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Published online by Cambridge University Press: 24 January 2025
The author of this article argues that whilst a desire for uniformity and certainty in taxation law is both desirable and necessary, it should not and cannot be achieved simply by extrapolating general property and trust concepts and authorities into taxation law. Conversely taxation authorities cannot mechanically be cited as supporting property and trust principles. The result of simple extrapolation not only inhibits effective judicial response to tax avoidance by by-passing important policy considerations but also creates uncertainty by obscuring the real reason for the decision.
1 This statement is liberally extracted from the lengthy argument of Becker, The Birth and Death of Meaning .(1971), particularly at 147, 161. It draws on the work of a whole movement in psychology including Fromm , Fear of Freedom (1942), Brown, Life Against Death (1970), Chapter 15. Freud, Civilization and its Discontents (1930) 42, provides the basis. Bell, The Coming of the PostIndustrial Society (1974), particularly at 346, says the relationship of technical “rationality” and political decisions will become “one of the most crucial problems of public policy” in the post-industrial society.
2 Let it be stated at the outset that I do not accept that this polarisation between “form” and “substance” is necessary or justified. See further infra p.209 But this oversimplification is the basis of thinking among tax lawyers and must therefore be the starting point for this analysis.
3 It was authoritatively spelt out by the House of Lords in Westminster v. I.R.C. [1936] A.C. 1 and recently affirmed in Europa Oil (N .Z.) Ltd v. C.I.R. (Europa (No. 2)) (1976) 76 A.T.C. 6001. Lord Tomlin (at 19) firmly rejected the view that “in revenue cases there is a doctrine that the Court may ignore the legal position and regarci"which is called 'the substance of the matter'”. The reference to “legal position” does with respect, beg some large questions. It assumes away the logical problems of extrapolating precedents, attacked in this article. He explicitly makes the rather extravagant claim that law is a “golden and straight metwand” to be contrasted with “the uncertain and crooked cord of discretion”. Words are far less precise a tool than Lord Tomlin would have us believe. (See note 101.) Lord Wright (at 30) said “the legal effect as between the [parties to a contract] must determine for revenue purposes the character of the payments ... “. He does not say why this should be conclusively extrapolated when another party with a whole new range of interests is litigating. Obviously it would not be difficult for two sympathetic parties to hopelessly compromise a third (the Commissioner) if this were the rule. Lord Atkin (at 8) dissenting on the facts but not the 111,w said: 'The only function of a court of law is to determine the legal results of the dispositions so far as they affect tax” and by looking (at 15) it is clear he accepts the same premise as Lord Wright. See Lord Russell (at 25); Lord Macmillan (at 28). Further reference to existing dogma is made in the context of Europa infra p. 213.
4 “Substantive” is here used in Weber's sense as a set of criteria to evaluate a system which is drawn from outside the closed system. A “substantive” evaluation of present assumptions is an incidental part of an earlier analysis in which the other side of the penny, the interpretation of tax statutes, is attacked: Grbich, “Section 260 Re-examined: Posing Critical Questions about Tax Avoidance” (1976) 1 University of New South Wales Law Journal 211,212 (footnote 9), 225. An analysis based on a flat contrast of the “sacred” non-falsifiable assumptions and the “secular”, rational framework is, of course, a vast over-simplification. All rational frameworks are built on extra-rational feet of clay: their assumptions. They can be no stronger than those assumptions. We must either show that the consequences of the whole framework and assumptions are on a balance of articulated criteria undesirable or demonstrate internal inconsistencies in the framework. This article takes the latter course. See further n. 27.
