[16.1] A number of provisions require or allow the reconstruction of tax accounts: they require or allow the Commissioner to tax on the basis of facts that did not occur but are deemed to have occurred. All assume that the operation of the Assessment Act on the basis of the facts that did occur would in some respect defeat the intention of the legislature, or what may be called the policy of the Act. The provisions would be said to be directed against tax avoidance, a phrase that is explained in [16.8] below.

[16.2] Of these provisions, Pt IVA has the widest operation. Section 65 is directed to tax avoidance by shifting of income between associated persons as defined in the section. Division 6A of Pt III is directed more narrowly to tax avoidance by shifting of income derived from property. Division 13 of Pt III is directed to tax avoidance by shifting income between persons who do not deal at arm’s length in international transactions. Each of these provisions has a manner of operation distinct from that of other sections which may also be seen as directed against tax avoidance. A number of these were considered in [10.289]–[10.362] above. They include ss 82KJ and 82KL, which operate, in a sense, to reconstruct a tax account by simply denying a deduction otherwise available to one party to a transaction. The provisions now to be considered require or allow that on the reconstruction of the tax accounts of one party to a transaction on the basis of facts that did not occur, there will be or may be a reconstruction of the tax accounts of another party to the transaction on the same basis.

[16.3] A number of the provisions referred to in the preceding paragraph may be prima facie attracted by the same circumstances. Which provision is to be applied is the subject of some consideration in [10.313]ff. above. In general, Pt IVA may operate only where none of the other provisions has operated. The precedence among ss 65, 82KJ and 82KL depends on the provisions of those sections taken in conjunction with subss (3) and (4) of s. 177B. In the case of Div. 13, the precedence depends on the provisions of s. 136AB(1). In the case of Div. 6A precedence must rest on the concluding words of s. 102B(1) which, when s. 102B operates, requires that the income referred to “shall be treated for the purposes of [the] Act as if the transfer had not been made”. A transfer of income which is deemed by s. 102B(1) not to have occurred could not be one that will bring about a tax benefit as defined in s. 177C and thus could not trigger the reconstruction power given to the Commissioner by s. 177F of Pt IVA.

Reconstruction under Section 65

[16.4] Section 65 was the subject of consideration in [10.310]ff. above. Its operation depends on the exercise of a function by the Commissioner by which he determines the extent to which the payment or liability incurred by a taxpayer to an associated person is reasonable. On that determination being made, the operation of the section is automatic. The taxpayer who made the payment or incurred the liability is entitled to the deduction, otherwise allowable, but only to the extent that the payment or liability is reasonable in amount (s. 65 (1)). And, subject to s. 65(1B), the associated person to whom the payment was made or the liability incurred will, to the extent of the amount of deduction denied to the taxpayer, be deemed not to have derived income (s. 65(1A)). Section 65(1B), displacing to this extent s. 65(1A), will require that where the payment has been made or the liability has been incurred by a partnership in which a private company is a partner, the company shall be deemed to have paid a dividend of an amount ascertained in accordance with s. 65(1C). The consequences of this latter deeming are explored in [10.324] above.

Reconstruction under Division 13 of Part III

[16.5] The operation of Div. 13 is considered in [10.359]ff. above. Reconstruction under s. 136AD depends on the exercise of at least two functions by the Commissioner, the first in reaching a satisfaction that the parties to an international agreement as defined in s. 136AC were not dealing with one another at arm’s length, and the second in determining that the relevant subsection of s. 136AD should apply, if, as a matter of fact, the consideration received or given was less than an arm’s length consideration. There is a third possible function on whose exercise reconstruction may depend. If it is not possible or practicable for the Commissioner to ascertain the arm’s length consideration, the arm’s length consideration is deemed to be such an amount as the Commissioner determines. The reconstruction is in other aspects automatic: the arm’s length consideration is deemed to have been received or given.

[16.6] Where the application of s. 136AD has resulted in an amount being included in the assessable income of a taxpayer, or has resulted in a taxpayer being denied a deduction, s. 136AF gives the Commissioner a power to reconstruct the tax accounts of another taxpayer, so as to exclude an amount from the assessable income of that taxpayer or to allow him a deduction. The general intention of s. 136AF is parallel with the intention of s. 65(1A). Reconstruction under s. 136AF depends, however, on the exercise of two functions by the Commissioner, while reconstruction under s. 65(1A) is in all respects automatic. The Commissioner must form an opinion that the amount of income that is the subject of reconstruction would not have been included in the assessable income of the other taxpayer, had there been an agreement with the first taxpayer entered into at arm’s length, and the Commissioner must form an opinion that it is fair and reasonable that the amount of income subject to reconstruction should not be included in the assessable income of the other taxpayer (s. 136AF(1)(a)). Similar provisions in s. 136AF(1)(b) apply in relation to the reconstruction of an allowable deduction available to the other taxpayer.

Reconstruction under Division 6A of Part III

[16.7] The operation of Div. 6A of Pt III was considered in [13.82]ff. above. The reconstruction is in all respects automatic. It does not depend on the exercise of any function by the Commissioner. Where s. 102B operates, any income derived from property to which the section applies is to “be treated for purposes of [the] Act as if the transfer had not been made” (s. 102B(1)), and an amount equal to the income derived from property that is treated as not having been transferred is “deemed to have been paid by the transferor to the transferee at the time at which the income was paid to, or applied or accumulated for the benefit of the transferee” (s. 102C(c)(i)). And it is deemed to have been paid for the purpose for which it was in fact transferred (s. 102C(c)(ii)). The tax accounts of transferor and transferee must give effect to these deemings.

The Meaning of Tax Avoidance

[16.8] Tax avoidance, as the phrase is used in discussion about tax, is a phrase of shifting meaning. It is at times used as a synonym for tax evasion, though a distinction between evasion and avoidance is a fundamental one. Evasion is the non-payment of tax when the law requires payment. The phrase tax avoidance is also used in a sense that is the one preferred in this Volume: the non-payment of tax when the law does not say that tax should be paid, though the policy of the law says that it should. The phrase is used in other senses. It is sometimes used in a sense that makes it a judgment on the policy in fact embodied in the law, a judgment made by someone who does not agree with that policy and would want to see a different policy embodied in the law. Thus the view is held by some people that capital gains should be subject to tax. That view may lead them to describe the sale of shares in a company that has accumulated profits as tax avoidance. In this instance the meaning of tax avoidance shades into yet another meaning which would identify tax avoidance with actions of the kind that will attract the general provisions of Pt IVA of the Assessment Act. This last meaning would say that there is tax avoidance if a person acts in a way that justifies an inference that he acted as he did because he wanted, for himself or for another, the relief from tax that would attend his actions. There is tax avoidance in this sense even though neither the words of the law nor the policy of the law would say that his actions should give rise to a greater tax liability.

