Ash Street Properties Pty. Ltd. & Ors v. Pollnow & Ors.
Members: Samuels JAMahoney JA
Priestley JA
Tribunal:
Supreme Court of New South Wales (Court of Appeal)
Priestley J.A.
General background
The decade of the 1970s began with the top rate of the "progressive" Australian income tax on individuals at about 68c in the dollar. Through the decade the purchasing power of that dollar fell. So long as the cut off point for the various rates remained the same this fall meant a silent increase in tax for individuals; in particular, more and more people found themselves deriving taxable income upon some part of which income tax was levied at the highest rate. Not surprisingly this led to intensive scrutiny of the provisions of the Income Tax Assessment Act to see what scope it might give for taxpayers to arrange the affairs of themselves and their families to keep the total income tax paid by them to a figure lower than it would have been had they not made such arrangements. For a time many people came to believe there was ample scope.
The Income Tax Assessment Act had had to deal with the taxing of partnerships, trusts and companies as well as of individuals. An obvious use of partnerships, trusts and companies was for income splitting among (inter alia) members of families. Other arrangements were based on the fact that trust and company income was taxed differently from that of individuals. Further scope was afforded by the way in which partnership income and losses were dealt with. The net income of a partnership was calculated as if the partnership were a taxpayer and the partner's individual interest in that net income included in the partner's assessable income; similarly the partnership loss was calculated as if the partnership were a taxpayer and the partner's "individual interest" in the partnership loss was an allowable deduction: sec. 90 and 92(1). Various combinations of ideas based on these facts were used by taxpayers in ways which in some cases the courts felt compelled to hold were lawful; the result was to reduce the burden of taxation on some taxpayers.
Of many examples the following were among the better known. A member of a professional partnership was able to split his income with his wife:
F.C. of T.
v.
Everett
80 ATC 4076
;
(1979-1980) 143 C.L.R. 440
(the tax year in question was that ending 30 June 1973). A share trader found a way to claim as an allowable deduction an amount which in commercial fact he did not pay out;
Curran
v.
F.C. of T.
74 ATC 4296
;
(1974) 131 C.L.R. 409
. A group of taxpayers were able to "buy" allowable deductions at a price less than the tax saving they made by being able to deduct them;
F.C. of T.
v.
Westraders
80 ATC 4357
;
(1979-1980) 144 C.L.R. 55
(loss claimed in respect of year ending 30 June 1975). Some of these cases produced results which appeared very strange to people not acquainted with the complications of the
Income Tax Assessment Act.
In
Cridland
v.
F.C. of T.
77 ATC 4538
;
(1977) 140 C.L.R. 330
the Act produced the result that it was possible for a person to obtain the favourable tax status of a primary producer on payment of $1 pursuant to arrangements made by a tax entrepreneur. These successes by individual taxpayers did not mean automatic success for those who tried to copy them. Large numbers of
Curran
and
Everett
type cases, to mention only two of many types, were subsequently and still are being contested by the Commissioner. Publicity given to the successful taxpayers and comparative silence about both taxpayers' failures and the Commissioner's resolute resistance combined to encourage innovative approaches to the
Income Tax Assessment Act.
Further the continually growing number of people finding themselves in higher tax brackets meant additional pressure upon professional advisers to scour the
Income Tax
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It was not to be expected that these changes would diminish the wish of taxpayers, whose eyes had been opened wide by what seemed to them to be the decade's revelatory tax decisions, to arrange their affairs to their own advantage in whatever lawful way the Income Tax Assessment Act would permit. One of the simpler ideas in this regard was that income-producing property could be bought with borrowed money, the interest paid on which by the taxpayer would be an allowable deduction from the taxpayer's assessable income. On the assumption that the purchasing power of the dollar would continue to fall, the taxpayer calculated that the increase in the money value of the property (which would not be taxable) would be greater than the loss suffered by the payment of interest, once both the tax effect of that payment, and the income produced from the property were taken into account.
In terms of the Income Tax Assessment Act for the year ending 30 June 1979, when the events with which this appeal is concerned began, the idea can be concretely illustrated by the following example. Income tax of $53,221 was levied upon a taxpayer with a taxable income of $100,000. If, however, at the commencement of that tax year the taxpayer bought a home unit for $50,000 with money borrowed at a rate of 15% p.a. the year's interest of $7,500 would be an allowable deduction. If the rent from the unit, net of outgoings, was $2,500 for the year, then income tax of $50,146 would be levied, that is $3,075 less tax would be paid. If the purchasing power of the dollar fell 8% in the year, and if this was exactly reflected in the value of the unit at the end of the year, the overall position of the taxpayer, first without having bought the unit, and second, having done so would be:
Unit not bought Unit bought
$ $
Taxable income 100,000 Taxable income 95,000
Less tax 53,221 Less tax 50,146
-------
44,854
Plus increase in value
of unit 4,000
------- -------
Money position at end Money position at end
of year $46,779 of year $48,854
------- -------
If the taxpayer bought property which increased in value in absolute terms as well as by the inflationary factor, then the taxpayer's net position was better still. In lay terms the taxpayer used income, 61.5c in the dollar of which would otherwise be paid to the Commissioner, in deductibly hiring the use of money to buy income-producing property which it was hoped would improve the taxpayer's net after-tax position. This idea was generally believed in 1979 to be lawfully workable under the Income Tax Assessment Act as it then stood. Further, the prices of rental property were rising at a rate making the use of the idea particularly advantageous. High income taxpayers were in the best position to make use of the idea.