5 See the judgment of the House of Lords delivered by Lord Morris in Finsbury Securities Ltd v. I.R.C. [1966] 1 W.L.R. 1402, 1417 where such concepts as the absence of a “real and genuine” transaction and the “essence of the scheme” were used to hold an artificial tax avoidance scheme taxable. Any observer of recent United Kingdom and New Zealand authorities would not fail to miss this recent trend. That is an article in itself. Compare the even wider concepts introduced by the United States Supreme Court in the leading case of Helvering v. Clifford (1940) 309 U.S. 331. The collegiate judgment, delivered by Douglas J.(two Judges dissenting) said: “Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue”. Contrast the narrow and legalistic approach of the Australian High Court in Patcorp Investments Ltd v. F.C.T. (1976) 10 A.L.R. 407, extensively attacked in Grbich, “What the Three Sisters Did to Section 260” (1977, Monash University/Tax Institute Occasional Papers on Taxation, No. 7).
6 This is a reference to Keynes' famous aphorism that ideas are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical lawyers who consider themselves quite exempt from any philosophical influences are usually the slaves of some defunct jurisprude.
7 Lord Cross in Dingle v. Turner [1972) A.C. 601, 624-625 (H.L.) makes this point in the context of whether the same charity rules should apply for tax purposes and general equity law (here the validity of purpose trusts).
8 Llewellyn, , The Bramble Bush (Oceana ed. 1951) 41 ffGoogle Scholar.
9 Acknowledgment to Labarre for the language.
10 (1971) 125 C.L.R. 418.
11 [1927] A.C. 844. No doubt the decision gave a considerable impetus to the development of the modern discretionary trust in which an object's rights are far less concrete.
12 [1960] A.C. 1.
13 [1960] A.C. 206.
14 (1976) 76 A.T.C. 6001.
15 Organisation has been defined as the mobilisation of bias. See the refutation of the assumption that error is necessarily a random disturbance in an organisation. Campbell, “Systematic Error on the Part of Human Links in Communications Systems” in Porter and Roberts, Communication in Organisations (1977).
16 The view advanced two centuries ago by Adam Smith, An Enquiry into the Nature and Causes of the Wealth of Nations (1961) 350.
17 Grbich, “Section 260 Re-examined: Posing Critical Questions about Tax Avoidance” (1976) 1 New South Wales Law Journal 211, 229 ff.
18 Tax on company profits is now 46%. Personal tax is a maximum rate of 60% on the distributed residue. Add payroll tax and miscellane us taxes and the rate exceeds 80%.
19 This amounts to an advocacy for the need to teach tax and property in integrated subjects. Monash Law School has tried some experiments with this.
20 Refer to the analysis of Reich, “The New Property” (1974) 73 Yale Law Journal 733, 771 that “property is not a natural right but a deliberate construction by society”.
21 Based on the theory of Keynes, The General Theory of Employment, Interest and Money (1936).
22 Reid, “Is and Ought after Darwin” (1977) 40 Modem Law Review 249.
23 The case for movement to “goal criteria rather than process criteria in evaluating legal decision-making” and the need for lawyers to develop better justificatory criteria to maintain legitimacy is well pursued by Frankel, “Humanist Law: The Need for Change in Legal Education-or-If judges do not find the law but make it, what do they make it from?” (1976) 39 Utah Law Review 39.
24 Katz and Kahn, The Social Psychology of Organisations (1966).
25 The term used by Shaklar, Legalism (1964) 10.
26 Eisenstein, , Ideologies of Taxation (1961) 3. Sharkansky, The Politics of Taxing and Spending (1969) 34Google Scholar.
27 See the classic essay by Felix Cohen, “Transcendental Nonsense and tile Functional Approach” (1935) 35 Columbia Law Review 809 where he argues that to justify legal rules or to criticize them in a vacuum “produces horrid wilderness of useless statistics” (at 849), that a theory of descriptive legal science cannot be separated from the task of legal cdticism or from the “consequences of legal decisions” and must be based on a framework of values. He makes a spirited case for “cleansing legal rules . . . of the compulsive flavour of legal logic or metaphysics” to make room for “conscious ethical criticism” (at 847) but does not explain why the public will accept a lawyer's valqes so cleansed in preference to their own.
