Federal Commissioner of Taxation v. Everett.
Judges: Bowen CJDeane J
Fisher J
Court:
Full Federal Court
Deane J.: The respondent Peter Robert Everett (``the taxpayer'') is a solicitor. Prior to 1 July, 1966, he was employed as an ``Associate'' by three solicitors who carried on their profession in partnership in Sydney under the firm name of Dibbs, Crowther & Osborne. On 1 July, 1966, the taxpayer, to use his words, ``became a partner in that firm by purchasing a 13% interest in the partnership business and the assets, undertaking, goodwill and income thereof'' from one of the existing partners (Mr. Edwards) who ``continued'' as a partner in the firm. Thereafter, the taxpayer and the other three solicitors carried on the practice in partnership under the same firm name. The taxpayer ceased to be paid a salary and received no remuneration for his professional work as a member of the firm additional to his contractual entitlement to share in partnership profits. Drawings against projected partnership profits were made by the partners on a monthly basis.
There was no formal contract between the taxpayer and his partners containing the terms of the partnership agreement between them. At some stage, however, the four partners initialled a document which was described, and to which I shall refer, as the ``Heads of Agreement''. Mr. Edwards, in an affidavit upon which he was not cross-examined, stated that the terms of that document both ``evidenced the basis of the partnership agreement between the partners'' and ``have regulated the association of the partners and have been complied with by the partners'' during all relevant periods.
The Heads of Agreement record that ``the interests of the Firm take priority over individual interests'' (cl. 1), that each partner shall ``use his best endeavours to promote the interests of the Firm'' (cl. 11) and that, in the event that a partner engages in associated remunerative activities, any ``moneys received by way of trustees' commission, directors' fees etc. shall be the property of the Firm'' (cl. 12). They provide that ``the interests of the partners in the capital and income of the Firm'' shall be 13% in the case of the taxpayer and 29% in the case of the other three partners (cl. 3) but, subject to certain provisions aimed at reducing the ``percentage of goodwill'' which a partner who has reached the age of 65 shall ``hold'', the partners ``will progress to equality of interest within 10 years'' (cl. 9). A partner may retire ``on six months' notice (less on grounds of ill-health'' (cl. 5) and shall retire ``if so requested by all the other partners but shall be given six months' notice of such request'' (cl. 7). ``Death, retirement or resignation shall not dissolve the Firm as to the survivors'' (cl. 4). On death or retirement of a partner, ``the value of his interest''
ATC 4601
(which is defined as being the total of 75% of the average of his share in net profits during the three preceding years and the surplus of his ``percentage of the General Account and of the Control Accounts'' over certain liabilities) ``shall be paid pro rata by the remaining partners'' over a designated period (cl. 5). A partner guilty of grave professional misconduct ``may be dismissed without notice by the other Partners and shall be entitled'' to only one-half of ``the value of his interest'' less ``any loss or damage suffered by the other partners''.There was no express requirement in the Heads of Agreement that the four partners devote the whole or any specified proportion of their working time and professional activities to the affairs of the partnership. It is, however, plain that the underlying basis and an implied term of the partnership agreement between the taxpayer and his three partners was that each of the four partners should devote, at the least, a substantial part of his working time and attention to the business and affairs of the firm.
The practice of Dibbs, Crowther & Osborne was described by the taxpayer as ``much the usual sort of practice''. The partnership property included a leasehold interest in premises on which the practice was conducted, a law library, office furniture, fittings, fixtures, stationery, typewriters and the like. In addition to non-professional staff the partners employed a number of solicitors and articled clerks who were engaged in legal work.
By deed made 7 January, 1969, the taxpayer (in the deed referred to as ``the Vendor''), for a consideration of $3,832.50, conveyed and assigned to his wife (in the deed referred to as ``the Purchaser''):
``6/13ths of the Vendor's share in the partnership... together with all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of sec. 31 of the Partnership Act 1892 as from the date of these presents to hold the same unto the Purchaser absolutely PROVIDED HOWEVER that nothing herein contained shall entitle the Purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the Vendor at the date hereof has been distributed to the Vendor.''
The deed proceeds to ``declare'':
``that the Purchaser shall not by reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the Vendor would otherwise have been entitled had this assignment not been made.''
The deed of 9 January, 1969 (``the deed of assignment'') was executed by the taxpayer and his wife with the approval of the taxpayer's three partners. Mr. Edwards, in his affidavit, swore that shortly after its execution ``notice was given to the partners of the aforesaid firm of an assignment made by Peter Robert Everett, a partner of the firm, in favour of his wife, Dianne Joyce Everett of 6/13ths of his interest in the said partnership which said assignment was accepted by the members of the firm''. Mr. Edwards' affidavit continued: ``Having received notice of the assignment the partnership has since that time dealt with the income arising in respect of the 6% assigned to Dianne Joyce Everett in accordance with her instructions, such income being paid usually to the credit of her current banking account although on occasions on her specific direction it has been paid to the credit of her husband's account''. It is plain that Mr. Edwards intended to include both the proportionate share of monthly drawings against projected profits as well as the proportionate share of profits when ascertained in his reference to ``such income being paid'' in this extract from his affidavit.
