Cridland v Federal Commissioner of Taxation
Encyclopedia
Cridland v Federal Commissioner of Taxation was a 1977 High Court of Australia
case concerning a novel tax scheme whereby some 5,000 university
students became primary producers (as in farmer
s) for tax purposes, allowing them certain income averaging benefits. The Australian Taxation Office
held this was tax avoidance
, but the test case was decided in favour of the taxpayer, one of the students, Brian Cridland.
In the taxonomy of tax schemes, this one was in the category of a wholly intentional tax benefit but which people other than those intended came to access. Amendments tightening the definition of a primary producer were subsequently made, so such a scheme would fail today.
accountant
D. P. O'Shea was a partner in the firm Fadden and O'Shea and was, as the court said, "versed in the arts of tax minimization". He hit upon a scheme to access the income averaging provisions of division 16 of the Income Tax Assessment Act 1936
(ITAA). Income averaging allowed a taxpayer to spread income over multiple tax years and was meant for primary producers (farmers etc) with highly variable incomes. Section 157 provided that if a trust is carrying on a business of primary production, then all the income beneficiaries are likewise considered carrying on such a business.
O'Shea had one of his companies acquire land and lease
(or otherwise grant) use of that to newly formed unit trust
s. Those trusts were to acquire livestock
or similar so as to carry on a business of primary production. The money for all this was lent by O'Shea or associates and the trusts were to end after 21 years, at which point all assets reverted back to him or associates. The actual assets and production, it seems, were to be small, and in any case remain effectively under O'Shea's control.
In 1969 O'Shea distributed pamphlets advertising his scheme at universities in Queensland
, New South Wales
and Victoria
. Students were to pay a nominal sum of $1 to join. Over 5,000 responded and became beneficiaries of the No. 1 trust. Brian Cridland, the subject of the court action, was a student at the University of Queensland
nearing the end of his engineering degree
course. He became a beneficiary of the No. 2 trust and then in 1970 was transferred to the No. 4 trust when the No. 2 ceased operation.
The payment of $1 each was not meant to make a profit for O'Shea and associates, in fact it was seldom collected. The trust deeds allowed the trustee
to register a person if the trustee was satisfied the person had donated at least $1 either to an institution under section 78 of the ITAA (various museums, cultural funds, etc), or to a similar body approved by a university Student Representative Council. O'Shea even made a $500 payment to a section 78 body himself to cover anyone who might fail to have a documented payment themselves (and therefore might have failed to meet the formal requirements of the scheme).
Any income actually earned by the trusts would, or would not be, distributed to some or all beneficiaries entirely at the discretion of the trustee. Beneficiaries were not actually going to receive income, or nothing significant, just be "presently entitled" to satisfy section 157. Cridland for instance said to the court he didn't expect any income, he did receive $1 in each of June 1969, 1970 and 1971 though.
The pamphlets described an annual payment of $50 to be made by subscribers, but only if and when they saved at least that much tax. It also pointed out there was no way anyone could be forced to make such a payment, it would rely on the honesty of participants. No such amounts were actually paid.
It seems O'Shea made no profit from the scheme. Presumably if he was creating a scheme for himself anyway then it cost little to let others join, and perhaps the scheme brought other business for his accounting firm.
decided the scheme was a form of tax avoidance
, and under the general anti-avoidance provision of ITAA section 260 (which was operative at that time) they ignored Cridland's interest in the trusts and issued assessments for tax years ending 30 June 1970, 1971 and 1972 accordingly. Cridland took the matter to the Supreme Court of New South Wales
, where Justice Mahoney agreed with the commissioner.
Section 260 was worded very broadly, striking out any agreement "altering the incidence of any income tax". If taken literally then almost any everyday business transaction would come under it. Consequently it had been "read down" in case law over the years to decide when it should not apply. This included not applying it to transactions "of a normal character", nor as decided in Keighery v Federal Commissioner of Taxation (1957) to matters where the statute contains alternatives available to the taxpayer (in that case a public versus private company).
Cridland argued that this latter "choice principle" applied, that becoming the beneficiary of a trust was a choice allowed by section 157; and if the statute explicitly provides consequences for people in certain positions then they should be able to utilize those. Justice Mahoney decided section 157 was not a choice in this sense and which the taxpayer could make of themselves, and indeed regarded the section as having a more mechanical nature so that primary producers operating their business via a trust could come under division 16.
Cridland appealed to the High Court
, where Chief Justice Barwick
and Justices Stephen
, Mason, Jacobs
and Aickin
instead unanimously found for him and against the ATO, holding the choice principle was not so narrow as Mahoney had interpreted it.
The justices followed their own High Court decision in Mullens v Federal Commissioner of Taxation
(1976), not decided until after Mahoney had made his judgement. In Mullens they determined that if the statute provides certain consequences then a taxpayer may enter into circumstances or transactions to which the statute applies, and that section 260 does not strike those out just because this is to the taxpayer's advantage.