28 Wechsler, 'Toward Neutral Principles of Constitutional Law” (1959) 73 Harvard Law Review 1, 15 although the major thesis in the article claiming that neutral principles are possible and desirable has been seriously dented. See the refutation in Miller and Howell, “The Myth of Neutrality in Constitutional Adjudication” (1960) 27 University of Chicago Law Review 66.
29 Bell, Coming of the Post-Industrial Society (1974).
30 Australians paid only 26.6% of gross national product in total taxes. The O.E.C.D. average was 31.8%. Australia was 16th among 22 O.E.C.D. countries below the United States (27.8%) and Germany (34.5%) and only Japan (20.1% ) of the major industrial democracies fell below Australia. (O.E.C.D., Paris, 1973. Quoted in the Asprey Report, 9).
31 Supra n. 21.
32 The case is documented in Galbraith, New Industrial State (1967), drawing on Burnham, The Managerial Revolution (1941) and Trotsky, The Revolution Betrayed (1937) 53, but a general trend to centralization of power in larger companies and bureaucracies is well documented in Australia. See for example, Connell, Ruling Class, Ruling Culture (1977); Wheelwright, “Concentration of Economic Power” in Playford and Kirsner, Australian Capitalism (1970); Playford, “The Myth of Pluralism” (1969) 15 Arena 23.
33 Adam Smith, The Wealth of Nations op. cit.
34 (1971) 125 C.L.R. 418.
35 For example, there is a very similar analysis in the context of characterizing income sources in F.C.T. v. United Aircraft Co. (1944) 68 C.L.R. 525, 534.
36 (1971) 125 C.L.R. 418, 423 ff.
37 Id. 424.
38 Those words “in substance” sit rather strangely in this tax context, see infra p. 208 (on judicial insistence on “form”). Is it heretical to suggest that the Westminster doctrine is used more “selectively” than the sweeping dicta in recent authority would have us believe? It would certainly make sense if courts were pursuing “creative ambiguity” (see infra p. 195).
39 That information is capable of being protected with property remedies is clearly supported by the majority House of Lords judgment of ,Lord Guest in Boardman v. Phipps [1967] 2 A.C. 46, 115 where he said that all the information obtained by a trustee in his fiduciary capacity “became trust property”. Lord Upjohn, in the minority (at 127) said “In general, information is not property at all. It is normally open to all who have eyes to read and ears to hear”. He concluded: (at 128) “But in the end the real truth is that it is not property in any normal sense but equity will restrain its transmission to another if in breach of a confidential relationship”. Lord Upjohn would therefore see the granting of a proprietary remedy in Boardman, as a functional response to protect particular rights based on other criteria-not a source of law. Rights which have been protected in a similar context to Brent: Argyle v. Argyle [1967] Ch. 302 (interspousal confidences protected). Seager v. Copydex Ltd [1967] 1 W.L.R. 923 (information about commercial product revealed during negotiations on another matter held confidential) and authorities cited therein. See the analogous decision in Victoria Parks Racing and Recreation. Grounds Ltd v. Taylor (1937) 58 C.L.R. 479, citing the United States decision in International News Service v. Associated Press (1918) 248 U.S. 215. See also Ansell Rubber Co. Pty Ltd v. Allied Rubber Industries Ltd [1967] V.R. 37. See Neave and Weinberg, “The Nature and Function of Equities” (1978) (originally presented to Australian National University Property Workshop, May 1977).
40 It is the content of that term and how far it is to be extended in particular contexts which is the controversial content of property law. In particular, see the celebrated attempt by Reich, “The New Property” (1964) 73 Yale Law Journal 733 to harness the rhetoric of “property” to extend the rights of welfare recipients and the subsequent controversies it caused. See, for example, the recent attack on this rhetorical device and its consequences in Van Alstyne, “Cracks in 'The New Property'” (1977) 62 Cornell Law Review 445, 485.