The taxpayer's ``interest... in the capital and income of the Firm'' was subsequently increased from 13% to 22%. That increase
ATC 4602
occurred however, after the income tax year in question and it is not relevant to consider, whether, upon the proper construction of the deed of assignment, the rights of the taxpayer's wife enjoyed any resulting enhancement.The present appeal relates to the income tax year ended 30 June, 1973 (``the tax year''). In that year, the taxpayer's share in the net income (for income tax purposes) of the partnership, if the effect of the deed of assignment is ignored, was $35,418.00. Of this amount, $11,185.00 was, as a consequence of that deed, either paid to, or applied in accordance with, the specific direction of the taxpayer's wife. The taxpayer, in his taxation return for the year, excluded that amount of $11,185.00 from his assessable income. The Commissioner assessed the taxpayer to tax on the basis that it should be included in his assessable income. The taxpayer appealed to the Supreme Court of New South Wales in its Administrative Law Division. The Supreme Court upheld his appeal and varied the assessment by excluding the amount. The issue involved in this appeal is whether that amount of $11,185.00 should properly be regarded as assessable income of the taxpayer of the relevant tax year.
The taxpayer's primary arguments were put in the alternative. It was well established, it was said, that ``part of a share in a partnership'' can be assigned in equity. The deed of assignment effected an immediate equitable assignment of part of the taxpayer's ``share in the partnership'' of Dibbs Crowther & Osborne including an appropriate part of his right to share in partnership profits or, for income tax purposes, his individual interest in the net income of the partnership. The effect of the assignment was that the proportionate part of what would otherwise have been the taxpayer's individual interest in the net income of the partnership was derived not by the taxpayer but by his wife whose property it was. Alternatively, it was argued, the effect of the deed of assignment was that the proportionate part of the taxpayer's ``share in the partnership'' was held upon trust for his wife and the appropriate part of the taxpayer's individual interest in the net income of the partnership was derived by him, in his capacity as trustee, as income of a trust estate. The assessment of these arguments involves examination of the concept of a ``share in a partnership'', determination of the precise effect of the deed of assignment and consideration of whether the proportionate part of the taxpayer's interest in the net income of the partnership can, in the circumstances, properly be regarded either as not having been derived by the taxpayer at all or as being income of a trust estate derived by the taxpayer in the capacity of trustee.
The phrase ``share in a partnership'' can be used to convey a number of different meanings. It can be used to refer to the right of a partner to share in any surplus of partnership assets over partnership liabilities upon dissolution and the associated beneficial interest in the totality of partnership assets prior to dissolution (
Bolton
v.
F.C. of T.
(1964) 13 A.T.D. 378
at p. 382
;
Bakewell
v.
D.F.C. of T. (S.A.)
(1937) 58 C.L.R. 743
at p. 770
). It can, in some contexts, be used to refer to the ``capital'' directly or indirectly contributed to the partnership and which is distinct from, and may be unrelated to, his interest in any surplus of assets on dissolution (see
Lindley on Partnerships
, 13 Ed., p. 347). As a matter of convenience, it can be used to refer to the total aggregation of a partner's rights under a particular partnership agreement (his part ``of the whole adventure'':
Hocking
v.
Western Australian Bank
(1909) 9 C.L.R. 738
at p. 743
). While the phrase is a useful one and is to be found in the various Partnership Acts and in judgments of the highest authority, it is important to ensure that its latent ambiguity does not conceal a need for precision and that its use does not camouflage either the true nature of the particular partnership relationship or the fact that generalisations as to the content of the rights and duties,
inter socios
, of the members of a partnership are liable to be misleading.
As between the partners, the rights and duties of a member of a partnership are primarily contractual. They flow from the express or implied terms of the particular partnership agreement. Questions of illegality aside, any implication, by statute or rule of law, of provisions into the relationship between partners is ordinarily subject to any contrary intention appearing
ATC 4603
from the agreement between the partners. The rights of a member of a partnership will commonly (but not necessarily) include rights relating to any partnership assets which may exist. They will almost invariably (but, conceivably, not necessarily) include rights relating to any partnership profits which may be earned.In the absence of agreement to the contrary, a member of a partnership has no definite or separate share or interest in any particular partnership receipt or other item of partnership property. He has an undivided beneficial interest in the totality of partnership assets (including receipts and choses in action) and is entitled to insist that they be applied for legitimate purposes of the partnership. The precise content of that undivided beneficial interest will be affected by any separate right of the partner to share in any partnership profits or in any distribution of partnership assets in the sense that the distribution of partnership profits and assets, in accordance with the provisions of the partnership contract, is a legitimate purpose of the partnership. If the partnership agreement so provides or all the partners so agree, there is no general rule of law which prevents the partners dividing or applying partnership receipts and other assets at any time or in such manner as they see fit. In the absence of such provision or consensus, however, a partner's separate interest in relation to partnership assets is to share, either equally or in such other proportion as the partners may agree, in any surplus remaining, upon a dissolution, after the realization of the assets and payment of the debts and liabilities of the partnership. His separate entitlement in relation to any partnership profits is, in the absence of such provision or consensus, to share, either equally or in such other proportions as the partners may agree, in partnership profits if and when they are earned in respect of any accounting period which the partners accept (or, in the absence of agreement, the overall circumstances indicate) as appropriate or in respect of the whole or a particular part of a partnership venture. (See, generally,
Livingston
v.
Commr. of Stamp Duties (Qld.)
(1960) 107 C.L.R. 411
at p. 453
;
Canny Gabriel Castle Jackson Advertising Pty. Ltd.
v.
Volume Sales (Finance) Pty. Ltd.
(1974) 131 C.L.R. 321
at. pp. 327-328
.)
In some cases, particularly where correspondence exists between proportionate contribution to capital, proportionate right to share in any surplus of partnership assets on a dissolution, and proportionate right to share in any partnership profits which may be earned, it may be legitimate to see a partner's share of profits which have been earned as flowing from the capital which he has directly or indirectly invested in the partnership or from his interest in partnership assets. It is not, however, necessary that there be any such correspondence. It is possible to have a partnership without capital or partnership assets. Where partnership assets exist and partnership capital has been contributed, one partner may have contributed all the capital and, on a dissolution, be entitled to any surplus of assets and another partner whose sole contribution is his skill and personal exertion may be entitled only to share in partnership profits (see, for example,
Wiltshire
v.
