Perpetual Executors and Trustees Association of Australia Ltd v Federal Commissioner of Taxation (No 2) (Thomas' Case)
(1955) 94 CLR 129 ALJ 505
[1956] ALR 1
(Judgment by: Dixon CJ)
Between: Perpetual Executors and Trustees Association of Australia Ltd
And: Federal Commissioner of Taxation (No 2) (Thomas' Case)
Judges:
Dixon CJMcTiernan J
Fullagar J
Kitto J
Taylor J
Subject References:
Estate Duty (Cth)
Judgment date: 29 November 1955
Judgment by:
Dixon CJ
This case stated concerns the value at which an interest in a partnership is to be assessed for the purposes of the Estate Duty Assessment Act 1914-1942. The deceased person whose estate is under assessment is the late Frederick Charles Henry Thomas who died as long ago as 28th January 1944. At his death he was a member of a firm carrying on business under the name of Maples. The partnership consisted of seven persons and their fractional shares in the capital of the partnership were unequal. Thomas' proportion was nineteen and a half per cent. The deed of partnership contained a provision stating how the death of a partner should affect the partnership. The clause provided that the partnership should not be dissolved by the death of any of the partners, but that certain provisions which followed should apply.
They consist of some rather intricate clauses but it is enough to state compendiously their purport so far as they apply in the events that happened. The clauses gave to each of five of the surviving partners options to purchase from the legal personal representatives of the deceased a specified fractional proportion of the capital. The fractions were not all identical but together they added up to nineteen and a half per cent. As the deed expressed it, the legal personal representatives should "be deemed to have given" these options "to the five respective surviving partners". On the exercise of such an option the price was to be computed according to elaborate provisions which took the balance sheet of the partnership as the basis. But it was specifically agreed and declared by the deed that in computing the amount of purchase money payable on the exercise of any option no sum should be added or taken into account for goodwill. (at p11)
The deed made no express provision for the possibility of all the surviving partners failing to exercise their options. Perhaps it was considered that the implications of law from the clause against dissolution on death are clear enough and suffice. But in any event it would have been needless to provide for the contingency. For it was admitted before us that the assumption had been made by the parties that the options gave the surviving partners the right to purchase the interest of the deceased in the partnership at an under value, so that the options were antecedently certain to be exercised. And exercised they all were. The total amount payable to Thomas' estate by the surviving partners under the options so exercised was 156,254 pounds. The agreed case stated tells us that if, in effect, the option clauses had been out of the partnership deed the value of the deceased's share or interest in the business and assets including goodwill was (sic) 176,254 pounds. This is taken to mean, though perhaps not altogether logically, that if the value of the goodwill were included the value of the deceased's share would be greater by 20,000 pounds. (at p11)
When the commissioner came to make the assessment of the value for estate duty of the deceased's estate, he added 20,000 pounds to the value of the deceased's interest in Maples. He ascribed the addition to the "proportion of goodwill" in the partnership business. There stood in his favour the decision of the majority of this Court (Rich, Starke and Williams JJ., Latham C.J. and McTiernan J. dissenting) in Trustees Executors & Agency Co. Ltd. v. Federal Commissioner of Taxation (Milne's Case) (1944) 69 CLR 270 . That case differed materially from the present only in the fact that under the deed to which Milne was a party no allowance in respect of the value of the goodwill of the partnership business was to be made to a partner or his representatives on his death, retirement or expulsion. All five members of the Court had decided that no share in the goodwill devolved upon the executor or formed part of the deceased's personal property so as to be comprised in his estate under s. 8 (3). But the majority held that the interest in goodwill was caught by s. 8 (4) (e) as a beneficial interest of the deceased at death which by virtue of an agreement made by him passed or accrued on or after his decease to other persons, namely the surviving partners. The minority dissented on the ground that there was no "passing or accruing" of the deceased's interest as such to the surviving partners. There was simply a cesser of his interest with a consequential enlargement of theirs. Latham C.J. relied upon Attorney-General v. Boden [1912] 1 KB 539 , where Hamilton J. held that there was no "passing" of the goodwill to the surviving partners under a partnership deed in even stronger terms.