41 In a progressive tax system which calculates income annually the effect of taxing $65,000 in one year rather than $12,000 odd over three years is to produce a much higher total tax bill. But see the averaging provisions for authors ins. 158C and for primary producers in ss. 149-158AC Income Tax Assessment Act 1936 (Cth).
42 See discussion of horizontal and vertical equity in the Taxation Review Committee [Asprey] Report (A.G.P.S., 1975).
43 Reification is the process by which abstract concepts (or their verbal labels) are treated as if they had real existence. They are raised on a pedestal above their origins. Human beings then experience them as objective reality.
44 This is to adopt the argument extensively developed in the well-known essay by Crick, In Defence of Politics (1964).
45 Scheingold, The Politics of Rights (1914) 15 ff., discusses legal symbols as a source of political legitimacy.
46 Grbich, “Section 260 Re-examined: Posing Critical Questions about Tax Avoidance” supra n. 17.
47 Shaklar, op. cit. 10.
48 Kuhn, The Structure of Scientific Revolution (2nd1 ed. 1970), 38, 85, 94 stressed the fact that professional paradigms are closed systems with their own standards of success, their own standards for deciding what information is relevant, their own definition of what constitutes a problem.
49 Llewellyn, , “The Normative, the Legal and the Law-jobs: The Problem of Juristic Method” (1940) 49 Yale Law Journal 1355, 1373CrossRefGoogle Scholar.
50 Popper,The Logic of Scientific Discovery (1959).
51 [1960] A.C. 1.
52 [1960] A.C. 206.
53 (1941) 51 Yale Law Journal 1.
54 Id. 3.
55 [1960] A.C. 206, 227.
56 Id. 239.
57 See Lord Denning, M.R. making an analogous point with respect to resulting trusts in Re Vandevell's Trusts [1974] Ch. 269, 320Google Scholar.
58 Attacked in Grbich, , “Vesting: The Classification Charade” (1973) 9 Melbourne University Law Review 81, 82Google Scholar.
59 See Gifford, , “Communication of Legal Standards, Policy Development, and Effective Conduct Regulation” (1971) 56 Cornell Law Review 409Google Scholar.
60 Lindblom, , “The Science of Muddling Through” (1959) 19 Public Administration Review 19CrossRefGoogle Scholar.
61 Lord Radcliffe in C.S.D. v. Livingston [1965] A.C. 694, 712.
62 Cross, , Precedent in Enqlish Law (2nd ed. 1968) 182Google Scholar,
63 Hermann, , “The Structuralist Approach to Legal Reasoning” (1975) 48 Southern California Law Review 1131, 1138Google Scholar.
64 Supra p. 192.
65 There is dicta in other cases saying that a vendor is only a trustee in a qualified sense (Cotton L.J. in Rayner v. Preston (1881) 18 Ch. D. 1, 6) or a quasi-trustee (Cumberland Consolidated Holdings Ltd v. Ireland [1946] K.B. 264, 269).
66 [1971] Ch. 892 (Russell, Buckley and Cairns L.JJ. unanimously). See also Re Denstram [1975] 1 W.L.R. 1519 and the cases cited there.
67 Some author's licence is claimed for this mel'odrama. It is fiction based on fact.
68 [1971] Ch. 892, 933 (Russell L.J., for the Court of Appeal). See the wide ambit of the doctrine articulated by Lord Denning M.R. in Cooke v. Head [1972] 2 All E.R. 38, 41 and Eves v. Eves [1975] 1 W.L.R. 1338; but compare the much narrower approach of Lord Diplock in Gissing v. Gissing [1971) A.C. 886, 905.
