the part~!er who has the real and effectii.e control of that sl~arc,and had been added to and included in his asses>ablc inconlc, and the ~mrtnership shall be liable to the t a s so assessed. The effect of an assessment under this section woultl 11e to destroy the income tax advantages arising from spreading the aggregate inco~ntlfrom a business arnong a family group. Since ic will often 1r:~i)l.c~n that the sole proprietor wlio has rt.organised hi.; I~usincssas i l i):trtnership, 01- who Ins pro\-idc? the capital for it5 formation, will wish to 11;1~-(, degree of control over the partnera sIiip income, >. ! J 1 ~niglltstlcin to provide a lorinidable ol~:.tacleto tJ1u realisation 01' hi5 \visllr~s. Hotvcver, judicial interprctation of tliis section ha5 I - L X I I I O Vits~ sting. I n Kobevt Colds/vrn~rl ~ Pi~rfi~ership r. F.C.7'.li a partncrsl~ipagsecmcnt 11ctn.cen C', hi5 wife and l ' a x Plarz~zj~zg the F a m i l y B u s ~ ~ l e sz tst ()lieer~slar~d XI fov two daughters provided that C should have the sole management and control of the business; that the partners should be entitled to the net profits and bear the losses of the business in equal shares; that the three female partners should allow seventy per cent of their share of profits to be credited to capital account, and that they should not be entitled to draw upon their drawing accounts without the approval of C ; and that C should be entitlcd at an). time to sell or dispose of the partnership business upon such terms and conditions as he thought proper. A Boar-d of lievicw bad upheld an assessment of the partnership under s. 94. An appeal was allowed by Latham C. J. He agreed that the wife and daughters had "not the real and effective control and disposal" of their shares of the net income of the partnership, but he found it irnpossi1,le t o say that C had "the real and effective control" of their shares. C had merely a power of veto, a pourer to prevent other partners applying the money to their own purposes; before s. 94 could be invoked, it must appear that C had exclusive and complete control of the shares of his wife and daughters. Power to manage the partnership business could not be said to include power to control shares of income. Finally, the section referred to the control of-a share in the net income and therefore related to a partnership as a going concern; it had no reference to powers of control or disposal of partnership assets upon a dissolution of the partnership. ItIis clear, therefore, that a particular partner may reserve to himself the sole right to manage and sell the business, and a large measure of control over the disposition of the net profits, without subjecting the partnership itself to income tax liability. Since a partner's interest in the net income or loss of the partnership is included in his individual assessment, the partnership form of enterprise presents a considerable advantage over the company form when a business incurs a net loss. Company losses may be carried forward in accordance with s. 80 of the Income Tax Assessment Act, but since a company is a distinct legal entity from its shareholders, company losses may not be set off against income derived by the shareholders. This consideration is particularly important in the case of a newly established business or one liable to considerable fluctuations of fortune. I t is suggested that where a taxpayer has income from other sources, one should hesitate to advise him to form or reorganise his business as a company unless there is reasonable certainty that temporary trading losses will not be incurred. A further point in favour of the partnership form of organisation is that it permits advantage to be taken of the averaging provisions contained in Division 16 of the Income Tax Assessment Act. These provisions apply only to the income derived by a primary producer; but if a taxpayer carries on a business of primary productionla together with other businesses, the averaging provisions will apply to the whole of his taxable income.lg As against this, tile partnership form of organisation presents a considerable disadvantage in the case of a rapidly expanding business by reason of the application of the provisions of the Income Tax Assessment Act relating to Provisional Tax and C o n t r i b u t i ~ n . ~ ~ Since the tax is collected in the case of a partnership in advance of the assessment, the partners may find that the development of their business is being retarded by the withdrawal therefrom of funds t o meet the tax liability. I n the case of a company, however, the primary tax is payable only a t the date specified in the notice of assessment; and by virtue of s. 103 of the Income Tax Assessment Act, a private company attracts additional tax on the undistributed amount of its income only if it has failed to make a sufficient distribution within the prescribed period, which is a period of ten months after the end of the year of income. As we shall see, i t is a simple matter to postpone this period still further by forming a chain of private companies, and to avoid the additional tax altogether by floating a non-private company. (b) The 0;heration o a Company.