The justices were in no doubt though that a transaction like Cridland had entered into was not normal for a university student, and was only explicable for attracting the income averaging provisions, but such considerations could not override the fact that the transaction was one to which specific provisions of the ITAA applied.
John Howard
introduced amendments in the Income Tax Assessment Amendment Bill 1978 restricting the definition of a primary producer in section 157. As from 1 July 1978 there are now two further requirements,
These requirements act to prevent a similar broad-based scheme today, but don't deny income averaging benefits to farming families operating their business through a trust. (Trusts as an ownership structure have some advantages for ongoing family businesses and are and were quite often used in farming.)
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
case concerning a novel tax scheme whereby some 5,000 university
University
A university is an institution of higher education and research, which grants academic degrees in a variety of subjects. A university is an organisation that provides both undergraduate education and postgraduate education...
students became primary producers (as in farmer
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s) for tax purposes, allowing them certain income averaging benefits. The Australian Taxation Office
Australian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
held this was tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
, but the test case was decided in favour of the taxpayer, one of the students, Brian Cridland.
In the taxonomy of tax schemes, this one was in the category of a wholly intentional tax benefit but which people other than those intended came to access. Amendments tightening the definition of a primary producer were subsequently made, so such a scheme would fail today.
Scheme
In 1968, BrisbaneBrisbane
Brisbane is the capital and most populous city in the Australian state of Queensland and the third most populous city in Australia. Brisbane's metropolitan area has a population of over 2 million, and the South East Queensland urban conurbation, centred around Brisbane, encompasses a population of...
accountant
Accountant
An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...
D. P. O'Shea was a partner in the firm Fadden and O'Shea and was, as the court said, "versed in the arts of tax minimization". He hit upon a scheme to access the income averaging provisions of division 16 of the Income Tax Assessment Act 1936
Income Tax Assessment Act 1936
Income Tax Assessment Act 1936 is an act of the Parliament of Australia. It's one of the main statutes under which income tax is calculated. The act is gradually being rewritten into the Income Tax Assessment Act 1997, and new matters are generally now added to the 1997 act.The reason for...
(ITAA). Income averaging allowed a taxpayer to spread income over multiple tax years and was meant for primary producers (farmers etc) with highly variable incomes. Section 157 provided that if a trust is carrying on a business of primary production, then all the income beneficiaries are likewise considered carrying on such a business.
O'Shea had one of his companies acquire land and lease
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
(or otherwise grant) use of that to newly formed unit trust
Unit trust
A unit trust is a form of collective investment constituted under a trust deed.Found in Australia, Ireland, the Isle of Man, Jersey, New Zealand, South Africa, Singapore, Malaysia and the UK, unit trusts offer access to a wide range of securities....
s. Those trusts were to acquire livestock
Livestock
Livestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...
or similar so as to carry on a business of primary production. The money for all this was lent by O'Shea or associates and the trusts were to end after 21 years, at which point all assets reverted back to him or associates. The actual assets and production, it seems, were to be small, and in any case remain effectively under O'Shea's control.
In 1969 O'Shea distributed pamphlets advertising his scheme at universities in Queensland
Queensland
Queensland is a state of Australia, occupying the north-eastern section of the mainland continent. It is bordered by the Northern Territory, South Australia and New South Wales to the west, south-west and south respectively. To the east, Queensland is bordered by the Coral Sea and Pacific Ocean...
, New South Wales
New South Wales
New South Wales is a state of :Australia, located in the east of the country. It is bordered by Queensland, Victoria and South Australia to the north, south and west respectively. To the east, the state is bordered by the Tasman Sea, which forms part of the Pacific Ocean. New South Wales...
and Victoria
Victoria (Australia)
Victoria is the second most populous state in Australia. Geographically the smallest mainland state, Victoria is bordered by New South Wales, South Australia, and Tasmania on Boundary Islet to the north, west and south respectively....
. Students were to pay a nominal sum of $1 to join. Over 5,000 responded and became beneficiaries of the No. 1 trust. Brian Cridland, the subject of the court action, was a student at the University of Queensland
University of Queensland
The University of Queensland, also known as UQ, is a public university located in state of Queensland, Australia. Founded in 1909, it is the oldest and largest university in Queensland and the fifth oldest in the nation...
nearing the end of his engineering degree
Bachelor of Engineering
The Bachelor of Engineering is an undergraduate academic degree awarded to a student after three to five years of studying engineering at universities in Armenia, Australia, Bangladesh, Bulgaria, Canada, China, Denmark, Egypt, Finland , Germany, Hong Kong, India, Indonesia, Ireland, Jordan, Korea,...
course. He became a beneficiary of the No. 2 trust and then in 1970 was transferred to the No. 4 trust when the No. 2 ceased operation.
The payment of $1 each was not meant to make a profit for O'Shea and associates, in fact it was seldom collected. The trust deeds allowed the trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
to register a person if the trustee was satisfied the person had donated at least $1 either to an institution under section 78 of the ITAA (various museums, cultural funds, etc), or to a similar body approved by a university Student Representative Council. O'Shea even made a $500 payment to a section 78 body himself to cover anyone who might fail to have a documented payment themselves (and therefore might have failed to meet the formal requirements of the scheme).