In that deed there was no option; it was an absolute provision that on the partner's death or on his otherwise ceasing to be a partner that particular partner's share should accrue to the two surviving or continuing partners subject only to payment of the value ascertained by an account without valuation or allowance for goodwill, which should accrue to the two survivors in equal shares. Faced with this decision in Milne's Case (1944) 69 CLR 270 the executors of Thomas determined to challenge it in the Privy Council. As a first step they appealed to this Court where they confessed that they could not succeed unless we would allow the correctness of the decision in Milne's Case (1944) 69 CLR 270 to be reconsidered; and that we refused to do: Perpetual Executors & Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation (Thomas' Case) (1949) 77 CLR 493 . The executors obtained special leave to appeal from the inevitable order upholding the commissioner's assessment. In deciding this appeal the Privy Council adopted a view of s. 8 of the Estate Duty Assessment Act and of the situation produced by the deeds in this and in Milne's Case (1944) 69 CLR 270 which struck at the foundation of alike the view of the majority and the view of the minority in Milne's Case (2). Their Lordships construed sub-ss. (3) and (4) of s. 8 as two mutually exclusive provisions. If a case fell within sub-s. (3) it must be excluded from the application of sub-s. (4).
The source of this interpretation is doubtless to be found in Earl Cowley v. Inland Revenue Commissioners [1899] AC 198 ; cf. Attorney-General v. Milne [1914] AC 765 , at p 769 and In re Duke of Norfolk: Public Trustee v. Inland Revenue Commissioners (1950) Ch 467, at pp 473, 484 though of course the statutory provisions are very different. As to the devolution of the deceased's interest in goodwill, their Lordships drew no distinction between the effect of the provisions of the partnership instruments in Boden's Case [1912] 1 KB 539 in Milne's Case (1944) 69 CLR 270 and in the present case. In all three cases, as their Lordships held, the entire interest of the deceased partner in the assets of the partnership including goodwill vested in the executors on his death. On this footing, as is obvious, sub-s. (3) of s. 8 applied in the two Australian cases and, as the sub-sections are to be regarded as mutually exclusive, sub-s. (4) became inapplicable. As to Milne's Case (1944) 69 CLR 270 , Lord Cohen, speaking for the Board said this: -
"In their Lordships' opinion the interest of Milne in all the partnership assets, including goodwill, vested in his executors on his death, although his executors would be bound, if the option were exercised, to transfer that interest to the purchaser at the price fixed in accordance with the partnership deed" [1954] AC 114 , at p 130; (1954) 88 CLR 434 , at p 444.
Referring to the decision of Hamilton J. in Boden's Case (1912) 1 KB, at p 556 that the interest of the deceased in goodwill was not property which "passed" on his death (scil to the surviving partners) within the meaning of s. 1 of the Finance Act 1894 but that the goodwill was property in which the deceased had an interest ceasing on the death of the deceased, Lord Cohen said:
"Their Lordships are unable to agree with this view. In their opinion the deceased partner's interest in goodwill in such a case must pass with his interest in the other assets to his legal personal representative, and the fact that its value is not to be taken into account in calculating the price receivable by the estate for his interest in the partnership is irrelevant" (1954) AC at p 131; (1954) 88 CLR, at p 446.
(Irrelevant means of course irrelevant to liability to duty, not to valuation.)
The present case is a fortiori . For whatever view might be taken of the effect of the provisions of the respective deeds in Boden's Case [1912] 1 KB 539 and in Milne's Case (1944) 69 CLR 270 the deed in the present case contemplates an interval between death and the exercise of the options and immediately on death the entire interest of the deceased in the partnership assets including goodwill must devolve upon the executor of the deceased partner pending the election to exercise or not to exercise the options. (at p13)
The conclusion that Thomas's interest in the assets of the partnership including goodwill passed to the executors and fell within sub-s. (3) of s. 8 as his personal property at the time of his death, left no question outstanding but the value to be attached to the interest for the purpose of duty. The commissioner does not appear to have contested the view that the price receivable from the surviving partners exercising the option represented the value of the nineteen and a half per cent interest of the deceased in the partnership assets, if the value of the share of goodwill was not to be reflected in the total. According to the report Mr. J. H. Stamp put the case for the executors as it resulted from the application of sub-s. (3) of s. 8 as follows:
"There is no justification for attributing to the estate a value greater than it can possibly derive from the assets; the estate is the aggregation of rights associated with obligations that cannot be severed from it, and those rights and obligations can only bring in in this case, and cases like it, the purchase price. This is quite plainly a s. 8 (3) (b) case. The purchase price should be taxed; that is fair for everyone, is realistic, and conforms with the facts of the case. The purchase price is treated as substituted for the asset sold, which includes the goodwill, and that is all that really comes into the estate of the deceased" (1954) AC, at pp 118, 119.