--The basic feature of the f income tax legislation relating to companies is the division of companies into two categories, private and non-private. S. 105A of the Income Tax Assessment Act defines a private company by reference to six positive descriptions, one or more of which it must answer, and three negative descriptions, none of which must be r~pplicableto it. In a general way it may be said that a private company is one which is controlled by a small group of shareholders. I t is therefore the category into which most family companie5 would fall. The great advantage of incorporation as a private rather than as a non-private company lies in the fact that lower primary tax rates are applied to primary companies." As againqt this, a private 18. "I'r~maryPrutluction" is clefined in s, t i of t h e Income T a x Xssessnlent Act. 19. Tile a p p l ~ c a t i o nof t h e averaging provisions \\ill n o t always operate t o t h c taxpayer's a d \ antage. X primary producer m a y therefore rnake all elect~o~r under 5 . 1AX.A of t h e Income T a x Assessment Act t h a t l>ilrision lti shall nut apply t o him. Such a n election binds hirrr a s regards all subhcqucnt ycars of ir~comr. Ailternatlvel~-, where a taxpayer establishes t h a t tllcre has l)ec11 a permanent reduction of his t a x a l ~ i eincome to an a n l o u ~ i t\\.hicll 1e.a than t\\o-tliirtis of 111s a \ erage taxnl)le Incornc (i ' sltuatl~~rl \\lllcl~ ~ n ~ g l i t \\ell corlle at)out as a result ot tlrc taxpal-er lwinging in r n r n r ! ) c ~ ~ 11i.r t a l n r l a-, p a r t ~ l c r s ) ,t h e exixting a\.erage ot calculation I:. ; i l ~ a n t l o n ~ t :111tl t h r a\ eraglng pro\ ision. appl) t o his l, future incomr. a-. i t h e 11,111 I I ~ L Iieen a t a x p ; i \ c ~ ~I. I)efore t11:it year. 10. Sections 221 Y.1 -211 1.H. 1 1 . At tlie tlme o i \\.ritr~ig,t h e Iirlmary t a x 1s ti\-e sh~lling-:111 t h e pourncl 011 t h e first t i \ e tliousantl pountls of taxaljle lncomc, aritl sr\c>11 hl~illir~gs in t h e pound un t h c r c ~ i i a ~ u t l c r tlrc t;~xal)lri11co111cin tile cayc 01 ; I 01 p i \ ate co1111)a11) ; the c ~ ~ r r e s p o n d ~ n g Ilgurca for non-p1-r\ a t e c o r r ~ f ~ ~ ~ n i c \ arc >even ~ l i i l l i ~ l g s ~ t lelgilt sl~illings tlie po1111~1. ar in company which fails to make a sufficient distribution in relation to the year of income is liable to pay additional tax upon the undistributed amount a t the rate of ten shillings in the pound. Those who are concerned with the management of a prosperous and developing private company are therefor? faced with this dilemma: If they plough the profits of the business back into it, and thereby fail to make a sufficient distribution, the company n-ill be liable to ttie tieavy additional t a x ; if they distribute the profits to themselves by way of dividends, they will be taxed pcrsonallj~ tlicir reci4pts; oil and if they float the business as a non-private cornpail-, they will incur the danger of losing control of it, and in any casc the corporate earnings will be taxed a t a higher rate. An attempt to solve this dilemma by a forrr of dividend stripping fared disastrously: Newton v. F.C.T.22. But in the same case the Privy Council expressly approved the decision of the High Court in IV. P. Keighery Pty. Ltd. v . F.C.T.23, and it is through the device employed in that case that a solutiori to the problem may be found. The essential fact upon which the draftsman of that company's constitution seized was that the various descriptions contained in the definition of a private company were referable to its situation on the last day of the year of income. If the position on that day was that the issued shares were held by more than twenty persons, each of whom had only one vote, and that no shareholder had the means to govern the voting of another, the company would not fall within the definition of a private company. How, then, were the members of the family (a husband and wife) to retain control ? Something could be done by choosing the other shareholders carefully; but complete security was available by issuing to the shareholders other that the husband and wife redeemable preference shares, reserving to the husband and wife the power as directors of the company to redeem the preference shares on giving seven days' notice, except that no such redemption should be made between 24th June and 7th July in any year. In these circumstances, the Commissioner assessed the company as a private company, on the basis that on the 30th June in the year in question it was "capable of being controlled by not more than seven persons". [S. 105 (1) (f)]. The assessment was affirmed by Williams J., but an appeal to the Full Court succeeded. I n a joint judgment, Dixon C.J., Kitto and Taylor JJ. stated: "To describe a company as capable of being controlled by a person or group of persons is to attribute to that person or I . 4 . 5 . i n cxcellerit a c c o u ~ l tof this i~lrolvedcasc and the ~~s~r>c~ples cstal)liihed by it \r.~ll1)e found In Cl~alloner:.\rraxlgements ~ I I41-oiti Income T a x : .I ('nnsltleration o f t h r Effects o f Ne~vton's C'asc i l!tagi 32 .\.I>. J . 100. 23. (l!).ir() [1957] HCA 2; 100 C.L.R. 66. 22 gr011p a presently existing power of control. 