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: McTiernan J)
Between: Perpetual Executors and Trustees Association of Australia Ltd
And: Federal Commissioner of Taxation (No 2) (Thomas' Case)
Judges:
Dixon CJ
McTiernan JFullagar J
Kitto J
Taylor J
Subject References:
Estate Duty (Cth)
Judgment date: 29 November 1955
Judgment by:
McTiernan J
Pursuant to the judgment of the Judicial Committee the High Court has to determine what value ought to be placed upon the share and interest of the late Frederick Charles Henry Thomas in the business and assets of the partnership of "Maples" including the goodwill thereof. The questions stated in this case for the opinion of the Full Court are directed to the proper way of estimating the value of that share and interest of Thomas in all those assets including the goodwill. The reference of that issue to this Court is to determine the value that ought to be placed upon that share and interest under s. 8 (1) of the Estate Duty Assessment Act 1914-1942, "having regard to all the relevant circumstances". The value to be estimated is, I understand, the amount of money for which such share and interest could have been exchanged in open market when Thomas died. The judgment of the Judicial Committee declares that the share and interest of Thomas in the business and partnership assets including goodwill fell within s. 8 (3) of the Act and that no part is to be deemed to be property within s. 8 (4). The Judicial Committee decided that on the death of Thomas, his share in the goodwill or any other partnership assets did not cease or go over to any of the other partners. The decision is that his share and interest in the goodwill and other partnership assets vested in his legal personal representative and came within s. 8 (3). The property consisting of that share and interest was a bundle of rights in the partnership assets. To give effect to the declaration of the Judicial Committee the property must be valued on the basis that it includes the share and interest of Thomas in the goodwill, and this element is not to be severed. The property to be valued existed under the articles of partnership. It must be valued with all the conditions including the restrictions attached to it by the articles. (at p16)
The controversy in the case is whether the value of the property is controlled by those articles, called in argument the "option clauses", which gave five partners, who survived Thomas, rights of pre-emption over his share and interest in the partnership assets including the goodwill. The pre-emption price was 156,253 pounds 11s. 3d. It is said that one of the relevant circumstances is that when Thomas died there was no possibility that these partners would not exercise their options. They did in fact exercise them. The pre-emption price was fixed by a formula in the partnership articles. But one of the articles expressly provided that in computing the price payable on the exercise of any option no sum should be added or taken into account for goodwill. The Court has to decide whether, notwithstanding the option clauses, the value of the share and interest of Thomas in the partnership assets including the goodwill could exceed 156,253 pounds 11s. 3d. or be less than 176,253 pounds 11s. 3d. The subject matter to be valued is not the right of the personal representative to receive the pre-emption price if the partners who had the options exercised them. That is not property left by Thomas. The relevant property is his share and interest in the partnership assets including goodwill. The whole of such share and interest was brought into charge by s. 8 (3) and is the subject matter to be valued. Could the sum of 156,253 pounds 11s. 3d. be less than the true value of that share and interest? I think so. This amount is computed without adding anything for the interest of Thomas in the goodwill. Admittedly the goodwill was very valuable and when Thomas died he owned nineteen and a half per centum of it as well as of the other assets. How then could 156,253 pounds 11s. 3d. be the fair value or a true measure of the value of the piece of taxable estate consisting of that proportion of the goodwill and of the other partnership assets?
The reason urged was that the option clauses were a burden on the share and interest of T homas in the partnership assets including the goodwill and it was of the essence of such share and interest that upon the death of Thomas his personal representative would be obliged to transfer it at the price fixed by the partnership articles if the options were exercised. The rights of Thomas as partner in the partnership assets including goodwill were expressed by the covenants between the partners. This mass of rights was the property that vested in his executor and upon the value of which duty is to be assessed. The property which existed under the partnership articles and no other property has to be valued. I do not agree that the "option clauses" are elements of the property to be valued or measure its extent. Their character is rather collateral to the articles which created and determined the share and interest of Thomas in the partnership assets including the goodwill. (at p17)
There occurs in the course of the judgment of the Judicial Committee the passage "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. The effect of the option was to restrict the executor's right to dispose of the interest of Milne. It did not affect the substance of the interest which the executor would transfer, whether he sold in the open market or to a purchaser exercising the option to purchase at the price fixed in accordance with the partnership deed. The passage quoted applies to the share and interest of Thomas to which this case relates, the Judicial Committee having said that the effect of the relevant articles of the partnership agreements in the two cases is the same. (at p18)
The options to purchase the share and interest of Thomas in the partnership assets including the goodwill were by the "option clauses" deemed to be given at his death to his personal representative. He could have no personal representative until he died. Strictly, therefore, the vesting of the share and interest of Thomas in the partnership assets including the goodwill preceded the accrual of the right of any partner to his option. There was no option in esse affecting such share and interest at the moment it came within s. 8 (3): the possibility of its arising resulted, it is true, from the partnership articles. But the option did not come into existence until Thomas died. The option clauses did not affect his possession and enjoyment of his share and interest in the partnership in his lifetime or change it from a share and interest equal to nineteen and a half per centum of the partnership assets including the goodwill into a different of less valuable interest. As already stated, when Thomas died he held that proportion of the goodwill and of the other partnership assets. For these reasons I think that the "option clauses" should be disregarded in determining the issue of value referred back to this Court. I understand that the difference between the amounts in the first and second questions depends upon whether those clauses are considered as having the effect of controlling the value for purpose of estate duty. As I think that these clauses have no such effect, I answer the questions as follows: (1) Yes. (2) No. (3) Unnecessary to answer. (at p18)
If the measure of value is the price fixed under the partnership articles, the result is that no more duty is payable than if the opinions of the minority in Milne's Case (1944) 69 CLR 270 could be applied. But the Judicial Committee have not endorsed those opinions. (at p18)
The words used in enacting s. 8 manifest the intention that the whole estate of a deceased person shall, subject to the exemptions, be charged with duty. Having been instructed that the interest of Mr. Thomas in the goodwill did not cease upon his death, but was an indivisible part of his share and interest in the partnership assets and that the whole of such share and interest, including the interest in the goodwill, was property charged by the Act with duty, I find it too difficult to affirm that the "option clauses" can operate to depreciate the duty payable upon such property. (See observations by Lord Hanworth M.R. in the case of In re Sir William Thomas Paulin; In re Crossman [1935] 1 KB 26 , at p 42 on appeal sub nom. Inland Revenue Commissioners v. Crossman [1937] AC 26 . In my opinion it would be tantamount to affirming that proposition to answer the questions in accordance with the contentions made by the appellant in this case. (at p19)