Kuenzli
(1945) 63 W.N. (N.S.W.) 47
). In such a case it would be unreal to see the right of the working partner to participate in any profits as flowing from his ``capital'' in the partnership or, indeed, from his ``share of the partnership'' in whatever sense that phrase is used. His right to participate in any partnership profits is a contractual provision of the partnership agreement under which he has agreed to devote his time and efforts to the partnership business.
In
Bakewell v. F.C. of T. (supra
at p. 771),
Dixon
and
Evatt
JJ., in a judgment with which
McTiernan
J. expressed his agreement, referred to a partner's share in a particular partnership as constituting a ``corpus'' and to the partner's share in profits as representing ``the income of that corpus''. Their Honour's comments must, however, be read
secundum subjectam materiam
and, in my view, do not constitute authority for a general proposition that a partner's share in partnership profits should in all cases and for all purposes be regarded as income flowing from the corpus of his ``share in the partnership''. Where questions involving the derivation of income are concerned, one must look to the realities or the substance of the particular matter (
Permanent Trustee Company of N.S.W. Limited (Prior's Estate)
v.
F.C. of T.
ATC 4604
(1940) 6 A.T.D. 5 at pp. 13-14 ; see alsoArthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314 at pp. 318-9 ). Where such questions are involved, the determination of whether the income of a partnership should be seen as flowing primarily from the assets of the partnership or from the personal exertions of the partners or of whether a particular partner's share of profits should be regarded as flowing primarily from his ``share in the partnership'' or from his personal exertions as a partner will properly involve consideration of the circumstances of the particular case.
The partnership with which the Court is primarily concerned in the present appeal is the relationship which existed, during the tax year, between four solicitors jointly carrying on their profession, with a view to mutual profit, under the firm name of Dibbs Crowther & Osborne. As has been seen, it was a term of the partnership agreement between them, as evidenced by the Heads of Agreement, that the ``interest of the partners in the capital and income of the Firm shall be'' 13% in the case of the taxpayer and 29% in the case of each of his three partners. I construe the reference to interest in the ``capital'' as being a reference to the proportionate share in surplus assets on a dissolution and the reference to interest in ``income'' as being reference to a proportionate share of net income or profits if and when earned in a relevant accounting period. Apart from these separate interests in any surplus assets on a dissolution and profits if and when earned, each partner had, while the partnership continued, the ordinary undivided beneficial interest in the totality of partnership assets. The right of each of the four partners to share in any surplus of partnership assets upon a dissolution was liable to be converted into a right to receive a monetary payment from the other partners in the event that the partnership was determined by his death, retirement, resignation or dismissal. Such a conversion would involve a change of form of the relevant right but would not involve any new beneficial interest coming into existence (see Bakewell v. D.F.C. of T., supra , at p. 770). While there were, in fact, capital assets of the partnership, the subsisting beneficial interest in the totality of partnership capital assets constituted, in the context of the underlying entitlement to share in any surplus of assets upon a dissolution, an existing proprietary right susceptible of immediate partial assignment in equity. While there were, in fact, partnership revenue receipts (including choses in action) pending ascertainment of profits and distribution (by payment or credit), the subsisting undivided beneficial interest in such receipts and in any work in progress likewise constituted, in the context of the underlying entitlement to share in partnership profits, an existing proprietary right.
In their professional activities, the four partners used partnership assets, employed both professional and non-professional staff and enjoyed the advantages of any partnership goodwill. It is possible that, in some circumstances, the profits of a solicitor's practice should properly be seen as flowing primarily from the goodwill of the practice and the assets employed in carrying it on. Thus, for example, the profits derived from a deceased solicitor's practice carried on by an employed manager for the benefit of the estate may well, in some circumstances, properly be seen as being primarily derived from the goodwill of, and property employed in, the practice (cf.
Re Lazarus deceased
(1940) 11 A.B.C. 249
). In the present matter however, the four partners were actively engaged in the partnership practice. The income of the partnership consisted of fees paid for professional work performed by themselves or, under their supervision, by those whom they employed in carrying on the partnership business. Neither the income nor the profits of the partnership business could, in my view, properly be seen, in so far as the partners were concerned, as being derived either from the partnership assets used in the business or, in any relevant sense, from the activities of the staff employed by the partners in the course of their carrying on the partnership business. The income and profits of the partnership were derived by the partners from their activities (including use of partnership assets and employment of partnership staff) in the carrying on of the partnership business and were the fruits of the personal exertion of the four partners.