'Capable of being controlled' in this context cannot be interpreted so widely as to be satisfied whenever a possibility of obtaining control over the company exists by reason of something in its constitution or its special circumstance^."^^ The first matter established by Keighevy's case is that it is possible for a small family group to retain firm control of a nonprivate company. But there is a further important matter settled by that case. The device of creating the non-private company was only part of the scheme. Mr. and Mrs. Keighery were interested in a private company called Aquila Steel Pty. Ltd., which had a substantial amount of profits available for distribution. To avoid payment of tax on the undistributed amount, they took steps to create the appellant company as a non-private company. The appellant company then purchased the shares held by the Keigherys in Aquila Steel Ptj.. Ltd., and the latter company declared dividends sufficient to relieve it of liability t o the additional tax. The result was that Aquila Steel Pty. Ltd. paid primary tax a t the rates applicable to a private company, but no undistributed profits tax, whilst W. P. Keighery Ptv. Ltd., the non-private appellant company paid no tax, since the whole of the taxable income derived by it resulted from the dividends declared by Aquila Steel Pty. Ltd., and hence was subject to a complete rebate under s. 46 of the Income Tax Assessment Act. An attempt by the Commissioner to invoke s. 260 of the Income Tax Assessment Act (the section which annihilated the scheme propounded in Newton's case) was rejected. The Act itself presented taxpayers with the choice of incorporation as a private or non-private company, and s. 260 could not be invoked to deny them the benefits arising from the exercise of such a choice. I t is thus possible to have the best of both worlds by operating the business under the form of a private company, and by creating a holding company modelled on W. P. Keighery Pty. Ltd. to which distributable profits may be tran~ferred.~S course, the necessity Of for a holding company only arises where the operating company is troubled by the need to make a sufficient distribution. A very small company which makes enough merely to pay the salaries of its employees (including the family shareholder employees) will derive no benefit from the formation of a holding company, except the stamp duty benefit mentioned earlier in this article (which may not equal the cost of incorporating the holding company). Where the business in question is relatively large, consideration 24. ( 1 ! ~ 5 8 ) 1 0 0 C . L . I I . , a t p . 8 6 . 25. See G u n n : I'rivate and Holding ('ol~ipanies (396303 81 Cllarterc:rl Accountant in Australia, p. 3. should be given to the advisability of creating a group of private companies, the shares of which are held by a non-private holding company. A group of companies has two advantages over a single First, since the primary tax rate on the first five company. thousand pounds of the taxable income is less than that on the remainder, the total tax payable will be reduced according as the income from each unit of the group approximates five thousand pounds. Secondly, the retention allowance will increase as the number of units is multiplied. Its major disadvantage (apart from the extra cost and labour involved in forming and operating a group of companies rather than one company) is that, since the various units arc: distinct legal entities, losses made by one unit may not be set off against gains made by others. L e have seen that a sole proprietor who is contemplating V converting his business into a partnership can retain a large measure of control without subjecting the partnership itself to income tax liability. X company will of course be taxed independently of any internal arrangements contained in its memorandum or articles of association about the rnatter of control. I t is clear, however, that Queensland company legislation presents no obstacle to drafting suitable clauses so as to ensure that the former sole proprietor retains control over the company's activities and dividend policy.26 Ll'e have further seen that the principal advantage of the partnership form of organisation is that the partnership itself will not generally attract tax, whilst a company will be assessed on its taxable income. I n the case of a relatively small business, however, it will often be possible for the entire net income to be disbursed in salary payments or other allowable deductions to the members of the family, with the result that the company itself will have no taxable income. LVhere this can be done, the income tax consequences of conducting the business as a partnership or as a company will be identical. The limits to this means of reducing the taxable income of a company are set by s. 109 of the Income Tax Assessment Act. "So much of a sum paid or credited by a private company to a person who is or has been a shareholder or director of the company or a relative of a shareholder or director, being, or purporting t o be(a) remuneration for services rendered by that person; or (b) an allowance, gratuity or compensation in consequence of the retirement