Any income actually earned by the trusts would, or would not be, distributed to some or all beneficiaries entirely at the discretion of the trustee. Beneficiaries were not actually going to receive income, or nothing significant, just be "presently entitled" to satisfy section 157. Cridland for instance said to the court he didn't expect any income, he did receive $1 in each of June 1969, 1970 and 1971 though.
The pamphlets described an annual payment of $50 to be made by subscribers, but only if and when they saved at least that much tax. It also pointed out there was no way anyone could be forced to make such a payment, it would rely on the honesty of participants. No such amounts were actually paid.
It seems O'Shea made no profit from the scheme. Presumably if he was creating a scheme for himself anyway then it cost little to let others join, and perhaps the scheme brought other business for his accounting firm.
Courts
The Australian Taxation OfficeAustralian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
decided the scheme was a form of tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
, and under the general anti-avoidance provision of ITAA section 260 (which was operative at that time) they ignored Cridland's interest in the trusts and issued assessments for tax years ending 30 June 1970, 1971 and 1972 accordingly. Cridland took the matter to the Supreme Court of New South Wales
Supreme Court of New South Wales
The Supreme Court of New South Wales is the highest state court of the Australian State of New South Wales...
, where Justice Mahoney agreed with the commissioner.
Section 260 was worded very broadly, striking out any agreement "altering the incidence of any income tax". If taken literally then almost any everyday business transaction would come under it. Consequently it had been "read down" in case law over the years to decide when it should not apply. This included not applying it to transactions "of a normal character", nor as decided in Keighery v Federal Commissioner of Taxation (1957) to matters where the statute contains alternatives available to the taxpayer (in that case a public versus private company).
Cridland argued that this latter "choice principle" applied, that becoming the beneficiary of a trust was a choice allowed by section 157; and if the statute explicitly provides consequences for people in certain positions then they should be able to utilize those. Justice Mahoney decided section 157 was not a choice in this sense and which the taxpayer could make of themselves, and indeed regarded the section as having a more mechanical nature so that primary producers operating their business via a trust could come under division 16.
Cridland appealed to the High Court
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
, where Chief Justice Barwick
Garfield Barwick
Sir Garfield Edward John Barwick, was the Attorney-General of Australia , Minister for External Affairs and the seventh and longest serving Chief Justice of Australia...
and Justices Stephen
Ninian Stephen
Sir Ninian Martin Stephen, is a retired politician and judge, who served as the 20th Governor-General of Australia and as a Justice in the High Court of Australia.-Early life:...
, Mason, Jacobs
Kenneth Jacobs
Sir Kenneth Sydney Jacobs KBE , Australian judge, was a Justice of the High Court of Australia.Jacobs was born in 1917 in Gordon, a suburb of Sydney, New South Wales...
and Aickin
Keith Aickin
Sir Keith Arthur Aickin KBE QC , Australian judge, was a Justice of the High Court of Australia.Aickin was born in Melbourne in 1916, and was educated at Melbourne Grammar School. He also studied at the University of Melbourne, where he graduated with a Bachelor of Laws and later a Master of Laws...
instead unanimously found for him and against the ATO, holding the choice principle was not so narrow as Mahoney had interpreted it.
The justices followed their own High Court decision in Mullens v Federal Commissioner of Taxation
Mullens v Federal Commissioner of Taxation
Mullens v Federal Commissioner of Taxation was a 1976High Court of Australia tax case concerning arrangements where stockbrokers Mullens & Co accessed tax deductions for monies subscribed to a petroleum exploration company...
(1976), not decided until after Mahoney had made his judgement. In Mullens they determined that if the statute provides certain consequences then a taxpayer may enter into circumstances or transactions to which the statute applies, and that section 260 does not strike those out just because this is to the taxpayer's advantage.
The justices were in no doubt though that a transaction like Cridland had entered into was not normal for a university student, and was only explicable for attracting the income averaging provisions, but such considerations could not override the fact that the transaction was one to which specific provisions of the ITAA applied.
Subsequently
Following the High Court's decision, TreasurerTreasurer of Australia
The Treasurer of Australia is the minister in the Government of Australia responsible for government expenditure and revenue raising. He is the head of the Department of the Treasury. The Treasurer plays a key role in the economic policy of the government...
John Howard
John Howard
John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....
introduced amendments in the Income Tax Assessment Amendment Bill 1978 restricting the definition of a primary producer in section 157. As from 1 July 1978 there are now two further requirements,
- A minimum $1,040 must be received from the trust.
- The Commissioner of Taxation must be satisfied the beneficiary's interest wasn't acquired primarily for the purpose of obtaining income averaging.
These requirements act to prevent a similar broad-based scheme today, but don't deny income averaging benefits to farming families operating their business through a trust. (Trusts as an ownership structure have some advantages for ongoing family businesses and are and were quite often used in farming.)