Federal Commissioner of Taxation v. Jefferies.Judges:
Supreme Court of Queensland
This is an appeal from a decision of the Board of Review No. 3, Case M38,
80 ATC 284, which by majority allowed an objection by the present respondent to an amended assessment made by the appellant in respect of income derived by the respondent during the year ended 30 June 1975.
As at 27 June 1975 the respondent was and had been during that financial year carrying on in partnership with five other persons a plumbing business under the firm name C.J.R. Plumbing Co. the partners by Deed bearing date 1 June 1975 had set out the terms of their agreement so to do which had been continuing from in or about the year 1973. Each of the partners had pursuant to that Deed a one-sixth interest in capital and after allowing for payment to some partners of salaries or expenses as might be determined, the Deed provided that profits should be divided among the partners in the same proportion as they were entitled to capital.
Clause 3 of the Deed provided:
``Each respective Assignee covenants that they will indemnify the respective Assignors and keep the respective Assignors indemnified from and against all the debts liabilities and obligations of the firm to the extent aforesaid as at and from the Twenty-seventh day of June One thousand nine hundred and seventy-five and from and against all actions proceedings claims demands costs and expenses in respect thereof.''
Clause 9 provided for the preparation during the continuance of the partnership of a balance sheet and revenue accounts as at the thirtieth day of June in each year. No
ATC 4661time was fixed for the division of profits or the drawing of profits by the partners other than a provision that during the continuance of the partnership each partner was to be able to draw ``such amount or amounts as the partners may decide''.
By Deed of 27 June 1975 the respondent and the other five partners assigned parts of their interests in the partnership to others. So far as is relevant, by this assignment the respondent reduced his one-sixth interest in the partnership to one-eighteenth and the dispute between the appellant and the respondent centres upon whether up to 27 June 1975 he was liable to pay tax on one-sixth of the profit made by the partnership to that date or whether for the whole of the financial year ending 30 June 1975 he was liable to tax upon one-eighteenth of the profit of the business.
By the Deed of 27 June 1975 it was agreed that ``... notwithstanding the sale and assignment the partnership shall not be dissolved or terminated and shall be continued by the Assignors and Assignees...''. The close of business on 27 June 1975 was expressed to be the time from which the assignment was to have operation.
For the respondent it was argued before the Board of Review that by reference to the terms of the Deed of Partnership and the Deed of 27 June 1975 that no dissolution of the partnership had been effected by the assignments of 27 June 1975. This proposition the Board of Review did not accept and for the reasons given by the members of the Board I think that there was on 27 June 1975 a termination of the one partnership and the commencement of operations by another. Counsel for the respondent whilst not conceding this conclusion offered no argument against it and I propose, therefore, not to discuss it further. The majority of the Board further considered that by the assignment the respondent had created for the benefit of his assignees an immediate equitable entitlement to an interest in the income as subsequently determined of the partnership and obviously considered that no income was derived until such subsequent determination was made.
The relevant accounts and income tax returns for both the respondent and the said to be continuing partnership were not prepared until December of 1975 and insofar as the partnership accounts are concerned contain mistaken references to 27 June 1975, it being asserted on behalf of the respondent that the intention was to prepare accounts as at 30 June 1975.
The argument of the respondent as his counsel put it centred primarily around the decision of the High Court in
F.C. of T. v. Everett 80 ATC 4076; 54 A.L.J.R. 196. Use was also made of statements in the decisions of the members of the Full Federal Court in Everett's case (78 ATC 4595) insofar as those statements supported the proposition that a partner is only liable to tax when in the ordinary course of business the accounts of the partnership are struck, because it is only then that there could be any division or apportionment of the respective interests of the partners in the result achieved by the partnership. With respect to the submissions in this behalf I would but say that I have, for the purposes of the instant case, had little assistance from Everett's case wherein the courts were not concerned with a partnership which had determined or with what had happened in the partnership prior to such determination. When a partnership determines, and irrespective of what partners had decided as an appropriate accounting day or time, the time for the taking of accounts has ordinarily arrived and a partner is then entitled to his share of the determined profit. This is why in
F.C. of T. v. Happ 5 A.I.T.R. 290, Williams J. said at pp. 293-294:
``Now the partnership under discussion continued in fact until 22 December 1944 and therefore for a considerable period of the financial year ended 30 June 1945. It was then dissolved by the agreement of 22 December 1944. Businesses are carried on by the individuals who are in partnership and not by the partnership firm as a separate conception. After 22 December the business was carried on by a different partnership consisting of Mr. and Mrs. Plotke. The old business, that of the four partners, came to an end, and the business carried on by the two remaining partners began. It was a new business:
Commissioners for General Purposes of Income Tax for City of London v. Gibbs (1942), A.C. 402 at pp. 413, 415, 416, 421, 430 and 432;
Rose v. Commissioner of Taxation (1951), 5 A.I.T.R. 197, at p. 201. If the carrying on of the business until 22 December 1944 was profitable and net income was earned within the meaning of s. 90 the assessable income of the respondent for the year ended 30 June 1945 must have included his individual interest in that net income. Section 19 of the Income Tax Assessment Act provides that
- `Income shall be deemed to have been derived by a person although it is not actually paid over to him but is... otherwise dealt with on his behalf or as he directs.'''