69 See recent criticisms of the sweeping approach of Lord Denning in Webb, “Trusts of Matrimonial Property” (1976) 92 Law Quarterly Review 489, Waters, Note on “Matrimonial Property Disputes-Resulting and Constructing Trusts” (1975) 53 Canadian Bar Review 366. See also the attack on “unstructured and subjective value judgments” in the U.S. cases by Folberg and Buren, “Domestic Partnership: A Proposal for Dividing the Property of Unmarried Families” (1976) 12 Williamette Law Journal 453, 487. See also the judicial reaction of Bagnall J. in Cowcher v. Cowcher [1972] 1 All E.R. 943, 948 with emphasis on “sure and settled principles to proved ... facts. So in the field of equity the length of the Chancellor's foot has been measured or is capable of ascertainment. This does not mean that equity is past childbearing; simply that its progeny must be legitimate by precedent out of principle” and see the remarkable proposition by Oakley, “Has the Constructive Trust Become a General Equitable Remedy?” (1973) 26 Current Legal Problems 17, 38 that the use of constructive trust in non-matrimonial disputes is . undesirable because it “May well seriously undermine established principles of property law”, as if “property law” were an atrophied crystal vase which does not have to adapt to social change or reconcile any other values against stability.
70 Recent attempts at achieving such structuring are contained in Webb, “Trusts of Matrimonial Property” (1976) 92 Law Quarterly Review 489; Everton, “Equitable Interests and Equities: In Search of a Pattern” (1976) 40 Conveyancer 209; Smith, “Licences and Constructive Trusts-The Law Is What It Ought To Be” [1973] Cambridge Law Journal 123; see also Oakley, Loc. cit.
But the existing arguments turn on criteria such as common intention or evidence of joint contribution to a fund (with emphasis on what is usually relevant) rather than structuring standards for extending equitable intervention and normal creation through use of the constructive trust device.
71 Examples abound: secret trusts, part performance, the trust itself.
72 Llewellyn, “The Normative, the Legal and the Law-jobs: The Problem of Juristic Method” (1940) 49 Yale Law Review 1355, 1400.
73 A reference to the celebrated work in legal anthropology, Llewellyn and Hoebel, The Cheyenne Way: Conflict and Case Law in a Primitive Jurisprudence (1961).
74 Justificatory criteria are simply the reasons given to justify a particular decision.
75 See Llewellyn's law-job no. 4.
76 Lord Denning M.R. in Hussey v. Palmer [1972] 1 W.L.R. 1286, 1290.
77 The recent decision in Ogilvie v. Ryan (1976) 2 N.S.W.L.R. 504 contains a lengthy judicial summary of the recent authorities. In fact structuring does take place very soon. An analysis of the number of reported authorities shows an immediate jump after uncertainty is increased by a decision which breaks new ground with broadly based criteria like Hussey v. Palmer [1972] 1 W.L.R. 1286 but the number of decisions soon settled down again.
78 Wallace and Grbich, A Judges Guide to Childbirth in Property (1978).
79 [1972] A.C. 844.
80 Schedule D. Case V, rule 1 Income Tax Act 1918.
81 Schedule D. Case V, rule 3 Income Tax Act 1918.
82 The profits of a wife were deemed those of her husband under rule 16(i) Income Tax Act 1918.
83 The celebrated extension is the granting to beneficiaries of equitable rights to trace into mixed funds in Re Diplock [1948] Ch. 465, 530. See also the earlier decision in Hardoon v. Belilios [1901] A.C. 118 where a beneficiary who was sui juris and “entitled to shares” was held liable by the Privy Council to indemnify the trustee for calls on those shares.
84 See also Piaget, To Understand is to Invent (1973) 27 who says:When, however, in violation of the rules of positivism ... an attempt is made to explain phenomena and the [scientific] laws governing them instead of limiting oneself to their description, the boundaries of the observable are necessarily overstepped, inasmuch as all causality depends on necessary inferences i.e. on deductions and functional [theoretical] structures that can• not be reduced to simple facts.
For further clarification see Hermann op. cit. 1154.