As has been said, it was implicit in the partnership agreement that each of the four
ATC 4605
partners would devote, at the least, a substantial part of his working time and attention to the business and affairs of the partnership. Substantial failure so to do would constitute a breach of an implied term of the agreement. Such failure would render the partner in default liable, upon accounts on dissolution, to make good any loss suffered by the firm by reason of his default (Dyer v. Samman (1956) V.L.R. 49 ) or to be prejudiced by an allowance being made in favour of the other partners in respect of their services (
Airey v. Borham 29 Beav. 620 ; 54 E.R. 768 ). Even if he fulfilled the continuing obligation to devote time and attention to the partnership business, his right to participate in the profits of that business could, at any time, be terminated if he were guilty of grave professional misconduct or if it became necessary for him to retire on the grounds of ill-health and, on six months' notice, be terminated either by his three partners' forcing his retirement from the partnership or by his voluntary retirement therefrom. The partnership could be dissolved at any time by agreement between the partners, In sum, the accrual to the taxpayer of any separate proprietary right to receive a detached share in any future partnership profits was dependent upon the emergence of any such profits, upon the continuance of the partnership, upon the continuance of the taxpayer as a member of it and, for practical purposes, upon the taxpayer's continuing fulfilment of his obligation to work in the partnership business. In the event that a separate and separable right to receive a share of profits which had actually been earned did accrue to the taxpayer, that share of profits could not realistically be regarded as primarily flowing from or being ``the fruit of'' any contribution to partnership capital or any interest in the totality of partnership assets or in any surplus of partnership assets upon dissolution. As a matter of substance and reality, any partnership profits were primarily the result of the personal exertions of the four members of the partnership and the taxpayer's share of them was his agreed share of the fruits of those personal exertions. If attribution be necessary, any share of profits which the taxpayer became entitled to receive should be attributed primarily to his personal exertions as a member of the firm. There was correspondence, in so far as proportion is concerned, between the taxpayer's proportionate right to share in partnership profits which had been earned and his proportionate right to share in any surplus of partnership assets on a dissolution. The two rights were independent however and neither one could properly be seen as constituting the fruits of the other. The taxpayer's entitlement to receive (by way of payment or credit) a 13% detached share of partnership profits augmented the content (but did not change the nature) of his undivided beneficial interest in partnership revenue receipts (including choses in action) and work in progress (see above). The augmentation of the content of that interest resulted from, and was not the source of, his contractual entitlement to share in profits. His right to a 13% share of profits could not properly be seen as flowing from his undivided beneficial interest in the revenue receipts, work in progress or capital assets of the partnership.
The deed of assignment, in terms, effected an immediate conveyance and assignment of 6/13ths of the taxpayer's ``share in the partnership... together with all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of sec. 31 of the
Partnership Act
1892''. Since it purported to deal, by way of present assignment, with part only of the taxpayer's ``share'' in the partnership and the other rights to which reference is made, its operation was, of necessity, equitable (see
ATC 4606
Norman
v.
F.C. of T.
(1963) 109 C.L.R. 9
at pp. 29-30
). Even in equity, its effectiveness as an immediate assignment falls to be determined by reference to the nature of the property which it purportedly assigned. That property did not include the taxpayer's interest in any already accrued profits which were held pending distribution. The taxpayer's wife was expressly excluded from any entitlement ``to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof until such time as the share therein'' of the taxpayer at the date of the deed had been distributed to the taxpayer. In so far as future profits were concerned, the deed purported to deal only with ``the right
to
The provisions of sec. 31 of the
Partnership Act
1892 are, subject to a possible qualification in the case of the right to accounts on a dissolution contained in sec. 31(2) (see
Lindley on Partnership
, 13th Ed., p. 385), primarily intended for the protection of the partners of an assignor (
Dodson
v.
Downey
(1901) 2 Ch. 620
at p. 622
). In so far as the right to accounts is concerned, the deed could not, as against the taxpayer's partners who were not parties to it, confer upon an assignee of part only of the taxpayer's share in the partnership, the right of an assignee of the whole of a partner's share contained in sec. 31(2) (see, for example,
Bergmann
v.
MacMillan
(1881) XVII Ch. D. 423
). The reference to the section in the operative part of the deed may be inappropriately worded. Be that as it may, the intent of the reference is clear enough. The ``right to receive an appropriate share of the profits of the partner'' which is purportedly assigned is intended to correspond to the entitlement referred to in sec. 31. That entitlement is stated, in the section, in words corresponding to the words used in the subsequent declaratory part of the deed of assignment itself. The right or entitlement of the assignee was ``only to receive the share of profits to which the assigning partner would otherwise be entitled''. Both the words in the declaratory part of the deed and the reference to sec. 31 serve to underline what the operative words of the deed had in any event made clear, namely, that, in so far as profits were concerned, the deed was only purporting to deal with the entitlement to receive an appropriate part ``of the profits of the partner'', that is to say, an appropriate part of the share in partnership profits which, in the event that they were earned, the taxpayer was himself entitled to receive. In so far as the quantum of any entitlement was concerned, it would seem that the taxpayer's wife would, in the absence of fraud, be bound by the accounts between the partners (
Ex p. Barrow, re Slyth
(1815) 2 Rose's Bank.
Cases
252 at p. 255;
Partnership Act
(N.S.W.) 1892, sec. 31(1)).
As a matter of construction, I would read the reference to the taxpayer's ``share in the partnership'' in the operative part of the deed of assignment as being a reference to his interest in partnership assets. It is, however, unimportant for present purposes whether the phrase is so construed or whether it is construed as including not only the taxpayer's interest in partnership assets but also any entitlement to participate in partnership profits. In either case, the taxpayer, by the deed, purportedly assigned to his wife the right to receive an appropriate part of the profits to which he would otherwise be entitled. In either case, the conclusion that the taxpayer's entitlement to share in any partnership profits could not properly be seen as flowing from his interest in partnership assets or from any capital contribution to the partnership has the consequence that the effectiveness of the purported partial assignment in so far as entitlement to receive a share of future profits is concerned will fall to be determined by reference to its effectiveness as a partial assignment of that entitlement as distinct from by reference to the effectiveness of any assignment or partial assignment of some other interest from which the entitlement to share in future partnership profits could properly be said to flow. The question arises whether that entitlement was an existing right or interest susceptible of immediate effective assignment in equity or a future right or expectancy not susceptible of such effective immediate assignment (see, per Younger L.J., in
Performing Right Society
v.