In the course of his reasons Williams J. referred with approval to a decision of the Full Court of Western Australia,
F.C. of T. v. Melrose (1924) 26 W.A.L.R. 22, the headnote of which reads: ``An assignment by a partner of his interest in the profits, capital and assets of the partnership before the end of the year of assessment does not relieve him of liability to income tax in respect of the profits made before the date of assignment.'' Mr. Gzell Q.C. submits that both Happ's case and Melrose's case must now be regarded as bad law. Apart from authority to which I shall refer, he points out that so far as the respondent's position is concerned the assignment of his relevant interests preceded even if only by a fraction of time the dissolution of the partnership which resulted. In my opinion, in this case there is no point in trying to determine which of the egg or the hen preceded the other, because from any commonsense point of view the assignment and dissolution of the partnership effected by the same document should be regarded as having occurred contemporaneously.
I think it will be appreciated that in my view the termination of the one partnership is crucial to a correct decision of this case and although reliance is naturally placed on such expressions as ``the net balance ascertained according to the usual and recognized principles of accounting'', as quoted by Windeyer J. in
Peterson v. F.C. of T. (1960-1961) 106 C.L.R. 395 at p. 404, one cannot escape the conclusion that when a partnership determines the usual and recognized principles of accounting require ascertainment of the net balance as at the date of determination.
This conclusion is not avoided by reference to such cases as
Ibbotson v. Elan L.R. 1 Eq. 188 and
Browne v. Collins L.R. 12 Eq. 586. Those authorities were concerned with a different problem, namely how a deceased partner's share in profits was for his estate purposes to be divided between capital and income. They were used as illustrations of the propositions adopted by Starke J. in
Hughes v. Fripp & Anor. (1922) 30 C.L.R. 508 at pp. 520-521. In explanation of the relevant propositions his Honour said:
``The reason, I apprehend, is that as the right of the testator to the profits had accrued at the time of his death, then the profits must be treated as having fallen into the hands of the testator, and so to form part of the corpus of his estate. If, on the other hand, the right of the testator to the profits of a partnership business accrues, according to the agreement or the course of business of the partners, at some time subsequent to his death, then those profits have not fallen into the hands of the testator at the time of his death, and cannot be treated as an asset or as part of the corpus of his estate.''
I think it reasonable to say for the purposes of the instant appeal that the right of the respondent to his share in the profits accrued to him at the time the first partnership determined and that his share of the profits must be treated as then having fallen into his hands.
For these reasons I think that the appellant is entitled to assess the income of the respondent up to 27 June 1975 as including one-sixth of the net profit of the partnership carried on to that day. How the respondent disposed of that interest does not affect the position.
However, it remains to be considered whether within the terms of sec. 170(2) of the Income Tax Assessment Act the Commissioner was entitled to issue the assessment as amended. As I said earlier, relevant accounts for the partnership were prepared in December 1975 and at the same time the income tax returns for the partnership and the respondent were prepared. The respondent's return was forwarded to the Commissioner about 5 January 1976 and the procedure of assessment included the fixing of an amount
ATC 4663of tax to be paid by one of the Commissioner's officers. That return had a rather cryptic statement in it: ``Share in C.J.R. Plumbing Co. sold to trust for children''; the officer considering the return paid no particular attention to that statement but proceeded forth with his task without in any way concerning himself with a possible partnership return. There was a supervisor's note on the return authorising him to do so. His work was apparently completed on 18 February 1976.
Considered in isolation that return, of course, did not make ``full and true disclosure'' of the material facts relating to the partnership and the assignment by the respondent. The notice of assessment was not immediately forwarded to the respondent but went to him on about 21 April 1976. In the meantime, and early in March 1976, the partnership return had been lodged. Why the partnership return was lodged so long after the individual return is not made to appear although it was stated that the original intention was that the two returns should be lodged together. Moreover, despite a contrary intention on the part of the agent of the respondent and the other partners when the partnership return was lodged, the Partnership Deed of 1 June 1975 and the Deed of Assignment of 27 June 1975 were not forwarded with it. The partnership return certainly contained within it matters which could be described as putting the Commissioner on notice, but the question for me, it seems, is whether without copies of the relevant Deeds there was full disclosure particularly when one bears in mind the mistaken date to which the accounts referred. The relevant assessment was not complete when the officer of the Commissioner did his work on 18 February 1976 (
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 per Kitto J. at p. 252) and if I understood
Levy v. F.C. of T. (1960-1961) 106 C.L.R. 448 and
Lee v. F.C. of T. (1962) 107 C.L.R. 329 as deciding that mere receipt by the Commissioner of the partnership return operated of its own force as a disclosure of all the material facts contained in it, I would have been led to a conclusion that the Commissioner had had no satisfactory basis for the issue of an amended assessment. However I do not think that the principle of those cases is such as to apply to the matter which I am considering because of the time lapse to which I have referred between receipt of the individual return and the partnership return and the failure, innocent though it was, to afford to the Commissioner the opportunity to consider the two Deeds of June 1975. Although my mind has wavered somewhat in relation to this question I am satisfied that the Commissioner did not have a full and true disclosure of all material facts and that because of this there has been an avoidance of tax which the Commissioner was entitled to correct by way of amended assessment. For these reasons I think that the appeal should be allowed.