85 Dahl, “Power” in International Encyclopedia of the Social Sciences (1968) XII, 405.
Any attempt to develop an empirical theory of causal nexus will run headlong into the fact that a causal chain has many links; that the links one specifies depend on what one wishes to explain; and that what one wishes to explain depends, in part on the theory with which one begins. In causal analysis, it is usually . . . possible to insert a very large number of additional variables between any two supposedly directly related factors. We must stop somewhere and consider the theoretical system closed. Practically, we may choose to stop at the point where the additional variables are either difficult or expensive to measure, or where they have not been associated with any operations at all. . . . A relationship that is direct in one theoretical system may be indirect in another, or it may even be taken as spurious. . .. Some of the links that an analyst may take as “effects” to be explained by searching for causes are the outcomes of specific decisions; the current values, attitudes, and expectations of decision makers; their earlier or more fundamental attitudes and values.... Meanwhile, it is important to .specify which effects are at the focus of an explanatory theory and which are not. A good deal of confusion, and no little controversy, is produced when different analysts focus on different links in the chain of causation without specifying clearly what effects they wish to explain.
86 Supra pp. 195-196.
87 See fuller discussion in Grbich, “What the Three Sisters Did to Section 260” (1977, Monash University/Tax Institute Occasional Papers on Taxation, No. 7) 22 ff.
88 See comments in supra note 3 Bachrach and Baratz, “Decisions and NonDecisions: An Analytical Framework” (1963) 57 American Political Science Review 633 and see the extension of the argument in Luke, Power (1976). For a cogent analysis of the power process operating in a system of rules (and its dysfunctions) see Gouldner in Pugh, Organisation Theory (1971) 36.
89 [1971] A.C. 761.
90 (1976) 76 A.T.C. 6001. (The majority comprised Barwick C.J., Lords Diplock, Edmund-Davies, Dilhorne.)
91 Id. 6007.
92 Id. 6009.
93 (1964) 111 C.L.R. 430.
94 Section 31C of the Income Tax Assessment Act 1936 (Cth), as enacted in the Income Tax Assessment Amendment Act 1977 (Cth).
95 (1976) 76 A.T.C. 6001, 6013.
96 Id. 6014.
97 Grbich, “Section 260 Re-examined: Posing Critical Questions about Tax Avoidance” supra n. 17 226 ff. No apology need be made for this. So often, the problem for us as lawyers is not so much the development of new ideas as the exorcism of old ideas. Such ubiquitious ways of thinking permeate into every corner of our mind. Because we have long since ceased to articulate them, we cannot see when they have outlived their usefulness. These old ideas then inhibit our response to new demands made on the legal system. Only by rigorous attempts to articulate and to falsify existing theories can ideas advance. The theme is developed throughout Popper's work. See Popper, Conjectures and Refutations: The Growth of Scientific Knowledge (1972).
98 Human beings are active in the processing of information. They use models to sift through, to codify and then to store information. Man builds theories before1 he can handle information and that information is considerably modified by the initial theory he uses. See Bruner, The Relevance of Education (1972) 31 or any of the writings of Piaget, Chomsky or the structuralist theorists. See also Hermann op. cit. and the articles cited in Cohen op. cit. 826.
99 Grbich supra n. 17, 227 ff.
1 This theme is developed extensively in an administrative law context by Davis, Discretionary Justice: A Preliminary Enquiry (1969) and in extensive later writing.
2 See Bishin and Stone, Law, Language and Ethics (1972) 473 ff.; Hart, “Positivism and the Separation of Law and Morals” (1958) 71 Harvard Law Review 593, 606; Fuller, “Positivism and Fidelity to Law-A Reply to Professor Hart” (1958) 71 Harvard Law Review 630; Gifford, “Communication of Legal Standards, Policy Development and Effective Conduct Regulation” (1971) 56 Cornell Law Review 426.
3 Lord Atkin in I.R.C. v. Westminster [1936] A.C. 1, 8; also see at 15, 19 ff. (Lord Tomlin), 25 (Lord Russell) and particularly 30 (Lord Wright).
4 Supra n. 26.
5 See pp. 189, 193 ff.
6 Lord Wright spells this out in I.R.C. v. Westminster [1936] A.C. 1, 30.