London Theatre of Varieties
(1922) 2 K.B. 433
at p. 454
and
Salmond and Williams on Contract
(1945) p. 463). That question must be answered in the light of the decision of the
ATC 4607
High Court of Australia in Norman v. F.C. of T., supra , andShepherd v. F.C. of T. (1965) 113 C.L.R. 385 .
In Norman's case (supra) , the intending assignor had purported voluntarily to transfer and assign to his wife ``all his right title and interest in and to'' certain interest to accrue (during a period including the relevant year) on a loan repayable by the borrower at will and dividends which might be declared (during the relevant year) on certain shares. It was held, unanimously, that the relevant indenture was not an effective assignment of the dividends since there was no right to receive dividends unless and until they were declared. The dividends constituted a mere expectancy or possibility which was not susceptible of separate voluntary assignment in equity. The decision of the Court as to dividends was influenced by the special provisions of the Act relating to income from dividends and by the fact that the shares themselves were not held by the intending assignor at the time of assignment. The reasoning of the members of the Court in relation to dividends (see, for example, per Windeyer J., ibid ., at p. 40) does however lend some support for the view that the entitlement to receive a share in any future partnership profits in the present matter is, if viewed independently of any proprietary interest in partnership assets, likewise an expectancy.
A majority of the members of the Court ( Dixon C.J., Menzies and Owen JJ., McTiernan and Windeyer dissenting) in Norman's case (supra) , reached the conclusion that the object of the purported assignment relating to interest on the loan was likewise an expectancy or possibility which was not susceptible of such voluntary assignment. The critical difference between the members of the Court was not, however, the result of any basic disagreement as to the principles governing the effectiveness of a purported equitable assignment of an expectancy. The difference between the members of the Court was confined to two comparatively narrow questions. The first of those questions was whether, as a matter of construction, the relevant assignment should be seen, as Menzies and Owen JJ. ( ibid . at p. 22) and, possibly, Dixon C.J. ( ibid . at p. 16) saw it, as a purported assignment of future interest itself or, as McTiernan J. ( ibid . at p. 18) and Windeyer J. ( ibid . at p. 38) saw it, as a purported assignment of the right to be paid interest at a future date. The second question was whether, notwithstanding the borrower's entitlement at any time to repay the capital and thereby to extinguish the liability to pay interest, the taxpayer's right to be paid interest if the loan continued was an existing chose in action susceptible of immediate effective voluntary assignment or merely a future right or expectancy. On that second question, McTiernan and Windeyer JJ. ( ibid . at pp. 18, 38) were of the view that the relevant right was a present right, Dixon C.J., was of the view that it was no more than an ``expected right'' ( ibid . at p. 16) and Menzies and Owen JJ. found it unnecessary to indicate any view at all ( ibid . at p. 22).
The purported voluntary assignment in Shepherd's case (supra ) was to five persons in specified proportions and was of the assignor's ``right, title and interest in and to an amount equal to ninety per centum of the income which may accrue during a period of three years from the date of this assignment'' under a royalty agreement by which the assignor, who was the grantee of certain letters patent relating to castors, had granted a licence to manufacture castors according to the relevant specifications. The amount of royalties payable during any period depended upon the quantity of castors made and sold by the licensee who was under no obligation to make and sell any minimum quantity. Owen J., who dissented, was of the view that the appellant had not purported to assign part of an existing contractual right to receive royalties. The other members of the Court ( Barwick C.J., and Kitto J.) held that he had purported to assign such a contractual right. Barwick C.J., and Kitto J., also held that, in the circumstances, the contractual right to receive royalties was an existing right susceptible of partial immediate voluntary assignment in equity. The future royalties, being future property or an expectancy, were not in themselves susceptible of such independent voluntary assignment. When such royalties became in fact payable however, they flowed from, or represented ``the fruit'' of ``the tree'' which had been effectively assigned (per Kitto J., ibid ., at p. 396). In the course of his judgment, the Chief Justice referred to Norman's case (supra ) and commented that in so far as that case
ATC 4608
``dealt with the attempted assignment of the promise to pay interest, it must... depend upon the view that the promise to pay interest... inhered in the existence of a principal sum upon which the interest was to be calculated and payable. Consequently, there was no promise to pay interest, if no principal remained due''. Kitto J., in the course of his judgment, said that to understand the grounds of decision in Norman's case (supra) ``it is necessary to remember that in respect of the future year the loan agreement recorded the terms which should apply to the relationship of borrower and lender so long as such a relation should exist, but it left the borrower free to decide whether such a relation should exist in the relevant year. It gave the lender no right in any possible event to insist upon there being a loan in existence in that year''.As has been said, Norman's case (supra) did not decide whether, in so far as the interest was concerned, there was an existing proprietary right in the sense of a present entitlement to receive any interest which might in fact accrue due in the relevant future period. Two of the three Justices who expressed an opinion on that question were of the view that there was. The above comments of Barwick C.J., and Kitto J., in Shepherd's case (supra) were, therefore, hypothetical. They do, however, underline the importance, in determining whether or not there is an existing proprietary right susceptible of immediate assignment, of the consideration that it is a matter of speculation whether the substratum of the entitlement will exist at the time when the relevant future benefit may accrue.
