Kowald v. Commissioner of State Taxation (W.A.).

Judges:
Wallace J

Court:
Supreme Court of Western Australia

Judgment date: Judgment handed down 5 May 1980.

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Wallace J.

This is an appeal pursuant to sec. 58 of the Death Duty Assessment Act 1973 (W.A.) and Ord. 77 of the Supreme Court Rules. The appellant is the surviving widow of Leonard William Kowald, the deceased, who died on 9 July 1976. The appellant and deceased entered into a partnership deed on 26 November 1965. The business thereof was that of farmers. As at 9 July 1976 the partnership had not been dissolved or wound up.

An agreed statement of facts sets it out that by cl. 6 of the partnership deed the parties thereto agreed to make available for the use of the partnership all farming lands owned by them, either solely or jointly one with the other. The land contributed to the partnership by the deceased covered an area of approximately 1,073 ha and was valued for probate purposes at $160,000. The land contributed by the appellant to the partnership approximated 202 ha and was sold by her on 23 January 1979 for $50,750. Deceased and appellant lived together in a residence situated on deceased's land until his death. He was the principal farmer and the appellant assisted him.

The partnership was the owner of livestock and plant throughout, particulars of which are set out in the partnership tax returns for the relevant period of three years, from 10 July 1973 to 9 July 1976. Because of the deceased's ill health the partnership business diminished in activity and for the three years in question the partners leased their farming land and certain of the plant and livestock belonging to the partnership. However, the partners did not cease to engage in farming activity.

Rentals received for each of the three years involved were as follows: -

      Period 1 July 1973
        to 30 June 1974       $20,000
      Period 1 July 1974
        to 30 June 1975       $17,000
      Period 1 July 1975
        to 30 June 1976       $15,000
          

The was no written agreement evidencing the tenancy arrangements. The aforesaid rentals were paid to the partnership account as were the reduced items of income arising from their own farming activities. By cl. 7 of the partnership deed the net profits of the partnership were to be divided between the partners in equal shares. The total income to which I have referred was returned in the partners' partnership income tax returns for the three years in question and they were assessed to tax thereon. The partnership bank account in the name of the two partners was never altered.

The Commissioner argues that because of the very low income received from the partners' farming activities, the business of the partnership had ceased to exist. The parties thereto were in fact no longer farmers. Rentals receivable for the three years in question were therefore paid voluntarily into the partnership account when such rentals were not contractually payable thereto. The respondent utilizing the provisions of sec. 10(2)(a) assessed ``adequate rentals'' applicable to each of the partner's land and the jointly owned plant and livestock for each of the three years in question for the purpose of arriving at excess rental received. By this means a notional gift of rental amounting to $8,468 was made by deceased to appellant.

The appellant simply argues that the business of the partnership never ceased - that deceased and appellant retained livestock and plant for their own use as opposed to plant and livestock leased with the land. Their income tax returns evidence the receipt of small amounts of income from the parties' separate farming endeavours. The partnership had never been wound up and any moneys received by way of rental from the lessees were correctly paid into the partnership account in accordance with its provisions. Since the partnership had never been dissolved or wound up, the right or licence to use the partners' land continued to prevail. See
Munro v. Commr. of Stamp Duties (N.S.W.) (1934) A.C. 61 at pp. 66-67. The fact that partners contribute capital in different amounts does not give rise to a gift of any part of the partnership income. See sec. 34(1) and 57 of the Partnership Act 1895. Prima facie partners' participation in the profits and losses of the partnership are equal unless there is some agreement to the contrary. See Lindley on Partnership 13th ed., pp. 371-373. The respondent's argument is that although the partnership may well have been in existence during the three year relevant period prior to death, the farming business

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ATC 4257

thereof had ceased. The sums derived from farming activity related to an earlier period. In support of that contention the income tax returns of the partnership evidence minor amounts received for wool and wheat although a somewhat larger return from livestock. The agreed statement of facts however, makes it quite clear that not all plant and livestock was leased and that the partnership was the owner of certain livestock and plant throughout the three year period. The relevant tax returns reveal expenditure on items of plant, stock, fences, pest extermination and a livestock trading account. Indeed there is nothing to suggest that deceased and appellant had ceased to farm their land even though their activity in that regard was considerably reduced.

Then the respondent argues that the activity relating to the receipt of rent could not constitute a business for the purposes of the partnership. My attention was drawn to the Partnership Act definition of a business, sec. 3, which includes any trade, occupation or profession, and to sec. 7 which provides in subsec. (1) the definition of a partnership and in subsec. (2) the means by which a court will determine the existence of a partnership. The problem which I have with the respondent's argument, however, is that the agreed statement of facts evidences the existence of the partnership and the change in the main business thereof, as well as the continued farming activity of deceased and appellant.

It is not a case where the partners had ceased to be farmers, nor is it clear to me that that aspect of their business relating to the leasing of the land destroyed their occupation as farmers. It is, I agree, a question of degree but it seems to me that whilst the appellant and Commissioner have agreed upon the continued existence of the farming partnership, it is not for the respondent to intervene therein and contend that the business thereof has ceased to exist and thus the receipt of profits arising from the leasing of the farming land is not legitimately returned to the income thereof. In my opinion, whilst the partnership existed and the partners' occupation were those of principal farmer and an assistant to him - see para. 8 of the agreed statement of facts - the receipt of income from the leasing of the land and part of the plant and stock could not be viewed other than partnership income. It is not open to the Commissioner to declare otherwise. For these reasons I would allow the appeal and order the respondent to pay the appellant's taxed costs.