of that person from an office or employment held by him in that company, or upon the termination of any such office or employment, 26. See Greenwood and Others: Shades of Sir U'. S. Gilbert: A few Special Points about Family Partnerships and Family Companies (1956) 26 The Chartered Accountant in Australia 243, 320. Xti Thc Uilk,ersity of' ()ueenslailrl L r ~ i lJour~zirl as exceeds an amount which, in the opinion of the C,ommissioner, is reasonable, shall not be an allowable deduction and sllall, for all purposes of this Act, be deemed to be a dividend paid by the company on the last day of the year of income of the company in which the sum is paid or credited". The total income tax liability invol\.ed in the two forms of carrying on business may be illustrated as follows:- Case 1:-:lssume that the net profits (apart from salary p a l n ~ e n t s )of a business are £4,000. If the business is run as a partnership in which a husband (H) and a wife (W) share profits equally, the total tax payable for the income tax ].ear ending 30th June, 1960, uill be l752. If it is conducted as a private company which reasonably pays L2,000 each by way of salary to H and W, the total tax payable will be the same. Case 2:-Assume that the net profits (apart from salary payments) of a business are ,E5,BOO. The total tax payable by the partners will now he £1,342. If the private company reasonably pays l2,000 each by way of salary to H and \.V and makes a sufficient distribution the total tax payable will be i1,340.27 Case 3:-A155ume that the net piofits (apart from salary payments) of a huiiness are l8,000. The total tax payable by the partner. will l)c _i:',302. On the assumptions set out above, the total tax payable ~f the private company form of enterpriw is adopted will Ir~c&2,331. Cuse 4:-.lssr~me that the net profits (apart iron1 salary payments) of a business are _il6,000. The total tax payable by the partners will be fJO,819. If two operating companies are formed, cach of which has a net profit of $3,000, out of which it reasonably pays LP,000 by way of salary to H and LV, and each of which makes a sufficient distrilmtion, the total tax payable will bc Lfi,053. If the sliarcs in the operating companies are held 11)- a holding company, to wliich the sufficient distribution is made, and which itsclf declares no dividends to its shareholders H and I\-,t h e total tax payable uill be only L3,G.i:'. The tax paiable by a sole proprietor in the four sltuatlons set out above would bc Ll,l!)Ci, _/2,031, ,E3,410, and L8,418 respectively. (c) The Ilfisely of Sole ProprietorslzzP.---The lot of a sole proprietor is ol~\.iouslynot a happj. one. In these days of highly progressive iiicomc taxation it is regarded by certain persons who have traditio:lally carried on tlieir profession in that manner as yea1 s a large nunibc~i. medical ~)ractitioncrs of intolerable. I n I-cxcerit 2'7. I'rix a t e con,pnn!. ( 1 )i\.isiot~i) tax 3 'fax payable 1)y H . ant1 \V on personal Inconle of A2,322 (@,000 salary p111si 3 2 2 dividt%nci) A-t!lO each. - in particular have formed companies to carry on their practices, and have arranged for the shares to be allotted to members of their farnily either directly or by the interposition of a lioldi~lg companv. There are considerable difficulties involved in the operation of such a scherne.'s In particular, if the medical practitioner fails to bring to the notice of the patient the fact that he is an employee of the medical company, the contract will be between thc patient and the medical practitioner, and the fees paid will be deemed by virtue of s. 19 of the Incorne Tax Assessment Act to be dcrived by the latter though credited to the company's account. A surer method which is apparently beginning to find favour with the medical profession, but \vhich can readily be applied in other proft,ssions, consists in the formation of an auxiliary service company. The sole proprietor car]-ies on his business or profession in the ordinar)- manner, but instead of employing nurses, typistes, secretaries etc. himself, the sole proprietor arranges for these services to be provided for him by a sen-ice company. The same colnpanv will often also own the property or practice a t which the business or profession 6 carried on, the sole proprietor taking a lease fro111 the company. The shal-es in the srrvice company are held by the members of the sole proprietor's family. Since the payments made to the service company are incurred in gaining or producing the assessable income of the sole proprietor, they are allowable deductions under s. 51 of the Income Tax Assessment Act. It is irrelevant that this manner of carrying on business may be more expensi1.e : "It is not suggested that it is the function of Income Tax Acts, or of those who administer them, to dictate to taxpayers in what business they shall engage or how to run their business profitably or economically. The Act must operate on the results of a taxpayer's activities as it finds them".29 It is submitted that only to the estent30 that it can be shown that the payments made bear no relation to the assessable income gained or produced will the Commissioner be free to disallow them. There are, in general, two methods by which one may diminish the value of one's estate so as to attract less estate duty or succession duty. One may either dispose of property inter aivos or take steps to reduce its value. I t is impossible in an article of this nature to 2h. Gibson: Income 'Tax ant1 ('onipanie~ formed by Medical Practitioners (1!45X) 32 :\.L.J. 144. 