Section 260
11.42. The parent of section 260 appears to be section 82 of the New Zealand Land and Income Tax Assessment Act 1900 which,
apart from the addition in 1936 to the Australian section of the words ‘as against the Commissioner’ and certain other
immaterial differences in wording, is the pattern of the Australian section. The counterpart of section 260 was section
108 of the New Zealand Land and Income Tax Act 1954 as amended by section 16 of the Land and Income Tax Amendment (No. 2)
Act 1968. The New Zealand section 108 has been recently repealed and replaced by a section in very wide-reaching terms but
is itself now intended to be the subject of further amendment. The present New Zealand section 108 would be susceptible to
the type of criticism referred to in paragraph 11.5. Although in a shortened form to section 260, both that section and
the former New Zealand section 108 have the same objective and both have been the subject of considerable judicial
criticism and frequent differences of judicial opinion as to their application. As with the New Zealand section, the
Revenue has endeavoured to apply section 260, sometimes successfully and sometimes unsuccessfully, to transactions where
it has been contended that the feature of income-splitting is involved. The section has been interpreted as meaning that
not every transaction having as one of its ingredients some tax-saving feature is caught by its provisions and that, if a
bona fide business transaction can be carried
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through in one of two ways, one involving less liability to tax
than the other, the section is not to be applied merely because the way involving less tax is chosen. For the section to
have an application, it has been held, it must be able to be shown that it was implemented in that particular way so as to
avoid tax; if the transaction is capable of explanation as an ordinary business or family dealing without necessarily
being labelled as a means of avoiding tax, the section cannot be applied to the transaction. If tax avoidance is an
inessential or incidential feature of the arrangements that may well serve to indicate that the arrangement cannot
necessarily be described as a means of avoiding tax (see the various observations collected in Hollyock's Case
note).
11.43. It cannot be denied that this test for the section's operation lacks precision and that in many instances there will be strongly opposing points of view as to the necessity of applying the label. Further, as it has been held that section 260 is an annihilating provision—that it operates to destroy but not to supply and contains no power to rectify a transaction or to substitute something new in its place—the consequences which may follow from its application also create many difficulties. A number of these problems are referred to in the dissenting judgments of Lord Donovan in Peate's Case note and Mangin's Case note. The section provides ample room for uncertainty and for dissatisfaction on the part of the Revenue and the taxpayer alike and has been said to be long overdue for reform.note
11.44. The Committee is of the opinion that the criticisms of section 260 to which reference has been made should be heeded and the section be amended to reflect the following principles. If any arrangement had or was calculated to result directly or indirectly in the type of tax advantage described in the lettered sub-clauses of the section, the Commissioner should have the right to disregard it for taxation purposes, unless the arrangement was an ordinary business transaction creating rights or obligations that would normally be created between business people dealing at arm's length in a transaction of the nature in question and effected by means normally employed in such a transaction, or was made in the ordinary course of making or changing an investment, or was a bona fide arrangement of a person's or a family's affairs, and the Commissioner was satisfied that the arrangement was not entered into solely or primarily for the purpose of obtaining the tax advantage or that one of its main objectives was to obtain the tax advantage. If the Commissioner did disregard the transaction, he should be empowered to assess any person deriving income under or consequent upon the arrangement to income tax at a deterrent rate: for example, at a rate equal to the maximum marginal rate or at a rate declared by Parliament for the purposes of the section. Where the Commissioner acted upon this section, he should supply any persons affected with his reasons for doing so. It should be made possible to obtain the Commissioner's ruling upon proposals for any such arrangement in order to prevent a transaction being irrevocably entered into with the consequences, amongst others, of expensive litigation. For this purpose the system of advance rulings by the Commissioner, proposed by the Committee in Chapter 22, would be available to taxpayers and their advisers.