[16.9] It may be helpful to consider in turn each of the provisions identified so far in this Chapter and to judge in what sense of the phrase they may be said to be concerned with tax avoidance.

[16.10] Section 65 may be seen as an attempt to adapt the words of the law so that they might better express its policy. It is then a measure directed against tax avoidance in the sense of the phrase preferred in this Volume. The words of s. 51(1), in a number of decisions that have been the subject of discussion earlier in this Volume, have been given a meaning that is expressed in rules, including a rule that amounts to a rule of evidence, which lose contact with the policy of requiring relevance. A policy requiring relevance, it has been assumed, was sought to be achieved by s. 51(1). That loss of contact became evident in Cecil Bros Pty Ltd (1964) 111 C.L.R. 430. The manner of the attempt to restore the achievement of the policy of relevance goes some way, however, to expressing a new policy. The new policy may be thought to qualify a policy expressed in Ronpibon Tin N.L. (1949) 78 C.L.R. 47 that it is not for the Commissioner to tell the taxpayer how to run his business. A deduction is denied to the extent to which, in the opinion of the Commissioner, the amount of the payment made or liability incurred is not reasonable. The policy expressed in the principle requiring relevance is that a deduction is not allowable if the purpose of an outgoing is other than the gaining or producing of assessable income. It has been argued in this Volume that an inference of a purpose other than the gaining or producing of assessable income should be drawn where a payment exceeds what might be expected to be made in an arm’s length transaction, and the parties are not in fact at arm’s length. Section 65, at least in theory, goes beyond what has been argued for by contemplating the disallowance of the deduction of an outgoing to the extent that the Commissioner considers the amount paid is unreasonable. An unreasonable amount might yet be an amount that might be expected to be paid in an arm’s length transaction.

[16.11] Sections 82KJ and 82KL may also be seen as attempts to overcome tax avoidance in the sense of the phrase preferred in this Volume. They operate however at much greater cost to the policy of relevance than the cost that may be involved in the operation of s. 65. If the circumstances attract the operation of ss 82KJ or 82KL no part of an outgoing will be allowed as a deduction. An operation of s. 51(1), if it were undistorted by the decisions in Cecil, Europa Oil (N.Z.) Ltd v. C.I.R. (N.Z) (No. 2) (1976) 76 A.T.C. 6001 and South Australian Battery Makers Pty Ltd (1978) 140 C.L.R. 645, would in the circumstances with which ss 82KJ and 82KL are concerned have allowed some part of the outgoing as a deduction.

[16.12] It is not intended to suggest that the rules established by the courts in Cecil, Europa Oil (No. 2) and South Australian Battery Makers were intended to express a policy different from the policy that requires relevance. Rather, judicial interpretation of s. 51(1) has lost contact with that policy, in the application of an approach described in this Volume as extended form and blinkers, and explained in [2.473]ff. and [9.17]ff. above. The analytical integrity of the law has in that interpretation suffered partial collapse. Sections 65, 82KJ and 82KL would all be unnecessary if Cecil, Europa Oil (No. 2) and South Australian Battery Makers were to be reconsidered and rejected. The patching over of the state of collapse which those sections effect can never be satisfactory. The collapse will express itself in areas beyond the patching. The restoration of the analytical integrity of the law is a matter for judicial action. Loss of analytical integrity of the income tax is not confined to the interpretation of s. 51(1). Other judicial decisions having this effect have been identified in other contexts in this Volume. The gloss on the concept of derivation reflected in the decisions in McLaurin (1961) 104 C.L.R. 381 and Allsop (1965) 113 C.L.R. 341 ([2.558]ff. above) involves a collapse. The decision in Investment & Merchant Finance Corp. Ltd (1971) 125 C.L.R. 249 ([2.449]–[2.451] above) involves the collapse of the concept of a business transaction, and defeat of one aspect of the policies of the income tax expressed in the concept of income. The collapse has been patched over by a number of complex sections (ss 46A and 46B) which are not directed at the seat of the collapse. Effectively they cannot be. Judicial action is called for. It is a matter of regret that given the opportunity in Patcorp Investments Ltd (1976) 140 C.L.R. 247 to restore the analytical integrity of the law, the High Court refused to accept it. The justification of that refusal given in the judgment of Gibbs J.—that amendments to the Assessment Act had taken care of the loss of integrity—was almost immediately shown to be unfounded. Further amendments, and greater complexity, were to follow. The decision of the High Court in Curran (1974) 131 C.L.R. 409 involves the collapse of the principles of tax accounting concerned with the determination of profit and loss, and the attendant policy that profit must be a real gain, and a loss deduction a real loss. The patching done by s. 6BA is not and cannot be adequate to restore the integrity of the law.

[16.13] Division 13 of Pt III, like s. 65 and ss 82KJ and 82KL, is directed to overcoming tax avoidance in the sense preferred in this Volume. It is, in part, the avoidance that is made possible by the decisions in Cecil, Europa Oil (No. 2) and South Australian Battery Makers. Europa Oil (No. 2) was a decision on appeal to the Privy Council from the New Zealand courts. It confirmed an avoidance of tax by the shifting of income from a New Zealand company, in whose hands it would have been subject to New Zealand tax, to a Bahamas company in whose hands it was not.

[16.14] Division 13 has a wider purpose. It will overcome the tax avoidance that will result if the actual proceeds of disposal of property or the actual amount paid in acquiring property in a transaction that is not at arm’s length, are allowed to determine the amount of the gain or loss that is realised on a disposal. An Australian resident who sells goods to an associated non-resident for an amount that is less than an arm’s length price will shift income otherwise subject to Australian income tax to another in whose hands it may not be subject to Australian tax. Division 13 is intended to defeat that shifting by requiring that an arm’s length price be substituted.