2!1. I'wcddk i.. F.C.7'. (1942) 7 .I.7'.1). 186 a t p. 190 (Williams 1.). discuss fully the death duty problems that arise to plague u person who is seriously devoted to the task of minimising his total tax liability. A few comments on these two methods must suffice. (a) Inter Vhos Dispositions o Propevty.-The great secret for f preserving the splendor jamiliae at the present day is a nice appreciation of one's expectation of life. S. 8 ( 4 ) (a) of the Estate Duty Assessment Act 1914-1950 includes in the notional estate of the deceased property which has passed from the deceascd person by any gift i~tterz~izlos or by a settlement made within three years before his decease. S. 4 of the Succession and Probate Duties Act of 1904 provides that every disposition of property made by any person less than two years before his death and purporting to operate as an immediate gift of the property inter vivos whether by way of transfer, delivery, declaration of trust, or othernisc, shall upon tlic death of the donor be deemed to confer a succession on the Voluntary dispositions of property will therefore be effective to avoid estate or succession duties only if made three years or two years respectively before death. A natural concern of anyone contemplating parting with his property in favour of other members of liis family will be to ensure that his own financial security is not imperilled. I t is apparently comrrlon in thc case of a family company for arrangen~entsto be made tvhcreb~.a father is appointed governing director for his life a t a certain salary, and in return the father transfers shares to the other members of the family. Such an arrangement is not advisable. In Ke Sfe~e~nrP2 fami!y agreement was made between S and his n children by which the remuneration of S as governing director of a private company was increased from one thousand pounds per annurn to three thousand fivc hundred poui~dsper annum for his life, and S settled shares in the company on trustees in trust for his children. Shand J. held that s. 9 of the Successio~~ Probate and Duties Act applied upon the death of S : "In my opinion, then, the yearly amount or yearly value of the benefit was k2,500, and not l3,500, and the succrssion in respect of which succession duty is pag.able bl. the testator's children (as the persons whom the determination of thc payment of f;2,500 a year must be taken to have conferred an increase of in beneficial i~itere$,t the settled shares) should he a sum of 30. S. 51 (i) of the lncome Tax .issessment Act "adopts a principle that \vill allo\v oi the dissection and even apportionment of losses and o u t goings. I t does this by providing for the deduction of losses and outgoings to the extent to which they are incurred 111 gaining or producing i the assessable income" ; H o n p l b o ~ iT n S . I . . 7,. F.C. 7'. (1919) 7 8 ('.1..1<. 47, at p. 5 5 . 31. Both Acts prrnide relief from double duty. Estate L)ut!- .4ssesiment .4ct s. 8 ( t i ) ; l'he Succehhion and I'robate I h ~ t i e s .ict of 1904, s. 1. 32. [1920] St. li. (Jd. 207. 1 . 1 l l io t I I i l S9 money of which the annual x-alue would be equal to L1,300 a year in p e r p e t ~ i t y . " ~ ~ I t 5eems clear also that s. 8 (4) (c) of the Estate Duty Aschsment Act would apply so as to include the settled share5 a i part of the notional estate of the deceased. X better arrangement would be that the father rcccive in exchange for a tra~isferof I ~ i sshares n a;~lnry1:ntil hc, artain specified age, and ;L lump sum upon llis rctirctnent. If one is minded to make an inter ~ i z l o sgift or settlcinent, consideration should hc g i \ - e ~ ~ the cluestion \vht.tilct the property to is lilcely to increase or decrease in value. The Estate Duty Assessment Act rcqui~t,sthat tlie valnc of the prol~ertycomprised in the estate hc ahscssed as at the date of death. I n a rccent decision, G ~ l e C. of T." the High Court held that the property :$. deemed t o be I ) a l l of tile e-tnte of .tl~ecleceased was t l ~ eactual ~xopw-tygiven and not property into wliicli it iiad been transferred prior to his death. 111 i o Ilolding, it o\.erruled three pre\.ious decisions of its own--7'rztslces En-ecz~tcr,~ t d .-1ge1:cy Co. Ltd. a. a F.C.7'. (Teare's I'icars v. C.S.D.36 and Aloss 7,. F.C.1'.3i, a n d applied Sncddoiz T. Lord . i d . i ~ o c i l t e . ~I t is now clear that what must ~ be x.alued as at tlie dctz of death i the asset disposed of by the deceased, even though it is no longer in the hands of the disponee. The property dibl)osccd of is to 1x3 treated ji~:;tas if it liad remained the ?)ioperty of tlie deceased until his death aiid had then passed a s pal t of his cstate. Sfleddoiz 7 1 . Lord Adzlocate illusti-ntcs how estate duty may be lessened in tlie liglit of the above principlcs. I n that case it was held that what passed as a gift i1ltC.r ?lii,os by way of a dcclalation of trust of L5,OOO to be investtd by the tru:;tees ill s!larc:, \i.hli:h at the date of the death of t;le settlo; we:e xvoi-tli f;R,350 n-ax the L5,OOO and not the t ~ u s tfllild. *4ccctrt!iiibiy, n~helet h r \ali:e of the sh:rres in thc family ccinipaiiy is like:)- t.v risc, it is piv!?rnble that the di:;ponor ~ ) ~ . o \ - i d e cad! with v~-i!iclithe disporiec-a iliay purcliase the shares rather than make a gift of the slial-es tlic~c.