The ``right to receive'' part of the taxpayer's share of any future partnership profits which was purportedly assigned by the deed of assignment in the present matter was quite different to part of the benefit of the promise to pay royalties which was assigned in
Shepherd's case (supra)
. The promise in
Shepherd's case (supra)
was a promise by a third party (the licensee) to pay royalties to the assignor. The benefit of that promise was, during the joint currency of the letters patent and the licence agreement, an existing proprietary right which was independent of any future activities of the assignor and which had arisen under a ``contractual relationship'' between the assignor and the licensee ``which by its terms must continue throughout the ensuing three years'' regardless of whether the licensee should wish it to continue or not (
ibid
., at p. 396). The ``right to receive'' an appropriate part of the taxpayer's share of future profits which was purportedly assigned in the present matter was expressly stated to be exclusive of any share of prospective profits accumulated but not distributed at the time of the assignment. It was dependent not only upon such profits being, in the future, earned in respect of a completed period (ordinarily a period of twelve months ending on 30 June of the particular year) but upon the continuance of the partnership between the taxpayer and his three partners and, for practical purposes, the continued devotion, by the taxpayer, of a substantial part of his time and attention to the affairs of the partnership. The taxpayer's entitlement to share in any profits which he and his partners might earn in the future cannot properly be seen as flowing from a promise by any one or more of his three partners to pay him money. His entitlement was the result of mutual promises between the four partners relating not to a present chose in action but to the future division of partnership profits if and when they jointly earned them. The ``right to receive'' an appropriate part of the taxpayer's share of any such future profits which the deed purportedly assigned was no more than a prospective entitlement to receive a part of a share of future profits which may or may not be earned by professional activities which may or may not be carried on by a partnership which may or may not exist. The interest in such future profits of the partnership, if and when earned, was a future interest (compare
Horwood
v.
Millar's Timber and Trading Company Ltd.
(1917) 1 K.B. 305
at pp. 314-315
cited in
Norman's case, supra
, at p. 22). It was an expectancy or possibility which was not, in itself, capable of effective immediate assignment either at law or in equity and which could not properly be seen either as flowing from, or as the fruits of, an existing proprietary right or interest which was capable of such immediate effective assignment.
The effect of a purported immediate assignment of an expectancy or possibility was concisely stated in
Jordan's Chapters on
ATC 4609
``... a purported assignment of a mere expectancy (in the sense of the chance of becoming entitled under the will or intestacy of a person who is still living), or of property to be acquired in the future, is inoperative as an assignment, and has no effect unless made for valuable consideration. If there be consideration, it will operate as an agreement to assign the property when acquired, or to hold it in trust (the latter if the whole of the consideration has been satisfied) and this agreement will be binding on the parties as from its date and binding on the property in equity (although not at common law), if and when it is acquired by the assignor, if it is of such a nature and so described as to be capable of being identified. In the interval between the making of the agreement and the acquisition of the property by the assignor, the interest of the assignee is not contractual merely, but he has, as between himself and the assignor, a prospective interest in the property to be acquired which has some of the incidents of a proprietary right.''
(References to authority have been omitted.)
The nature of the intended assignee's interest pending acquisition by the intending assignor of future property the subject of a purported immediate assignment for valuable consideration which has been fully satisfied is of some importance in the present matter. Even pending acquisition by the intending assignor, the intended assignee enjoys more than the traditional concept of an equitable right
in personam
against the assignor. The relevant equitable principle does not depend upon the possibility of a court of equity decreeing specific performance with the consequence that the assignee's beneficial interest could not arise until after acquisition by the assignor. The relevant principle is that equity considers as done that which ought to be done. The consequence is that the beneficial interest in the property the subject of the assignment never vests in the assignor when the property is acquired by him. He holds it immediately in trust for the assignee. (See, generally,
Collyer
v.
Isaacs
(1881) 19 Ch. D. 342
at p. 351
;
In
re Lind
,
Industrials Finance Syndicate Ltd.
v.
Lind
(1915) 2 Ch. 345
at p. 360
;
Palette Shoes Pty. Limited
v.
Krohn
(1937) 58 C.L.R. 1
at pp. 16-17, 27
;
Bakewell v. D.F.C. of T., supra
., at pp. 760-761, 768 and
Visbord
v.
F.C. of T.
(1943) 68 C.L.R. 354
at p. 383
.)
The purported immediate assignment of the ``right to receive'' part of the taxpayer's share of future partnership profits had the effect that immediately a right to receive any share of particular earned partnership profits accrued to the taxpayer he held a proportionate part of that right in trust for his wife. The beneficial interest in the proportionate part of the right to receive the share of such profits never accrued to the taxpayer. It accrued to his wife. Actual receipt by the wife could, no doubt, properly be seen as flowing from her prior beneficial ownership of a proportionate part of the accrued right to receive. It may be assumed that the taxpayer held his undivided beneficial interest in the totality of partnership assets (including receipts and choses in action) partly upon trust for his wife. The taxpayer's right to receive a share of profits could not however, for the reasons which have already been given, properly be regarded as flowing from that undivided beneficial interest in partnership assets. His wife's right to receive a proportionate part of the taxpayer's share of partnership profits likewise could not properly be regarded as flowing from any prior beneficial interest in the totality of partnership assets. What then was the effect of the deed of assignment on the taxpayer's liability to income tax in respect of the relevant part of his interest in the net income of the partnership for the tax year?