[16.15] In substituting an arm’s length price for the amount paid, Div. 13 will go much of the way to overcoming the defeat of the policy of the law that results from Cecil, Europa Oil (No. 2) and South Australian Battery Makers. It may not go all of the way. It is arguable that in market conditions in which prices are fixed by a cartel arrangement, the price paid by a buyer in respect of the supply of goods or services is an arm’s length price notwithstanding that the seller has agreed to confer benefits on the buyer, in exchange for that price, that go beyond the supply of the goods or services. Thus, the price paid for the oil in Europa Oil (No. 2) by the company that purchased from Gulfex might be described as an arm’s length price, notwithstanding that the buyer also acquired by the payment a right to the diversion of a profit to the Bahamas company. Unless the function given to the Commissioner by s. 136AD(4) allows him to determine an arm’s length price in such circumstances that is less than the price fixed by the cartel, s. 136AD will have achieved something less than overcoming the defeat of the policy of the Assessment Act.

[16.16] At the same time s. 136AD may in some circumstances achieve more than overcoming the defeat of policy that arises from Europa Oil (No. 2) and South Australian Battery Makers. If those decisions come to be rejected by new judicial decisions there will yet be scope for income shifting by the payment of an excessive consideration. This is inherent in the absence of precision in s. 51(1). The assumption has been made that, unless the payment is substantially greater than the arm’s length price, s. 51(1) would need to accept the relevance of a payment between associated persons, in the absence of a showing of some distinct benefit, arising to the taxpayer or to another, beyond the supply of the goods or services to which the payment relates. Section 136AD may be seen as refining the law in its expression of the policy of relevance. At the same time it may be thought to share with s. 65 the prospect of some defeat of a policy that the law should not seek to tell a taxpayer how to run his business. The substitution of a price which the Commissioner considers to be reasonable, or to be an arm’s length price, for the actual price paid will always threaten the latter policy.

[16.17] Division 6A of Pt III is directed to preventing tax avoidance, in a meaning of tax avoidance that is not concerned with the failure of the law to express an existing policy. The enactment of Div. 6A involved an expression of a new policy. This new policy would limit the extent to which the Assessment Act allows the shifting of income. The general policy of the Assessment Act is that income derived by an individual or company taxpayer should be taxed as the income of that taxpayer. It will be taxed on a scale that takes into account only the amount of his income, though, in the case of an individual, rebates provided for in Subdiv. A of Div. 17 of Pt III may give significance to income derived by others in a family or other relationship with him. In the case of an individual the tax scale is progressive. In the result there is tax advantage overall to members of a group—most likely a family group—if derivation of income is spread over members of the group. It has been seen in the discussion of tax accounting that the Assessment Act allows some scope for members of a group to determine which member of a group will derive income, more especially by accepting the price charged for goods or services supplied by one member of a group to another. And an assignment of income, discussed in Chapter 13 above, may determine the member of a group who will derive income.

[16.18] Precisely what is the new policy reflected in Div. 6A is not easily identified. It does not appear to be a policy that rejects the individual as the unit of income taxation. It is rather a policy directed against what is seen as the unfairness that some kinds of income—business and property income—are capable of being shifted while other kinds of income—more especially salary and wages—are not capable of being shifted, at least as the present law on derivation of income stands. The policy that may justify characterising assignments of income as tax avoidance is thus a curious one: one person should not benefit from the general policy of taxing on the basis of the individual as the unit of income taxation if another person cannot. Such a policy achieves only limited expression in Div. 6A. Thus, the Division has no application in “relation to a transfer of a right to receive income from property where… the right arose from the ownership by the transferor of an interest in the property and the transferor has transferred that interest to the transferee or another person” (s. 102B(2)(b)). The shifting of income by transferring to another property whence income is derived is thus not inhibited by Div. 6A. And a shifting otherwise subject to the Division for a period beyond the prescribed period is not inhibited.

[16.19] Division 6AA appears in the Act adjacent to Div. 6A which may suggest that their policies have at least some kinship. A detailed consideration of Div. 6AA, which is concerned with the defining of a class of income—certain income of minors—which is subjected to a special rate structure, is beyond the scope of this Volume. Some observations on the Division may, however, be appropriate. At first sight it may appear to be a limited expression of a policy of taxing the income of an individual by reference to his family circumstances, and to this extent a further qualification on the individual unit as the basis of income taxation. Such a policy was reflected in the recommendations of the Taxation Review Committee (Asprey Committee), in paras [11.9]–[11.14] of its Full Report (A.G.P.S., Canberra, 1975), which are some of the background of Div. 6AA. Yet the exceptions to the operation of Div. 6AA would indicate a different policy which does show a kinship with the policy of Div. 6A. The exceptions in the definition of income to which the Division applies, listed in ss 102AE(2) and 102AG(2), appear directed to excluding all situations in which the derivation of income by the minor could not be said to have been the consequence of a shifting of income undertaken to take advantage of the benefit that may flow from the general policy of taxing on the basis of the individual as the unit of income taxation.

[16.20] So long as there is no definitive expression in the Assessment Act of a policy that would require the taxation of an individual by reference not only to his own income but also to the income of other members of his family group, there is no basis for an assertion that the tax advantages which flow from the mere fact of unequal distribution of income among members of a family group involve tax avoidance in the sense preferred in this Volume. Such tax advantages may be seen as involving tax avoidance only in the sense that they are contrary to policies which some people would wish to see expressed in the Act. The Asprey Committee recommended that the income of minor children living with their parents should be taxed in a way that brought their parents income into the reckoning (Full Report, para. [11.9]). And it recommended that spouses whose incomes are unequal should, by election, be able to have some of the tax advantage enjoyed by others whose incomes are more equal. Those recommendations appear in paras [10.26]–[10.28] of the Report.

[16.21] Part IVA of the Act has already been identified as concerned with tax avoidance in a meaning different from any of the meanings that will explain s. 65, s. 82KJ, s. 82KL, Div. 6A of Pt III and Div. 13 of Pt III as provisions concerned with tax avoidance, though there may be some reason to regard Div. 6A of Pt III as to a degree concerned with the Pt IVA meaning. The Pt IVA meaning may be caricatured: it is tax avoidance to pay less tax if the benefit of paying less tax was one that the taxpayer’s actions were directed to securing, and this whether or not the policy of the law intended he should have that benefit. Division 6A may be thought to reflect the Pt IVA meaning in one respect. It is concerned with short term assignments of income from property that do not involve a transfer of the property from which the income is derived. It may be said that a taxpayer who makes an assignment of such a kind will generally have been moved by a wish to escape the payment of tax on the income he has assigned. But Div. 6A will defeat the tax benefit that would arise to the taxpayer from the assignment whether or not, in the particular circumstances of the assignment, an inference that the taxpayer’s actions were directed to securing the tax benefit can be drawn, or, in the language of s. 177D of Pt IVA, whether or not “it would be concluded that the [taxpayer acted] for the purpose of [obtaining] a tax benefit”.