~t.lves. -4nother dcvicc u hich may be ernploled is for th(i diiponor t o trankfer share5 to thc dl,ponet\, and for the company subsccluently 33. . \ t p. 230. 'file term- o f i. cspreiil! Indicate tliat t h e a5ses.inient I > !j to l ~ e based upon t h e annual d u e u Ilia reserl-ed benefit, \ \ i t l l < ) i ~ t k regard to t h e nature 01 t h e ii~cceszor's interests in t h e property \\.l~ich 1t h e iubject of t h e tlispo~ltion. 'The mt%thoilby \\.hlch t h e azehhlnent 1s to I)e made onct: tlie annual \ . d u e 12 (letermineti i-; not prescrilwtl by tlie .4ct. The .;olutioii at1ol)teti in Ir'i' .';trrt' I I C C I ~ held in P:ngland t l l ; ~ proper-ty t 5(>11;11-;~tt~l nltl1011~11 dcri\,otl from t h c ~ i f tsuch as 511bsequt.1it illc.ornc., 01. I)onii~ sllarcs, is c~scludeclfrom tlic ~iotionalestate.'" 'l'lrc, ri,sult is t l ~ a t111~.propcrt! co~nl)riseci tllc cistate will be t11~. in . . O I I ~ I I I ;.Ilal.c..s gi\.,,ii, h u t their- \.aliic. will he climinislicd by tllr ~ ~ isinc. (I! t11(, I~onu>ili:~~.t,s. Otliel- applicatiorls of the principle c~st;~l)lis!r~,tlS ~ ~ ~ ~ t l t case ' can rt%adilybr c~ii~-isagr~l. in ioi! ~ ;Iccordirlg t o \\-lic,;lll~l-oft. l o i.isue I~onuh ~II;LI-(\.:'!' t I "'l'ii- htatc. 01 tlic~I;x\v ~,nal,lt,sa don,or to as,ist his dorlec to ;~\.oicl(obtate) dut! !.I, clloc3iing as tllr mctlium of his gift a t~ I), (11 l)ri)pc~-t>. \vl~icli~ v i l l1111ickIj.di5:1p1)~>:11-, climinish in or \-,l111t> i ~ such ,I n a y that tllc, done(% i rectivcs i!ic. t~clui~-alent of lii-. 1o>h in s.~nlt. noli-riutiablc iurm. This 'di.;a~)~~caril;g trick'. ;I-.it i- c.allcd, c-:lri i ~ c a pcrforrl~cd with a mortgage, or 1'rras~!i-!I~il!,.eon t o bc. rcl?nid, a ~ in Inany 0 t h ~ : \ v a ~ . s " . " ~ d 5. 1 of the Succcssior~ and Probate 1)utic.s of 190-1- li!ic\\.iie rc.cl11irt.h the 1-er!- assct clisposed of bj- the (lollor t o IIC l ) r o ~ i g l into accourit up011 the donor's death. S. 1is ~t clohc.lv 11iolic~lled 5. 2 (1) (c) of the (Eriglisli) Fi~larlce.Act 1894, on t l l c . I,yi4;ltio11 i!ri!it,lc(\ii~i(.iorationin Sncc!don'h case. 5 . 12 of t l i c . S~~c~~-c>?*ioii :111(1 I'rol~atc I)t~tiesAct l)rc-cril)r> that tlic dutie, r : ~ 11;:itliri rc'.;l)vct of c.1-cr\-surcc~.;iiori a 7 . c . to 1)c ~rccortlingto tllc I)(. \;Lluo tlic.i.c.of a t tlicx tirnr \r,lic.n the s ~ c c e ~ s i o n takes cl!c.cl. In PC (;o,~gu'Vt \v;ri l~clcl i ~ a t r tllc value \\.as t o t)c ta1;t.n ;?t t h c t i ~ n c whvn I I I ( , s.!,ic~c,c'c>c~r.: I~c~carnc~ first t rititlctl to ti,? xctual enjc!>rur-l?tof tlir l:,i\iic-ht colif(~~.rtd tllc, -ilcce3sion, since a succe:;,ioii tiikcs efftlct 1))\\.lic.ri tt,c >tkccc'shui cori~t~s into posscssio~ior enjo>.nrcrlt of it. I n tlit. c.aw of all i~iilnediatt~ gitt, the, s;iccc.sso~--done? ~r.ill br in ~)obst.x,iunor t,lijo\-nlc~it : ~ f tlir- property a t the time \\.hen the :.ucc.c~siiol~ dct>incd to 11c confc~red,narncly upon the death of is tliti donor, and tlic lroperty will be \-alucd for succesliion d u t y ~nir~~oic's a t that tirnc.. I t is >ubmittc.tl that .\rt (I)) Keduci,!,g the 17aluc o Pvopc~fj~.--Oneof the outstanding f ta?i ad\.antage.- of carrying on husirics:, i:i t!le closely controlled c o ~ - p ) r ; ~form i i tllc capacity it affol.dsto ;I sli;ir(,li~ldi~r diminish t(: to l I ~ ' ~ , . ~ l ' l t . , i 1 1 l t ( 1 1 { l r o l ~ t \arking T I - ~ I t i~l t . re\ a l u a t ~ ~o i l ia>-rt- 110t ~ lc ac~]i~:rc'clo r t i l t , ljurpohe ot rciale a t a pror1t. See [ n c t ~ l ~ 'l'as \,he..l I I . . 44 ( \ I ( I . l\'hel-e L)oni17 hIiart3. arc i.-ucci t(, I I , ? I ? l i i ~ l i l t ~ ~111 pri~j~ortl,~llt1ic1:- \ I I : I ~ ~ ~ I I O I ~ I I I I ~ti)? \ : L ~ L I Y 01 -\ to . 111'1s 111tt,r?>t> \ \ i l l n o t Ile aktt.ctc i to t ~ i ~ 1 1 1t a i l 1 a r i w lr a ~ 4 0 . . I .-(;. ,,. O I f L / t u t t ~ [!I40 2 [<.l;. 48.7. 41 ' l ' n x a t ~ ~ n ( ; ~ t t - . ant1 5ettIcrnelit>, at 1111. 4$l-;'O. '1'11~pa-%ige ha. 1 1 ~ c o ot t~-;ll~icr~l!c-cl t i ~ cl ) r t % ~ e ltle n s ? , t l ~ ce~~actnit.nt ~ t tllcX I.'l~la~ici> III t c \ct I ! l . i i cr,t~ll)elltvl\ \ l ~ ~ ; ~ t c r r )to n r l t e i t In thc past tt3l\\e. IJrotehhor !t 1;1,r-11 c1,111l)t\ \ \ I I ~ L I I V S t11v " d ~ h a ~ ~ p e a r i ~ ~ g \ \ i l l \ \ i ? r i < h r ~ c c t ~ > ~ f l ~ I l > ~ t11c1;" 11t.r-t3. See 1 1 1 ~ a r t ~ c l c"L.eilcral IA:\t;rtcI)i~t!\ n l u n r i o n ot (Gift-; i ~ l t c r \ l \ o > ' ' (l!Ni0134 .\.I.,],I:st in lc ill the property of the cornpang which he could forfc,it or alxindon. .. I he moneys to which his sons became entitlvd \vt.re tlle proprrty ot the colnpany and not property in or over \vllich hc. had a t an!