Federal Commissioner of Taxation v. Galland.

Judges: Mason J
Wilson J
Brennan J

Deane J
Dawson J

Court:
Full High Court

Judgment date: Judgment handed down 16 December 1986.

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Deane J.

When F.C. of T. v. Everett was before the Full Court of the Federal Court (80

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ATC 4076; (1978) 38 F.L.R. 26), I expressed the view (at ATC pp. 4604-4605; F.L.R. pp. 43-44) that the annual amount, in the form of a share of net income, which the taxpayer in that case became entitled to receive as a working member of a firm of solicitors should, prima facie, be attributed to his personal exertion and was not realistically to be seen as the fruits of his interest in the capital of the partnership. That being so, the amount which was prima facie included in his assessable income pursuant to sec. 92 of the Income Tax Assessment Act 1936 (Cth) (``the Act'') seemed to me to be, for the purposes of the Act, income derived by personal exertion to which any trust attached only upon or after its derivation (see, e.g.,
Stewart Dawson Holdings Pty. Ltd. v. F.C. of T. (1965) 39 A.L.J.R. 300 at p. 301 ). The consequence was that the provisions of sec. 96 of the Act (exempting a trustee from liability to pay income tax upon the income of a trust estate) did not, in my view, exempt the taxpayer in that case from liability to pay income tax in respect of that part of his share of the net income of the partnership which was assigned to his wife under the deed of assignment which he had executed in her favour. The reasoning which I thought supported that conclusion was summarised in the following extract from my judgment (at ATC p. 4612; F.L.R. p. 56):

``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 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...''

The reasoning which I accepted in Everett's case was, however, firmly rejected both by the majority ( Bowen C.J. and Fisher J.) of the Full Court of the Federal Court (at ATC pp. 4598-4601 and 4615-4621; F.L.R. pp. 34-36 and 61-69) and by the majority of this Court ( Barwick C.J., Stephen, Mason and Wilson JJ.; Murphy J. dissenting) when the matter came on appeal here (80 ATC 4076; (1980) 143 C.L.R. 440). I mention that reasoning here not for the purpose of attempting to resuscitate it but because the importance of Everett's case for present purposes seems to me to lie as much in what it rejected as in what it accepted. The conclusion reached by the majority of this Court was that it was ``a misnomer to speak of the [taxpayer's] share of the income as having been gained by his personal exertion'' (at ATC p. 4083; C.L.R. p. 454): the taxpayer's proportionate share of the net profits of the partnership was properly to be seen as payable to him as the owner of an interest in the capital of the partnership. That being so, that part of the proportionate share of profits to which the taxpayer's wife was entitled under the provisions of the deed of assignment was income of a trust estate and not income derived by his personal exertion as a working partner (see Everett , at ATC pp. 4078-4083; C.L.R. pp. 446-454).

When the reasoning of the majority in this Court in Everett's case is, as it must be, applied to the present case, it is inevitable that the appeal by the Commissioner must fail. The result of the application of that reasoning is that the present taxpayer's share of the net income of the partnership between his father and himself cannot properly be seen, for the purposes of the Act, as income derived by his personal exertion. It was derived by, and payable to, the taxpayer ``because he was a partner and the owner of a share in the partnership'' (see Everett, at ATC p. 4083; C.L.R. p. 454). In its entirety, it represented the fruits of that share. It was not derived as - indeed, it did not exist as - assessable income until it was ascertainable as net income (see sec. 92 of the Act) at the end of the relevant accounting period which was, for the reasons given by Mason and Wilson JJ., the tax year ended 30 June 1980. Accordingly, as Everett's case establishes, so much of it as was attributable to that part (49%) of the taxpayer's beneficial interest in the capital of the partnership which he had assigned (before the end of that accounting period) to Galland

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ATC 4892

Services Pty. Limited was derived by him as trustee of a trust estate for the purposes of sec. 96 of the Act. That being so, the taxpayer was not liable to pay tax upon it.

The appeal must be dismissed.