Reconstruction under Part IVA

[16.22] The discussion under the last heading is directed to showing the different senses in which the phrase tax avoidance may be used when it is said of any aspect of the Assessment Act that it is directed against tax avoidance. The very special meaning the phrase has when it is said of Pt IVA that it is directed against tax avoidance has been identified.

[16.23] Part IVA is most often described as the general provision of the Assessment Act directed against tax avoidance. In fact, Pt IVA does not use the phrase tax avoidance. Its language, in contrast with s. 260, the former general provision which does use the word “avoiding”, is “obtaining…a tax benefit in connection with a scheme” (s. 177C(1)). “Scheme” is given the very widest definition possible in s. 177A(1). And the Commissioner is given a function by s. 177F to deny a benefit by reconstruction of a tax account. He may deny the benefit if, having regard to listed circumstances, “it would be concluded that the person, or one of the persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling” the taxpayer who obtained the tax benefit to obtain that benefit, or of enabling that taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit (s. 177D). It will be noted that the idea of tax avoidance includes the obtaining of a tax benefit by a person who may not be the person of whom it would be concluded that he acted for the purpose of obtaining the benefit. A purpose in one person to obtain a tax benefit for another will make a benefit obtained by the other a benefit that is subject to denial by the Commissioner in the exercise of this function. “Tax benefit” is defined in s. 177C so that it is limited to (i) a benefit of an amount not being included in assessable income and (ii) a benefit of being allowed a deduction.

Background: section 260

[16.24] Section 260 may be regarded as the predecessor of Pt IVA. It applies to “a contract, agreement, or arrangement made or entered into” before 27 May 1981. Part IVA does not apply to a “scheme entered into or carried out prior to 27 May 1981”. A detailed account of the interpretation of s. 260 is not proposed. The words of the section to which most of that interpretation has been directed are:

Three aspects of that interpretation require mention as background to an examination of Pt IVA.

[16.25] One aspect is that the section did not give the Commissioner the power to reconstruct a tax account by adding any facts. He had no power to deem any facts to have occurred. The operation of the section was to annihilate facts as against the Commissioner. The Commissioner had power to assess only on the basis of “the facts that remained”. A too-close examination of the notion of facts that remained after the annihilation of other facts, might have led to a conclusion that once s. 260 had operated, the Commissioner could have no power to assess the taxpayer at all. Facts do not remain when associated facts are annihilated. At the least, they are changed. The courts did not however engage in a too-close examination. In Peate [1967] 1 A.C. 308, indeed, it might be said that the Privy Council approved a reconstruction of the facts by the Commissioner. The no-reconstruction aspect of the interpretation of s. 260 was, however, a constant threat to the usefulness of the section as a general provision against tax avoidance in any sense of the phrase. Part IVA, it will be seen, gives the Commissioner an express power of reconstruction, once it appears that Pt IVA operates.

[16.26] The second aspect concerns the meaning of “purpose of avoiding” as those words are used in s. 260. Newton (1958) 98 C.L.R. 1 confirmed that the purpose referred to was an objective purpose. It was a matter of inference from the circumstances. The passage from the judgment of Lord Denning in Newton constantly quoted in this regard is (at 8):

This aspect of the interpretation of s. 260 has been retained in the drafting of Pt IVA, though the language of s. 177D differs from the language used by Lord Denning. It is a matter now of whether “it would be concluded” that a person who entered into or carried out the scheme or any part of the scheme “did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme”. It is necessary that it would be so concluded “having regard to” a number of listed circumstances, none of which involves the subjective purpose of a person to obtain a tax benefit for himself or any other person.

[16.27] A consequence of this second aspect of the interpretation of s. 260 and its preservation in Pt IVA is that each is operative only in relation to tax avoidance, in a sense of the phrase which will describe not paying tax in circumstances where it can be inferred that someone wanted the consequence that tax would not be paid. The notion of tax avoidance involved may be caricatured by that description, but it is otherwise accurately described. It was enough to engage the operation of s. 260 that it could be inferred that one purpose of the arrangement was that tax would not be paid. At least this was the interpretation of the section in Newton though there is a reference in later cases to a requirement that the dominant purpose of the arrangement must have been that tax would not be paid. The effect of s. 177A(5) is that Pt IVA will be operative where there is more than one purpose in a scheme, only if the purpose that tax will not be paid is the dominant purpose.

[16.28] A restriction on the drawing of the inference of purpose was written into s. 260 by the judgment of Barwick C.J. in Mullens (1976) 135 C.L.R. 290 at 302:

The restriction might be described as the false-start doctrine. An inference may not be drawn unless steps have been taken towards entering one arrangement, and there is thereafter a switch to another arrangement that will give a tax advantage. There are no words in Pt IVA that expressly reject the false-start doctrine in the interpretation of s. 177D.

[16.29] The third aspect of the interpretation of s. 260 that requires mention is the “choice” doctrine, emphasised in the High Court judgments in W. P. Keighery Pty Ltd (1957) 100 C.L.R. 66 and later cases. The section would not make an arrangement void against the Commissioner if the taxpayer could be said to have been given by the Act a choice to enter into that arrangement. The choice doctrine was variously expressed. However expressed, it is a doctrine that precluded the operation of s. 260 if the tax consequences of the arrangement in question were consequences that the policy of the relevant provisions of the Act would approve. Thus, s. 260 did not operate in Mullens because there was no indication in the provisions of s. 77A, at the time the arrangement was entered into, that the deduction given by that section of the amount of a subscription for shares in a mining company should not be available unless the taxpayer both subscribed for the shares and continued to hold them for some period of time. Section 260 did not operate in Cridland (1977) 140 C.L.R. 330 because there was no indication in the provisions of s. 157 at the time the arrangement was entered into, that a taxpayer beneficiary of a trust that carried on a business of primary production should not have the benefit of the averaging provisions of the Assessment Act unless he was a substantial beneficiary. It followed that s. 260 was directed ultimately against tax avoidance in the sense preferred in this Volume, but was directed against it only in circumstances where it could be inferred that the taxpayer wanted the tax advantage that would otherwise flow from the failure of the words of the Act adequately to express their policy. The element in the interpretation of s. 260 that can be the subject of caricature was not excluded by the choice doctrine from the interpretation of s. 260.