- time ;L legal or ecluitahlc interest or po\vcr. ICut 1Yilliams J. \\?as: of I~ opinion that p:~ragrapli ( f ) ~ p p l i e d . ~n this he was overruled by the fell High ('ourt. I t agreed with IVilliams J . t h a t G had the intent specified in that paragraph, but tlenicd that any "transaction" k::rd 1)een "cntcrcd into". \Yhen a shareholder m:il;c3s "1) his ~ n i n d ~ o t cin a particular way and casts his 1-ote accordingly, to . lic earlnot hc saicl to be entering iiit o ;L tra~isactioi;. ; tr;~n-actioil i 1)y a ijerson nus st Iv a tra1is:iction with some othcr pt3rscjil. Hcre thrxrc \\.;is no transaction u i t h any p c r ~ o n . ~ ~ l'lltl intentional diminution of the \~aiL,~ olic'h propt,iij. ~ v i t h oi tht. coiist~luential illcrrlasc jn thc ~-;i111c rlir j > r o p r t \ . of otlicrs will of ti~crcioi-enot amount to a gift ~ n l c h s results froin a tramsi~ction it entered into between thc donor and done? ;A"nnd iinlers a coiri~~an\. acts as agent or trustcc for a shareliolder, iis acts are not tllo-;c of a n y shareholder, el-en of one who holds ;ill t1:c. I t i b tliuh possiljlc for a controlling sl~areholdert o 1.otc in favour of in<-r(x:i~ii~g 13. (l!J1!1) 78 ('.l'.l<. l!l!f. o 1nc111ilc>:( f ) an!. t i - , i ~ l ~ . i c t i o n ciitert~ili n + ( .!)). an!11. I)i.p,~;lt~ctn f p~~pert!pei-.c)n \tit11 i n t e n t thri-eb!. tc) t l i n ~ l ~ i ~ s l ? , tltl-i:ctl~.or ~~lcl~rectl!., \.al!!c3 111. 01 o \ \ n propert!- an11 to inci-ea,e the \ ; i l r ~ eo t tiic 1)ro]?e1-1! 01 a n \ t i . C;~ftI)lit!- .Assessment .\ct, . 1 . 45. l'er 12atham ( ' . J . ant1 \Yebt) J . , at p. 1 2 0 . , Ili. For a n ~ n - t a l l c e\\lie]-e paragraph ( f ) \ \ a s pl-i~pc.sl\ i l ~ l ) i r c vi e e l i i ~ i t s,'. ~ l, f . . . C . . 7 , i l ! l > 3 ) 1 0 .-l.T.1). 26Ij ( I i i t t o 47. . l l ( ~ c ~ ~ ? ,. ~ \(' < I I / / , ~ Y I ~ - l j i z f ~ < ocf ['f,. /.td. 1 !J2> I.( . l i l ! ) , : ~ 1 3 . (233. f . < t 1.). tllo ~ . ; l t l . of dividentl upon the class of sl1nrc.5 Irc.ld 1 ) ~ .the other sl~;t~-choltl(~r-sof 1x1-ying in o t t l c ~wag.s the. lights of dift'crent or CI;LS~(Y ~f : I ~ ; t ~ c h o l d [tiitli the intcnt of reducii~gtllc \.aluc of his ~b s11n1.c.switllout attracting ariy gift d u t ~ . . :\ri cx\-c.nmore fc\~-midable weapon i11 tlic armourg- of the t a x p1;tnucr is provided 115. the decisio~lof tlre High Court in Robertson . f 4 T h t itrticles of a.ssociation of AIacIiobertson P ~ J . Ltd. . prx)\.itl(~tlt11;it uiwn tllt. dtlath of MacPlicrson liol~ertson, tlie go\.~,rr~illg director of tlie company, the whole of the issued shares of thc conljxmy, whicli were l~reviouslyundiffc.;cntiated, would be di1.idc.d into S o . 1 class shares and Ko. 2 class shares. Shares standing in the share I-cgister in t1:c. name of the clect.ascd became S o . 2 c1:~ss sharcs, and all other share. became Ko. 1 class slrarcs. l'ilc.ilccfortli the rights attachrti to S o . 2 class sliares, with respect l ~ o t to tli\.iilend and to winding-up, n-cre much l i : ~ l~ advantageous tllan tlrost. :~ttached to Ko. 1 clas:; shares. This article produced ihc. i-c.-lilt that t h r shares licld by the deceascd deprecizted greatly in \ ; ~ l i i ( ul>unhis dcath. Tllc inclusion of thi. article precluded tlie , listinx of tllc c o ~ n p a n ~ sharcs by the Stock Exchange of 3Iell1ourne ,'s during tlic, decc,astd's lifetime, but not after his death. I n valuing tht. at~asc.-\vliich formcd palt of the estat? of t!le deceased, the ('o1nmissiorlc.r made an assessnrcnt on the I~asis that Iic was c.iltitlecl 1jy ~ i r t u c s. 16.4 of tlie Estate L)LI~J. of Assessment ;let t o strike out the articles wllicll pi-(11-cntcd listing on thc Stock Exchange,, or ;~ltcv-;~ati~.ely s. 8 (1) of thc sarne . k t \v;L.; applicable. that (c) ;\.$ tu TI:<' Higli (:ourt r;lloui.d a n a p ~ ~ c n l against t l c asse.;slnent. .\. 8 ((4 (4,\Villi;tms J . stated:"The relevant bencfici:tl interest in proprrtj- ~:hicllthe deceased had a t the time of his death was the beneficial interest in the shares he then owned in the company. Article 6 operated upoii his death to makc. these shares Icsh \.aluahle and tlic shares on ned bj- other sllareholders mor c valua1,le. I3ut thi: circunlstance is not sufficient to satisfy the pro\-isions of para. (e). To hatisfy thesc pro\-isions, tile beneficial interest ill the shares o\vned by thc. [leeeased must, h ~ virrucl of sornc settlement or agreemerit made bj. him, tial-e pas>ed or accrued or de~.ol\.cdon or- after his tlcct,are to or upoll solnc 0thc.r person. Thc huljjert property in tlltl prcsent case is the shares ~vhiclitlic cieccased owned a t his c!cath. l l ~ e b e sharcs forniccl ~ l n l of his estate3alter t his death. S o part of the bcntsficial interest in tlitese sharcs passeed or accrued or devolvecl on or after hi. death t o anv other person. '1'lwy simply became sharcs of Ics.; value tllan thcy were 1)cfore. S o oric accluircd any I,enetici:tl intcrc,st in them except as part of his estate. The S o . 