Section 6 of the Act defines a partnership, for the purposes of the Act, as meaning ``an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company''. The section defines ``business'' as including any profession. The taxpayer's wife was not one of the partners carrying on the practice of Dibbs Crowther & Osborne. The deed of assignment could not have made her a partner in that firm ( Hocking v. Western Australian Bank supra at p. 749). It expressly stated that it did not have that effect. Nor was she jointly with the four partners who carried on that practice, in
ATC 4610
receipt of the income of that firm. Her entitlement (her ``only'' entitlement) was to receive a part of one of the partner's share of any profits which the firm might earn. The four members of the firm were jointly in receipt of the partnership income. The fact that one or more of their number may hold part of his ultimate share in any partnership profit upon trust for a third person does not mean that that third person is in receipt of income jointly with his trustee and the other partners (and other beneficiaries if any) or that that third person is, for the purposes of the Act, a partner in the relevant partnership (see, generally,Tindal v. F.C. of T. (1946) 72 C.L.R. 608 at pp. 620-621, 628, 632 and
F.C. of T. v. Whiting & Ors. (1942-1943) 68 C.L.R. 199 at pp. 204, 214 ). The relevant primary partnership, in so far as the income of Dibbs Crowther & Osborne was concerned, was, for the purposes of the Act, the partnership which existed as a matter of law, namely, the partnership which existed between the four partners who carried on the practice in partnership. It was not suggested, either in the taxpayer's grounds of objection or the argument advanced on his behalf, that there was any relevant sub-partnership between the taxpayer and his wife arising from some joint receipt of his share of partnership profits (cf. Hocking v. Western Australian Bank, supra , at p. 749).
Section 92 of the Act provides that ``the assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income''. The phrase ``net income'' in relation to a partnership is defined, by sec. 90 of the Act, as meaning ``the assessable income of the partnership, calculated as if the partnership were a taxpayer, less all allowable deductions except the concessional deductions'' and certain other specified deductions.
Section 92 appears in Div. 5 of Pt. III of the Act. The Division provides for the apportionment among the members of a partnership of ``the net income'' of the partnership. It brings to the prima facie assessable income of each partner, his individual share in that ``net income''. In adopting this approach, the Division departs from the ordinary approach which the Act adopts of bringing gross income or receipts to assessable income. This departure is not however unique to Div. 5: it is to be found elsewhere in the Act (see, e.g., sec. 26(a)). Nor does the approach adopted by Div. 5 involve any attribution of distinct legal entity to the partnership or any basic inconsistency with conceptions of a partnership adopted by the general law (see
Rose
v.
Commr. of Taxation
(1951) 84 C.L.R. 118
at p. 124
). Indeed, there is a general consistency between the approach which the Act adopts and the legal position that while a partner has an undivided beneficial interest in the gross income or receipts of a partnership, his individual or separate entitlement is, in the ordinary case, only to share in profits. The ``net income'' which is apportioned among ``the partners'' by sec. 92 can readily be seen as a convenient parallel, for the purposes of the Act, to the ``profits'' in which the partners are entitled to participate. Plainly the two will not necessarily correspond. Exempt income of a partnership will be relevant to the determination, as between the partners, of partnership profits but will be irrelevant to the determination of ``net income'' of the partnership for the purposes of sec. 92. Outgoings of a partnership which can properly be taken into account in determining, as between the partners, partnership profits may be irrelevant for the purposes of ascertaining the ``net income'' of the partnership for the purposes of sec. 92 for the reason that they are not properly allowable as deductions under the Act.
It was argued, on behalf of the taxpayer, that the prima facie operation of sec. 92 of the Act is to include in the assessable income of a partner ony so much of his ``individual interest in the net income of the partnership'' as he is entitled beneficially to receive. The result, it was argued, was that the taxpayer's individual interest in partnership income did not, for the purposes of sec. 92 of the Act, include the relevant part of his share of partnership profits. The argument encounters some difficulties by reason of the theoretical difference between the individual interest in partnership income to which sec. 92 refers and the proportionate part of the taxpayer's share of partnership profits which the taxpayer's wife was entitled to receive. It also encounters some difficulty arising from the existence of independent subsisting rights of the partners (see, for example,
In
re Garwood's Trusts
,
Garwood
v.
Paynter
(1903) 1 Ch. 236
). If any of such difficulties
ATC 4611
were otherwise insurmountable, it may well be that the taxpayer would be entitled to call in aid the principle, to which reference has already been made, that in matters involving questions of derivation of income tax one should look to the reality and the substance. It is unnecessary that I express any view in that regard, however, for the reason that I am unable to accept the taxpayer's basic proposition as to the prima facie operation of the provisions of sec. 92 of the Act. The ``individual interest'' of a partner to which sec. 92 of the Act refers is, in my view, the interest to which a partner is separately entitled as contrasted with his joint interest in the whole. The fact that one of the partners will receive the whole or any part of his share in partnership profits in trust for a third party does not affect his individual interest in the net income of the partnership for the purposes of sec. 92. The question whether he is exempt from liability to income tax in respect of the appropriate part of his individual interest in the net income of the partnership will fall to be determined by reference to the provisions of the Act (sec. 95-102) dealing with trustees (see, generally, the comments of Rich J., in F.C. of T. v. Whiting, supra at p. 204: Rich J.'s comments as regards the effect of sec. 92 of the Act were not subjected to criticism in the subsequent judgments of the Full Court on appeal (ibid.) ). In my view, sec. 92 apportions the whole of the net income of a partnership among the partners leaving it to be determined, by reference to considerations relevant to a particular partner, whether the particular partner should be exempt from income tax as regards so much of his individual interest in the net income as may represent income to which he is not beneficially entitled.The net income of Dibbs Crowther & Osborne which fell to be apportioned ``among the partners'' pursuant to sec. 92 of the Act was the whole of the ``net income'' of the firm. For the purposes of sec. 92 of the Act, the respective individual interests were 29% of that overall net income in the case of each of the taxpayer's three partners and 13% of that net income in the case of the taxpayer. Prima facie, sec. 92 of the Act included the whole of the taxpayer's 13% ``individual interest'' in that net income in his assessable income.