[16.30] There is some survival of the choice doctrine in the language of Pt IVA though the intention would appear to be that it should have only a very limited operation. Thus, subss (2) and (3) of s. 177C exclude the operation of Pt IVA where the tax benefit arises from the “making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by [the] Act”. It will follow that, subject to a qualification, any tax benefit that may flow, for example, from the making of an election as to the value of trading stock, provided for in s. 31, or in s. 36A, will not attract the operation of Pt IVA, even though it would be concluded that the securing of that benefit was the dominant purpose in making the election. The qualification arises from s. 177C(2)(b). The operation of Pt IVA is not excluded if “the scheme was…entered into or carried out by any person for the purposes of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, election, selection, notice or option to be made, given or exercised…”. The qualification is intended to cover the circumstances in Westraders Pty Ltd (1980) 144 C.L.R. 55 and to let in the operation of Pt IVA. The express provisions of subss (2) and (3) of s. 177C, giving a limited operation in Pt IVA to the choice doctrine, is likely to be construed as showing an intention that the choice doctrine is otherwise excluded. In the result, Pt IVA is a bizarre exercise in law reform. It may deny a taxpayer the tax benefit of a scheme if it would be concluded that the dominant purpose of the scheme was to secure that benefit, even though it was the evident policy of the relevant provisions of the Act to allow the taxpayer that benefit. The discussion will return to this matter when some more detailed account of the provisions of Pt IVA has been attempted.

The operation of Part IVA

[16.31] A number of indications of the scope of Pt IVA emerge from the opening observations in [16.22] above and from the comparisons with s. 260 drawn under the last heading. “Scheme” has a very wide meaning (s. 177A(1)). The fact that an inference can be drawn of purpose of one party to a scheme to enable a tax benefit to be obtained by any taxpayer, may lead to the denial of that tax benefit to that taxpayer, even though he was not a party to the scheme (s. 177D). “Tax benefit” has a restricted meaning—an amount not being included in assessable income or a deduction being allowable (s. 177C). A scheme which involved taking advantage of the averaging provisions, as in Cridland (1977) 140 C.L.R. 330, would not be a scheme to enable a tax benefit to be obtained. The subjective purpose of a party to the scheme is, it seems, irrelevant: the issue is always whether “it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme” (s. 177D). The purpose so inferred must be the dominant purpose (s. 177A(5)). There is, it seems, only a limited survival of the choice doctrine developed in relation to s. 260.

[16.32] The wide meaning of scheme has implications for the operation of Pt IVA in regard to a plan of action that was “entered into” before 27 May 1981, and prima facie outside the operation of the Part (s. 177D). A step in the plan may have been taken after 27 May. In which case it is arguable that the step is a “scheme” entered into after 27 May and within the possible operation of Pt IVA, though presumably steps in the plan taken before 27 May could not be considered in drawing the inference of purpose that will make the scheme one to which the Part applies.

[16.33] A number of questions arise in regard to drawing the inference of purpose. There is no direct reference in the drafting of Pt IVA to the “false-start” doctrine developed in relation to s. 260. No doubt the action of a person in first taking steps towards entering into one arrangement and then switching to another which is the scheme, may increase the prospect that enabling a taxpayer to obtain a tax benefit will be concluded to be the purpose of the scheme, though it is arguable that the steps towards entering on the first arrangement are not relevant to the drawing of the conclusion. The conclusion, it would be argued, must be drawn from the scheme. But it is unlikely that the false-start doctrine has survived to the extent that a conclusion of purpose to enable a taxpayer to obtain a tax benefit cannot be drawn, unless there were prior steps towards entering into an arrangement and then a switch to a scheme.

[16.34] The scheme must be one that will involve a tax benefit, which is a reference in one aspect to “an amount not being included in the assessable income of [a] taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out” (s. 177C(1)(a)). It is arguable that those words are satisfied if the scheme involves the cessation of some existing process of income derivation, as a result, for example, of the transfer of a business by a sole trader to a trading trust. But it is hard to see how they can be satisfied if the taxpayer had no existing process of income derivation whose cessation was an aspect of the scheme—where, for example, he simply commenced business operations as the trustee of a newly established trust. In the latter case there would not appear to be any income of which it could be said that it “would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer…” (s. 177C (1)(a)).

[16.35] In its other aspect, “tax benefit” is a reference to a deduction “being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out” (s. 177C(1)(b)).

[16.36] It is arguable that those words are satisfied if the scheme involves the cessation of some activity involving outgoings or losses that are not deductible and the substitution of activity which involves outgoings or losses that are deductible. But it is hard to see how those words can be satisfied if the taxpayer had no existing activity involving non-deductible losses or outgoings that it was part of the scheme to replace with new activity that would involve deductible losses or outgoings. It would follow that an activity of expenditure recoupment transactions of the kind that are now dealt with specifically in ss 82KJ and 82KL ([10.330]ff. above), would not be a scheme to obtain a tax benefit.

[16.37] The definition of tax benefit may thus bring about limitations on the operation of Pt IVA. And there are other limitations on its operation which concern the drawing of an inference of dominant purpose to secure a tax advantage. The judgment of Lord Denning in Newton (1958) 98 C.L.R. 1 has been taken to contemplate a “business” purpose or a “family” purpose which is not a purpose to secure a tax advantage, even if tax advantage is a consequence of the action taken to achieve that purpose. The cases decided in relation to the operation of s. 260 constantly asserted the possibility. It appeared, however, that it was enough to attract the operation of s. 260 that an inference of a purpose to obtain a tax advantage was to be drawn, and the taxpayer had need to argue that any purpose that could be identified was not a purpose to obtain a tax advantage. The drafting of Pt IVA has opened the way to argument that even though an inference of two purposes is to be drawn, the business or family purpose is dominant and not the tax advantage purpose. There is a prospect of endless arguments about the inferences to be drawn.