Their Lordships, however, did not pronounce upon this argument. One reason it seems for not doing so was that some uncertainty existed as to the scope of an agreement made between the parties at the hearing here in the original jurisdiction whereby the value of goodwill was fixed at 20,000 pounds, if it was to be included. It was urged for the commissioner that the agreement covered the case of liability under sub-s. (3) and was not confined to liability under sub-s. (4) or in other words under the decision in Milne's Case (1944) 69 CLR 270 .
Unfortunately the uncertainty as to the scope of the agreement could not be resolved at the time, although now the parties concur that no agreement had been made between them as to the value of the deceased's share of the goodwill of the partnership in so far as such value is now material to the appeal. (at p14)
For this and other reasons their Lordships' report did not go beyond deciding that the appeal to the Queen in Council ought to be allowed and that a declaration ought to be made that the share and interest of Thomas in the assets of the partnership including the goodwill was part of his estate within sub-s. (3) of s. 8 and that no part of such share or interest is to be deemed to be part of his estate under sub-s. (4). (at p14)
For the rest, the matter was referred back to this Court to reconsider the objection of the executors to the assessment in the light of this declaration and in particular (if, as is the case, the agreement already mentioned is found not to be binding for present purposes) to consider what value ought to be placed upon the share and interest of Thomas including goodwill. (at p14)
The reference came before Kitto J., who stated this case. Neglecting for the moment the form of the specific questions in the case stated, the only question remaining for decision is the value to be placed for the purpose of the Estate Duty Assessment Act upon the interest of Thomas in the partnership assets including goodwill on the footing that such interest formed part of his personal property at his death. Once the figures are supplied it seems to me that the difficulty of deciding the issue depends only upon a proper appreciation of the nature of the "property" in question. It is a right in respect of assets but it is a right, or a congeries of rights, growing out of the partnership articles. Thomas's interest was delimited and described by the provisions of the deed of partnership and the "value" of the interest as at his death - or indeed at any other time - must depend upon the measure of enjoyment those provisions allow and the extent to which the share or interest may be expressed in or converted into money. The provisions which control the value of the interest at death are those which confer on the surviving partners a right to take over the whole interest for a sum computed under the terms of the deed. They are provisions which describe and characterize the interest as much as any other. They go to the essential nature of the interest. If at the date of death there were any uncertainty as to the exercise of these rights, no doubt their existence would not be decisive. It would be a factor, a powerful factor no doubt, but not more. But we know that there was never antecedently any such doubt. What the interest was worth to the deceased immediately before his death or to his "estate" or executors immediately after his death therefore depended on calculation only. For it was then certain that the options would be exercised.
The result is that for the entire share including goodwill there could not reasonably be any greater value in the interest of Thomas in the partnership at his death than the price ob tainable from his partners, that is to say 156,254 pounds. That is its value for the purpose of estate duty. This conclusion no dubt expresses a proposition of fact rather than of law. But it seems to me to be so evident a result that in answer to the first question it may safely be said that it is not open to find a larger value. (at p15)
The argument for the commissioner in support of a claim that the value should be increased by 20,000 pounds was based upon an interpretation which counsel placed on Lord Cohen's judgment. All I propose to say about it is that it is an interpretation I do not accept. I see nothing in the judgment incompatible with the conclusion that the price obtained for the whole of Thomas's interest from the surviving partners pursuant to the option clauses affords a criterion by reference to which the value of the whole interest including goodwill may be estimated because it is the result of the operation of the clauses which characterize and determine the nature of the interest. (at p16)
I think that the questions in the case stated should be answered: (1) No; (2) and (3): Do not arise. (at p16)