Section 96 of the Act provides that, except as provided in the Act, a trustee shall not be liable as trustee to pay income tax upon the income of a trust estate. The deed of assignment resulted in the establishment of a trust relationship between the taxpayer and his wife. In a context where there were partnership assets, the taxpayer's interest in them was, as has been said, an existing proprietary right. The taxpayer held an appropriate part of that proprietary right upon trust for his wife. In the event that partnership profits were earned, the taxpayer would hold an appropriate part of any accrued right to receive his share of such profits upon trust for his wife. For the purposes of the Act, there was a trust estate of which the taxpayer was trustee, his wife was beneficiary and any property or present interest held by the taxpayer in trust for his wife was the trust property. The question which arises is whether any part of the taxpayer's individual interest in the net income of the partnership of the year of income which was, prima facie, included in his assessable income by reason of the provisions of sec. 92 of the Act can properly be regarded as being income of that trust estate. The resolution of that question has caused me more than ordinary difficulty.
Section 96 does not refer to all income received by a person upon trust for another. It refers to ``income of the trust estate'' that is to say income derived by a trustee from property under his control as trustee (
Howey
v.
F.C. of T.
(1930) 44 C.L.R. 289
at p. 293
). It does not encompass income, derived by a person from his own property or by means of his own exertion, in respect to which a trust arises at the moment of derivation (
Stewart Dawson Holdings Pty. Limited
v.
Commr. of Taxation
(1965) 39 A.L.J.R. 300
at p. 301
). If the partnership profits could, in the present case, properly be seen as flowing from partnership assets, there would be much to be said for the view that the appropriate part of the taxpayer's share of partnership profits flowed from that part of his interest in partnership assets which he held in trust for his wife and therefore constituted income of the trust estate. Alternatively, if the taxpayer's entitlement to share in any partnership profits which might be earned could properly be seen as flowing either from his interest in partnership assets
ATC 4612
or from a capital investment in the partnership, a proportionate part of the taxpayer's share of profits could likewise possibly be seen as flowing from trust property and as income of the trust estate notwithstanding the fact that the taxpayer was actively concerned in the partnership business (see, for example, F.C. of T. v. Whiting, supra , and Tindal v. F.C. of T., supra ). For the reasons which I have given however, I am unable to see either the profits which the partners might earn as flowing from partnership assets or the taxpayer's right to receive a share of any such profits as flowing either from his interest in partnership property or from any capital contribution to the partnership. If the Act included in the assessable income of a partner only the share of partnership profits which he actually received, it would be arguable that receipt must ordinarily follow, and flow from, a prior right to receive which had arisen immediately the profits had been earned and which was held, in part, upon trust for the taxpayer's wife with the consequence that the receipt itself could be regarded as the fruits of that trust property ( Shepherd v. F.C. of T., supra , at p. 396). The individual interest in the net income of the partnership which the Act includes in assessable income is, however, quite independent of actual receipt. The derivation of that individual interest can, if discrepancies which do not assist the taxpayer in the present matter be ignored, be equated with the coming into existence of the separate right of a partner to share in particular profits which have been earned and not with the actual receipt of the whole or any part of that share of profits (see Rose v. Commr. of Taxation, supra , at p. 124 andF.C. of T. v. Happ (1952) 9 A.T.D. 447 at p. 450ff. ).
Any profits of the partnership in which the taxpayer was, under the partnership agreement, entitled to share were the joint professional earnings of the four partners. Those earnings were not derived by an interposed legal entity. They were derived by the taxpayer and his three partners themselves. The taxpayer's share in those joint earnings, determined by mutual agreement between the four partners, represented his earnings from his own professional activities. The deed of assignment did not preclude the taxpayer from terminating or forfeiting his entitlement to receive any share of those earnings or, after dissolution of the partnership or his ``retirement'', ``resignation'' or ``dismissal'', restoring to himself the full benefits of his professional earnings by carrying on his profession as a sole practitioner or as a member of an unrelated partnership. The reality and the substance of the matter was that, notwithstanding the effect of the deed of assignment, the relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion, being part of his earnings derived from his professional activities and did not constitute the income of income-producing property or income of a trust estate. (See
Bolton v. F.C. of T.
(1964) 13 A.T.D. 378 at pp. 387-388;
Stewart Dawson Holdings Pty. Ltd. v. Commr. of Taxation, supra
, at p. 301F;
Arcus
v.
Commr. of I.R.
(1963) N.Z.L.R. 324
at pp. 327-331
;
Hollyock
v.
F.C. of T.
71 ATC 4202
at p. 4206;
(1971) 125 C.L.R. 647
at p. 658
.) The consequence is that the provisions of sec. 96 of the Act did not, in my view, exempt the taxpayer from liability to pay income tax in respect of any part of the net income of the partnership which was, prima facie, included in his assessable income by virtue of the provisions of sec. 92 of the Act. I would note that my conclusion in that regard does not involve necessary acceptance of the broad statements which are found in some judgments to the effect that it is impossible, for income tax purposes, effectively to assign the whole or part of what are in truth earnings from personal activities (see, for example,
Spratt
v.
Commr. of I.R. (N.Z.)
(1964) N.Z.L.R. 272
at p. 277
;
Johnstone
v.
Commr. of I.R. (N.Z.)
(1966) 10 A.I.T.R. 222
at p. 228
;
Kelly
v.
Commr. of I.R.
(1969) 1 A.T.R. 380
at p. 384
; and note the comments of
Menzies
J., in
Peate
v.
F.C. of T.
(1964) 111 C.L.R. 443
at p. 446
).
The appeal should be allowed with costs. The orders of the Supreme Court of New South Wales in its Administrative Law Division should be set aside and in lieu thereof it should be ordered that the appeal to that Court should be dismissed with costs and the assessment the subject of the appeal be confirmed.
ATC 4613
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