[16.38] A multitude of statements have been made by Government and by the Commissioner about Pt IVA, asserting it will not operate unless action has been taken that will give a tax advantage, and that action is “blatant, artificial or contrived”, but none of those words appears in Pt IVA. In any case what is artificial at one time may become natural when it is generally practised. The inference in Peate [1967] 1 A.C. 308 of a tax avoiding purpose depended to a degree on the fact that Dr Peate was a pioneer in the cause of a corporate structure to conduct a medical practice. In a number of New Zealand decisions on the interpretation of the New Zealand provision corresponding with s. 260, actions that were “unusual” and “extraordinary” were pointed to as yielding an inference of a tax avoiding purpose. But the unusual and the extraordinary may in time become usual and ordinary.

[16.39] It is for the taxpayer who denies the Commissioner’s powers to reconstruct his tax account under Pt IVA to establish that no party to the scheme had a dominant purpose to enable the taxpayer to obtain a tax benefit. Taxpayer and Commissioner may be expected to engage in a competition of inferences that will indulge the imaginations of the parties. And subtleties about the notion of dominant purpose may be expected to be raised. Where more than two purposes are identified, the dominant purpose may be the most weighty of them, or it may be the purpose, if any, which alone outweighs all others.

[16.40] The stakes in the competition of inferences are high. If the taxpayer fails to establish that his inference is to be drawn, whatever view is taken of the Commissioner’s inference, the Commissioner will have the powers specified in s. 177F to reconstruct the taxpayer’s account, involving the inclusion of an amount in the taxpayer’s assessable income or the denial of a deduction.

[16.41] Yet one might be moved to wonder about the point of the competition. If it is accepted that the choice doctrine, that was part of the interpretation of s. 260, has not, save in regard to elections expressly conferred, been carried into its provisions, Pt IVA lacks any rational justification. The presence of a purpose to enable a person to obtain a tax benefit may make some sense as a basis of selection of occasions when a tax benefit will be denied, if it is not within the policy of the law to grant that tax benefit. But it makes no sense whatever as a selector of occasions when a tax benefit will be denied, if that benefit is to be denied even though it is within the policy of the law to grant it. It makes no sense that the law should include incentive provisions such as those that the taxpayer sought to take advantage of in Mullens (1976) 135 C.L.R. 290 if Pt IVA will deny the taxpayer the incentive the law sought to give him, because he was foolish enough to act in such a way that it would be concluded that he wanted that incentive.

[16.42] Where it is not within the policy of the law that the taxpayer should have a tax benefit, Pt IVA may serve a purpose of overcoming a failure of the law adequately to give effect to that policy, though one might wonder why the law should not in all circumstances be made to express its policy. But there can be no rational justification for provisions of the Act which enable the defeat of the law’s policies. In the absence of a choice principle, Pt IVA confers a function on the Commissioner, by reconstruction of tax accounts, to give effect to policies of his own choosing. In this there is an abandonment of the rule of law. There is an abandonment even though one might hope that the Commissioner will choose policies which are the policies of the law. This he might do by declining to exercise his function when there is no occasion to overcome a failure of the law to give effect to its policy. He would thus go some way to reinstating the choice doctrine. Indeed the choice doctrine could be substantially reinstated by a judicial decision that an exercise of the Commissioner’s function under s. 177F(1) will not be valid unless it seeks to express the policies of the law.

[16.43] Section 177F(3) gives the Commissioner a complementary function. Where he has exercised his function under s. 177F(1) to include an amount in the assessable income of one taxpayer, or to deny that taxpayer a deduction so as to deprive him of the benefit of a scheme, the Commissioner may exercise a distinct function to reconstruct the tax account of another taxpayer in a way that will treat the taxpayer as not having derived income which under the scheme he has derived, or will treat him as being entitled to a deduction to which, under the scheme, he would not be entitled. The reconstruction of the tax account of the other taxpayer is not automatic, as it is under s. 65 and Div. 6A of Pt III considered in [10.310]ff. and [13.82]ff. above. An automatic reconstruction would have assumed a principle that is clearly unacceptable. The derivation of income by one taxpayer does not have as a corollary that the person from whom he receives must be entitled to a deduction. And the non-deductibility of a payment by one taxpayer does not have as a corollary that a person who receives the payment does not derive income. The automatic reconstruction that results from the operation of s. 65(1A) does assume such a corollary. A taxpayer may make a payment to an associate, which is denied deduction, in part, by s. 65(1) as a payment of an unreasonable amount. It does not follow that the element of the payment that is unreasonable cannot be income of the receiver. It may yet, for example, be a reward for his services. An unreasonable payment for goods supplied by a relative may be a way of rewarding a relative for some service without exposing him to tax on the reward.

The place of section 177E in Part IVA

[16.44] In s. 177E, Pt IVA includes a section which highlights the vague and often inappropriate ideas which underlie the other provisions of the Part. In Slutzkin (1977) 140 C.L.R. 314, the High Court had held that s. 260 did not operate to prevent the securing of a tax advantage by selling shares in a company with accumulated profits, when those profits might have been taken out as dividends or by liquidating the company. The proceeds of sale of the shares by the owner of the shares will generally reflect capital gains that are not income. A dividend out of accumulated profits, or a distribution on liquidation so far as it represents income derived by the company, will be dividends and income of the owner of the shares. The shareholders in Slutzkin had “cashed up” their company prior to the sale of their shares: the company had sold its assets, and its share capital and reserves were now represented by cash. Though they might have suspected it, the shareholders who sold were not parties to the purpose of the company acquiring the shares, a purpose to move the company whose shares had been acquired to pay dividends that would absorb its reserves. The company that had acquired the shares, thereafter sold the shares. The company acquiring the shares was a sharetrader, and would be described as a dividend stripper. The advantages for such a stripper attendant on the stripping and on-sale of the shares were substantial at the time of the events in Slutzkin. Those advantages arose from the decision of the High Court in Investment & Merchant Finance Corp. Ltd (1971) 125 C.L.R. 249, a decision that has been identified in this Volume as one destructive of the analytical integrity of the Assessment Act, and for this reason giving rise to defeat of its policies. The advantages for the stripper have now been taken away by specific amendments to the Act in ss 46A and 46B, though the appropriate response ought to have been, and ought still to be, the overruling by the High Court of its decision.

