Judicial Legislation and the Rationalisation of Section 260 of the Income Tax Assessment Act 1936
| Date | 01 September 1977 |
| DOI | 10.1177/0067205X7700800303 |
| Published date | 01 September 1977 |
| Author | Razeen Sappideen |
| Subject Matter | Article |
JUDICIAL LEGISLATION AND
THE
RATIONALISATIO'N
OF
SECTION 260
OF
THE
INCOME
TAX
ASSESSMENT ACT 1936
By
RAZEEN
SAPPIDEEN*
Section 260
is
ageneral anti-avoidance provision found. in the
Income Tax Assessment
Act
1936. Together with sections 25(1)
and 51(1), it
is
one
of
the
most
important sections
of
the
Act.
To
the
"tax
planner" section
260
spells anathema: to the Revenue it
is
an invaluable aid to prevent tax avoidance and preserve tax
equity. Judges have tended
to
differ in their attitudes towards
section 260. This article examines the treatment
of
the section in
the hands
of
the judiciary, its interpretation and misinterpretation.
In
addition, the article seeks
to
highlight asignificant point,
namely, that the alternative to ageneral anti-avoidance provision
is
anti-avoidance legislation
of
aspecific nature which would add
tremendous complexity
to
an already complex
Act.
The plea
therefore
is
that the judiciary should re-assess the situation they
have helped bring about before it
is
too late, and that judicial
common
sense be substituted for the growing complexity
of
the
Income Tax Assessment
Act.
It
is
perhaps inevitable in an acquisitive society that taxation
is
regarded as aburden from which those who are subject to it will
seek to escape by any lawful means that may be found. This is
generally called tax avoidance and it
is
successful if by reason of
what
is
done what
is
potentially taxable
is
put outside the effective
operation of the revenue laws. Furthermore, in the absence of a
special law agenuine transaction does not lose its legal effect
because it was carried out to avoid, limit
or
postpone tax.
It
is
the
recognition of this that accounts for the legislature casting its net
wide to frustrate the attempts of those confronted with tax
liabilities to get round the law.
per Menzies J. in Peate
v.
Federal Commissioner
of
Taxation.!
Section 260 of the Income
Tax
Assessment Act 1936
(Cth)
needs
no introduction to persons familiar with Australian income tax legis-
lation. The section
is
ageneral anti-avoidance provision seeking to
prevent tax avoidance
as
distinct from tax evasion.
Tax
avoidance
unlike evasion
is
prima facie legal and as indicated in the extract
quoted above, does not lose its legal effect except by special provision.
Section 260
is
such aspecial provision. Not surprisingly, the section has
not been looked upon with favour, particularly by the judiciary. The
section has therefore had achequered history and this article
is
concerned with its vicissitudes. The section provides:
*LL.B. (Ceyl.), LL.M. (Penn.), LL.M. (Syd.); Lecturer, Law School, University
of
New South Wales.
1(1964)
111
C.L.R. 443, 445.
319
320 Federal
Law
Review
[VOLUME
8
260. Every contract, agreement,
or
arrangement made
or
entered
into, orally
or
in writing, whether before
or
after
the commence-
ment
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 absoiutely 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.
This section has two aspects: the first dealing with the scope of the
section, and the second dealing with the consequences
of
the
application
of
the section. As the section reads, it would apply to
"arrangements",2 having as their purpose
or
effect, the altering, reliev-
ing, evading
or
avoiding
of
income tax,
and
to arrangements which
prevent the operation
of
the Assessment Act.
The
section requires the
initial determination
of
whether there
is
an
arrangement having the
purpose
or
effect contemplated by the section.
If
such
an
arrangement
is found, the section declares it to be absolutely void as against the
Commissioner
of
Taxation.
,"Arrangements" having the "purpose or effect"
In
Newton
v.
Federal Commissioner
0/
TaxationS the Privy Council
said
that
the word
"arrangement"
as used in this section
meant
something less
than
abinding contract
or
agreement, something
in the
nature
of
an
understanding between two
or
more
persons-
aplan arranged between them which may
not
be enforceable
at
law.4
The
'word "purpose" as used in the section could be
taken
to
mean
the taxpayer's purpose. However, used together with the words
"or
effect", the section could be said to have been intended to apply
to
arrangements resulting in the avoidance
of
tax
regardless
of
whether
the avoidance had been intended by the taxpayer. This
latter
view has
the
result
that
where two persons
enter
into different
but
identical
.transactions,
one
having as its purpose the avoidance
of
tax, the
other
having no such purpose,
the tax
consequences would still be the same
2The courts have accepted the use of the word "arrangement" as acompendious
reference to the phrase "contract, agreement
or
arrangement".
3(1958) 98 C.L.R. 1.
4Id.7.
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