1 shares increased in \-alue b u t they were not the shares of thc dcccased. They were not his propert!. a t the date of his death. He had no beneficial interest in them. ('onsequentlj. no beiicficial interf,:t in these share> conltl pass or accrue or devolve on or after his death to or upon any other person. He was not in a position to makr a settlement or agreement about tllrm because thc.!. \vere not his to svtrlt~or agree about".49 S. 16-4 had no application, because the estatc had to I)c \raluc>d upon the hypothesis that thrl deceased had died, ant1 it was i~lr.ol\~cd in that hypothesis that the article no longer preciudctl listir~g. l'hc shares which fornletl part of the deceased's ?state n e r c s11arr.s in a company which then conformed t o the Stock Esch;tnge rtbcluirements, and consecluc.ntly there was no necessity to apply S. l(iX."" The questioil of the liability to succession d u t ~ of thosc whose . >hares ha1.e increased in value as the result of thc operation of the articles of association upon the death of a shareholt1t.r has rvcently been raised before the, Snprcme Court of Qutenslirntl. Tht, decision has not yct been dclivtred. Those tvho 11avt. conducted their business iii the form of a partnership hav? in gcncral much less scope for avoiding death duties 13. reducing thc value of their interest>. But Thomus' c u s e j l is now a source of considerable comfort to them. .I partnership agreement provided that upon the death of a n partner five of the surviving partners were to have the option of purchasing the share of the deceased in the assets: but that, in computing the purchase money payable on the exercise of those options, no sum should be taken into account for goodwill. Upon Thomas' death, the five surviving partners exercised their options. The question which arose was whether the share of the deceased in the goodwill, valued a t f20,000, formed part of his dutiable estate under tlir Estate Duty .\ssessment . k t . The Commissioner, relying on the decision of t h e majority of the High Court in ;\IilneJs cases2 added iP0,000 t o the value of the deceased's interest in the partnership. Upon appeal, the High Court refused to reconsider the correctness of the decision in Milne's case53. A further appeal to the Privy Lordships held that the entire Council was s u c c e s s f u l . ~ ~ h e i r interest of the deceawd partner in the assets of the partnerships including goodwill v t . t ~ d in the executors on hi> death. I t was thus assessable to d u t y as being personal property of the deceased within s. 8 (3) (b) of the Act; and since sub-secs. (3) and (4) of s. 8 I t p. 478. -50. Per Kitto J., at pp. 486-7. . i l . Perpetlral Exccutot; .old 7'rirrtrrs .-lssoriutioi2 Lld. 7,. F . C . 7 ' . ;1!45fi \.I..R. 1. 52. T r z ~ s t r r sExecutorr u ~ r d.4ct,ilc~' Co. L t d . 7'. F . C . T . (1944) 69 C.L.R. 2'70. .i3. (1!349) 7 ; (:.L.H. 493. 34. [I9541 -4.C. 114. 40. ~ ( ~mutually exclusive l)ro\~isionh, could not I)t, asscssabl(~ r c ~ it under . S ( 4 ) ( ) The cluestion of the valuch of the deceased's s l ~ a r e in tllcs ~)iu-tncrship, including the goodwill, was referred back t o the High ('ourt. Upon the reference, the High Court held (McTiernan .I. dissenting) that sincr it was certain that the options would be t,scrciscd, the value of the interest at the date of death could not oscecd thc purchase price obtainable from the surviving partners. It will be observed that the basis of this decision is the con(-cption that sub-secs. (3) and (4) of s. 8 are mutually exclusive. 'I'f~e authority for this view consisted primarily of a dictum of Lord Macnaghten in Earl Cotc'ley u . I.R.C.j5 which was repeated by I.ord Haldane in A f t . Geil. MilneS6. But in Public Trustee v . /.K.C.5i this view was decisively rejected by the House of Lords.ja It therefore becomes necessary to consider the applicability of s. 8 (4) ( e ) . 5 V o w c v e r , the Privy Council did express "grave doubt" whether considering only the language of s. 8 (4) (e) the respondent could bring the facts of Thomas' Case within it. z. j I t wolild seem from Robertso~tand Others 1). C.S.D."g that the ol)tion given to thc surviving partners to purchase the share of a partner upon his death at a reduced value i.i not regarded as conferring a succession upon them under s. 4 of the Succession and T'robntt. Duties Act. K. it'. R ~ . i s * lS$Jser.rratlons so patentl!. \!song ( m a y I lje forgiveri tor >a\-ing sol t h a t .is. thr>- leave only a sense oi wonderment . . . ---flatly c ~ ~ n t r a d l c t e d 1924 in 11y I.ord Haldane \ \ h o in 1914 had adopted them t ! ! ' .oclrcc o f endless tloutrt a n d c~rnfusiont o all \\.h(j have been cor?cerned i r i t h e exatillnation or ;~ctniinistratlonof this 11ranch of the la\\ - - a l l the.;e factor.; lead nle to tlie concltrsion t h a t I can properly invite >.o~iiI.nrdstiij).; t o ?a)- t h a t (thc two sections) are not mutualiv exclusi\ c ' . per \'iicoi~nt Siniontfs, at 11. 213. .-)!I. S . S (4) ( e )in( luties 111 tlie tleceaspd'; estate proper t! . . . lrfi~ig bericlicial a intrrest in propert!. whicll t h e deceahed person had a t t h e t ~ m e hi> of tieccase, \vhicll l~eneficialinterest, by \,irtue i ) L a settlement or agret3n1ent niatle bv him. rjassed or accrued on or aftri- 111.; death to. 11s de\-~rlved on or aiter hls decea3e upon, a n \ crttier pc2r>i,n IiU. ' 1958' Qd. R . 342. * B . A . , LL.B. (Qld.), 1'h.l). (Cantab.), Harrt-ter-at-lrr\\. Senior 1.ectnrer in I-a\\ i n t h e University of queenzland. .)<). -- .I I . -- 1 , L