[16.45] The advantage for the original shareholders in a Slutzkin sale of their shares continued despite ss 46A and 46B, though finding a stripper who would pay an attractive price for their shares may have become more difficult. Part IVA is clearly intended to confer a function on the Commissioner by which he might take away the tax advantage for the original shareholders in a Slutzkin situation. If that function is not given by the general provisions, then it is given by s. 177E. The decision in Sultzkin on s. 260 does not of course exclude the application of the general provisions of Pt IVA to any tax benefit to the original shareholders. But the application of the general provisions is doubtful. It may be doubted that there is a tax benefit. It is arguable that it could not reasonably be expected that dividends would have been paid by the company to its original shareholders, or that the company would have been liquidated by the original shareholders had they not entered on the scheme to sell their shares. If there can be said to be a tax benefit, it may be doubted that it would be concluded that a party to the scheme of selling the shares, or the scheme of sale, purchase and stripping, acted with a dominant purpose of enabling the original shareholders to obtain that benefit. And if there is any survival of the choice doctrine to be found in Pt IVA, it may be doubted, s. 177E aside, whether there is any policy of the law that shareholders in the situation of the original shareholders in Slutzkin should be held to derive income on the sale of their shares. The separate system of taxing company and shareholder adopted by the Australian law involves two levels of taxation, one at the company level and another at the individual shareholder level, when income moves through a company intermediary in its derivation and in its distribution to shareholders. It is arguable that the two levels of taxation operate to produce an unfair result if all income derived by the company is distributed to its shareholders, and it cannot be the policy of the law in any circumstances to treat the shareholder as if a full distribution had been made of income that has been taxed at the company level. To tax that element in the proceeds of sale of shares that reflects the accumulated income of the company is to treat the shareholder as if he had retained his shares and a full distribution had been made.

[16.46] A concern that the general provisions of Pt IVA would not give the Commissioner a function to reconstruct the tax accounts of shareholders in a Slutzkin situation explains the enactment of s. 177E. Section 177E deems a Slutzkin situation to be a scheme to which Pt IVA applies and it deems a tax benefit to have been obtained of an amount that is specified. The view taken in this Volume is that there is no rational justification for selecting the occasions when the Commissioner will have a function to reconstruct tax accounts by reference to the appropriateness of an inference that some person has acted for the purpose of enabling a taxpayer to obtain a tax benefit. It is more than bizarre to deem it appropriate to draw such an inference in order to give the Commissioner a function to reconstruct.

[16.47] Section 177E must be explained as an attempt to assert some new policy that would extend the scope of gains that are subject to the income tax. But the new policy is virtually undiscoverable from the terms of the section. Section 177E(1)(a) provides what key there is. There must have been a disposition of property of a company “as a result of a scheme that is, in relation to [the] company—(i) a scheme by way of or in the nature of dividend stripping; or (ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping”.

[16.48] Section 177E(2) in defining “disposal of property of a company” requires that “dividend stripping” be understood in a sense that is wider than what would appear to be its meaning in s. 46A. “Asset stripping” might have been a more appropriate phrase, and the word “stripping” suggests a substantial disposal of property. If the section is to operate, the disposal must be one that “in the opinion of the Commissioner…represents, in whole or in part, a distribution (whether to a shareholder or another person) of profits of the company…” (s. 177E(1)(b)). And the amount which in the opinion of the Commissioner represents a distribution must be such that it “would have been included, or might reasonably be expected to have been included…in the assessable income of a taxpayer…if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal” to that amount, and it would have been included, or might reasonably be expected to have been included in the assessable income of the taxpayer, “by reason of the payment of that dividend” (para. (c) of s. 177E(1)). If all conditions are satisfied the Commissioner will have a function to reconstruct the taxpayer’s account under s. 177F so as to include the amount in his assessable income.

[16.49] Linking s. 177E with s. 177D by the pattern of deemings leaves the Commissioner with a function to include the amount in the taxpayer’s assessable income, which opens up the prospect already discussed that the Commissioner may act in accordance with policies of his own choosing. This weakens whatever policy is sought to be expressed in s. 177E in a way that makes it impossible to identify it. If the conditions for the operation of s. 177E are met one might have expected that operation to proceed by simply making the relevant amount assessable income of the taxpayer, not by a number of deemings that will give the Commissioner a function to include the amount in the taxpayer’s assessable income. If the reason for an operation by way of deemings was to attract the prospect of reconstruction of the account of another taxpayer by way of complementary tax relief under s. 177F(3), that reconstruction should have been accomplished by distinct provisions.

[16.50] The taxpayer whose tax account is made subject to reconstruction by s. 177E may be a taxpayer in the position of the original shareholders in Slutzkin (1977) 140 C.L.R. 314, and it is in relation to the tax consequences for such a shareholder that s. 177E may be said to express a new policy. But there are difficulties in interpreting the section in a way that will subject such a taxpayer to reconstruction. The disposal of property must have been made “as a result of a scheme that is, in relation to [the] company … a scheme by way of or in the nature of dividend stripping” and the condition imposed by s. 177E(1)(c) that the taxpayer might have had an amount included in his assessable income, must be judged by reference to a notional dividend out of profits “immediately before the scheme was entered into”. The fact that the taxpayer is not a party to the scheme will not affect the operation of s. 177E, but the fact that the scheme commences some time after the taxpayer has ceased to be a shareholder will affect its operation in relation to a taxpayer in the position of an original shareholder in Slutzkin. It may be asked whether “a scheme that is, in relation to a company, a scheme by way of or in the nature of dividend stripping” will include the acquisition by a new shareholder—the dividend stripper—of the shares in that company. At least when the decision to strip is taken by the new shareholder after the acquisition of the shares, s. 177E will not operate to give the Commissioner a function to reconstruct the accounts of shareholders who are otherwise in the position of the original shareholders in Slutzkin. Section 177E(1)(c) will in those circumstances confine the Commissioner’s function to a reconstruction of the tax account of the dividend stripper. Perhaps it is the policy of s. 177E that the Commissioner’s function should be so confined, but this leaves adverse tax consequences for a shareholder who sells to a dividend stripper dependent on decisions having been taken by the stripper before the sale. It is hard to see what conceivable policy would justify imposing adverse tax consequences on the seller by reason of a state of mind of the dividend stripper at the time of the latters’ acquisition, when the seller need not have had any knowledge of that state of mind at the time he sold. The search for the new policy that will explain s. 177E becomes exhausting, and with little hope that it will be fruitful.

[16.51] The taxpayer whose tax account is made subject to reconstruction by s. 177E may be the dividend stripper where the company has made a disposal of property to the stripper or to its associate. In this aspect of its operation, s. 177E reflects a policy already evident in s. 108 of the Act. A detailed examination of the Assessment Act in relation to company distributions is not within the scope of this Volume. It is enough to say that a distribution which is not in form a dividend paid to a shareholder from company profits, may yet be income of a person with an interest in the company. Section 177E may add to the expression of an existing policy by giving the Commissioner a function to identify a company distribution in a disposal of property by the company.

The Extent of Achievement of the Policies of the Income Tax

[16.52] There will be general agreement that the income tax should secure the achievement of its policies. The extent of its achievement will always be limited by the amount of evasion—the failure to pay tax when the law requires payment. And the extent of achievement will be limited by the amount of tax avoidance in the sense of the phrase as it is used in this Volume—the failure to pay tax where the law does not require payment because it is deficient in the expression of its policies. The policy of the law may be identified with the intention of those who made the law—those involved in the processes of legislation.

[16.53] Some evasion is overt. The Commissioner simply does not insist on compliance with the law, because it appears that the law does not accord with its policy. In which event evasion contributes to the achievement of the policies of the law. The Commissioner has been less than rigorous in demanding compliance with the law in regard to the taxing of fringe benefits, more especially in the cases of low-interest loans allowed to employees, company cars, discounted goods and services and employer-provided accommodation at less than market rental. In all these illustrations there may be room for debate about the policy of the law. In the last instance the addition of ss 26AAAA and 26AAAB was found necessary to reframe the law to make it accord with its policies, or perhaps to adopt new policies dictated by a response by taxpayers to old policies.

[16.54] Tax evasion may be covert. Tax is escaped by a taxpayer who fails to return income he has derived. The failure may be innocent, or it may be with the intention of ensuring that tax known to be payable is not paid. The failure to return income derived in the so-called “cash” or “hidden” economies is the principal illustration. Tax evasion may be defiant—the failure to pay tax known to be payable accompanied by steps taken to ensure that the Commissioner cannot recover the tax. The failure to pay tax payable by companies that were the focus of bottom-of-the-harbour operations in the late 1970s is the principal illustration.

[16.55] Tax avoidance is the greater, the more the law fails to express its policies. The extent of that failure will reflect in part the approach taken by the courts to the interpretation of the law. On one approach the law speaks in its terms. On another the law is only the mouthpiece of its policies. On the latter approach there will be a failure of the law to express its policies only if the policies are mistaken by the courts in interpreting the law. The provisions of ss 15AA and 15AB of the Acts Interpretation Act remove inhibitions that the law previously imposed on courts in making a search for those failures. If no policy is found there will be no law and there can be no tax avoidance. In fact the law will always be treated to some extent as speaking in its terms, at least when no policy can be found. When no policy can be found, there can be no tax avoidance. There can be tax avoidance only when the law is held to speak in its terms and its terms are at odds with its policy.

[16.56] There will always be differences in the emphasis given by judges to an approach that the law speaks in its terms. Some judges may come near to asserting that the law always speaks in its terms, and that a search for policy should not be pursued lest the law in its terms be distorted by its policies. Maintaining such an approach may have been rendered more difficult by the express direction to the courts now given by s. 15AA of the Acts Interpretation Act that “construction that would promote the purpose or object underlying the Act shall be preferred to a construction that would not promote that purpose or object”. But if a judge takes the view that only one construction is possible, the direction may be ignored.

[16.57] An emphasis in interpretation on an approach that the law speaks in its terms has produced some remarkable opportunities for tax avoidance. The starkest illustration is Gorton (1965) 113 C.L.R. 604, a decision on the interpretation of the now abandoned federal gift duty. There is no equivalent illustration in the field of the income tax. There is a view that an insistence that the law speaks in its terms is an aspect of the achievement of values said to be expressed in the idea of the rule of law. Gorton would be seen as a demonstration of those values, a demonstration that loses its virtue only if the law is left unamended to continue to speak in its terms when its terms are evidently at odds with its policies. Gorton was left uncorrected by any change in the terms of the law until the tax itself was abolished.

[16.58] The extent of the failure of the law to express its policies may reflect another aspect of the interpretation of the law. It is a task of judicial interpretation of the tax law to draw out the implications of broad principles which are expressed in the words of the law. Where the rules that are framed in drawing out the implications of broad principles come to be a contradiction of those principles, the law will come to be at odds with its policies, and opportunities for tax avoidance as stark as that created by Gorton will come to be available. A rule that contradicts the principle whence it claims to be drawn is destructive of the analytical integrity of the law. It is not a demonstration of the rule of law—it is a rejection of it. It has no virtue. Its correction is an immediate need, and the correction is for the court that made the rule. Correction by legislation to restore the achievement of the policies of the law can never be complete, and it will be at the cost of considerable addition to the complexity of the law.

[16.59] A number of decisions of the High Court have been identified in this Volume as destructive of the analytical integrity of the income tax. They are (i) McLaurin (1961) 104 C.L.R. 381, and more especially Allsop (1965) 113 C.L.R. 341, in regard to the apportionment of a receipt between income and non-income elements: they contradict the income character of the income element; (ii) Investment & Merchant Finance Corp. Ltd (1971) 125 C.L.R. 249 which contradicts fundamentals of the concept of a business; (iii) Cecil Bros Pty Ltd (1964) 111 C.L.R. 430 and South Australian Battery Makers Pty Ltd (1978) 140 C.L.R. 645 which contradict the principle of relevance, an aspect of the concept of a deductible outgoing expressed in s. 51(1); and (iv) Curran (1974) 131 C.L.R. 409 which contradicts the most fundamental of concepts—that income is a gain and that deductible loss reflects a real loss.

[16.60] Attempts by legislation to stem the tax avoidance that has flowed from each of these decisions have been made in all instances, save the first. All attempts have been no more than patching a framework that is in a state of partial collapse. The patching in all cases leaves the prospect of further collapse. In the case of Investment & Merchant Finance the patching has dealt, in ss 46A and 46B, only with some manifestations of the collapse. It is a sad event in the judicial process that this patching was seen by the High Court in Patcorp Investments Ltd (1977) 140 C.L.R. 247 as a reason why it should not undertake a reconsideration of the correctness of its decision. The attempts at legislative correcting of Cecil and South Australian Battery Makers by ss 82KJ and 82KL have added immensely to the complexity of the Act. They are draconian, arbitrary and yet inadequate. The attempts at legislative correction of Curran in s. 6BA are inadequate. They do not deal with rights issues and option issues. They cannot in any case anticipate all the points of further collapse that Curran may generate. The restoration of sound structure by a High Court reversal of Curran is mandatory.