The plan of Messrs Butler and Pollnow
Amongst the many individuals to whom the idea (which came to be known as "negative gearing") seemed good in 1979 were Messrs Butler and Pollnow. Although the basic idea was the comparatively simple one I have
ATC 4612
described, it became overlain with complications flowing from their wish not to use it simply to improve their own income tax positions but also to make money from organising the purchase by other taxpayers of property with borrowed money to help the financial and tax positions of those persons. The idea was to collect a group of persons prepared to buy property of considerable value with borrowed money and then to organise on behalf of those people the buying and management of the property together with the keeping of appropriate records. Such persons were thought of as investors; from the point of view of each investor the position would be that he would let Messrs Butler and Pollnow organise the bringing of a number of people together; the investor would sign the documents presented from time to time, thereby becoming a borrower, a part owner of property and a regular payer of interest; would pay the amounts notified by Messrs Butler and Pollnow from time to time; and would be able to claim as an allowable deduction from assessable income an amount calculated by Messrs Butler and Pollnow and notified.Messrs Butler and Pollnow began to discuss their idea in the first half of 1979. In June they obtained professional advice on how to go about it. In July or August 1979 they "held a cocktail party and seminar with about thirty friends and colleagues" to whom they explained it. The response was good. From then on they put their idea into operation in regard to a number of separate properties and quite a large number of investors. Not all investors were concerned with all properties. In Mr Pollnow's own words at a stage before the first property was bought, what Mr Butler and he wanted in return for their work was "that 10% of the equity in the property should stay with us". Later they wanted about 15%.
These appeals
The present appeals concern Mr Pollnow's claims to half of the Butler-Pollnow "equity" share in seven of the properties. (It appears that nine were bought in all but no claim was made regarding properties called Willoughby Road Apartments and Cremorne Gardens.) A different company became the registered proprietor of each property. The seven registered proprietors of the seven relevant properties became the first to seventh cross-defendants and are now the first to seventh appellants. The form in which the various transactions relating to each property were cast, which involved the use of partnerships, trusts and companies, makes an outline of the facts concerning the disputes a little lengthy. Rather than describe the history concerning all the properties in one account, I will begin by tracing what happened in regard to the first one.
The Bay Road Property
This was 12-14 Bay Road, North Sydney. The first happening relevant to it was the acquisition of a company which became known as Butler Pollnow Pty. Limited. The two issued shares in this company were bought in August 1979 in the names of two accountants who held one in trust for Mr Butler and the other for Mr Pollnow. Messrs Butler and Pollnow became the two directors of the company. Two other companies were incorporated, one which became known as Amhon Pty. Limited ("Amhon") and the other Crumpet Holdings Pty. Limited ("Crumpet"). It was intended that Mr Butler's share of the Butler Pollnow "equity" in any property would belong to Amhon and Mr Pollnow's to Crumpet. Messrs Butler and Pollnow contracted to buy the Bay Road property in their own names on 4 October 1979. It was decided however that title to the property would be vested in a company, Bay Road Properties Pty. Limited, the shares in which were bought on 14 November 1979. Mr Crawley, a solicitor, and Mr Henry, an accountant, became the only members and directors of this company. It seems to have been common ground that they held the shares in their own right. On 16 November 1979 by a novation agreement Bay Road Properties Pty. Limited was substituted for Messrs Butler and Pollnow as the purchaser of the Bay Road property. On 14 November 1979 a deed was executed by Bay Road Properties Pty. Limited (called in the deed "the trustee") and Butler Pollnow Pty. Limited (called "the manager"). It recited inter alia that the manager intended to buy the Bay Road property ("the property") on behalf of the trustee and for that purpose to arrange for the constitution of a partnership and that the manager might request the trustee to hold the title to the property on behalf of the persons constituting the partnership on the terms later set out in the deed. The operative part of the deed carried the recitals into effect. The partnership was defined as that constituted
ATC 4613
by unit holders, themselves defined as the persons (including the manager) named in a list of allottees "of each of the 63 units comprising the Partnership" (cl. 1). Clause 2 provided that the trustee would hold any property vested in it under the deed in trust for the unit holders. Clause 3 perhaps taking a different view of the partnership from cl. 1, perhaps merely as an oddity of expression, said that the partnership was to "be constituted by a fund... divided into... 63 units each... having a value of $5,000...". Each unit holder was to be responsible for contributing to the partnership fund in proportion to the number of units held. The trustee was to be indemnified by the unit holders against all liabilities incurred as trustee. Clause 24 was as follows:"ACKNOWLEDGEMENT BY UNIT HOLDER
It is hereby expressly acknowledged by the parties hereto and covenanted by the holders of the units of Bay Road Apartments now and at any time hereafter that Crumpet Holdings Pty Limited and Amhon Pty Limited are exempt from and shall not be called upon to make any contribution whatsoever and in any manner howsoever arising in respect of any or all of the obligations arising hereunder and without limiting the generality of the foregoing in respect of contribution to principal reduction of mortgage interest payments, Council Rates, Water Rates, Land Tax and maintenance costs, charges, damages, losses or expenses or any liabilities howsoever arising hereunder and any other or all outgoings in respect of the trust property and shall be indemnified by all the other unit holders referred to in the Fourth Schedule hereto and it is further acknowledged, covenanted and agreed that all other unit holders to the exclusion of Crumpet Holdings Pty Limited and Amhon Pty Limited shall bear a proportion of the charges and costs hereinbefore recited and all of them on the basis of their unit holding as referred to in the Fourth Schedule hereto bears to 57 units."
Upon allotment of the units Amhon and Crumpet each received three, i.e. slightly less than 10% for (ultimately) Messrs Butler and Pollnow. There were 14 other unit holders, 13 being individuals and the other consisting of two individuals.
It seems that it was the intention that the investors should claim as allowable deductions against their assessable income their share of partnership losses incurred by the partnership of unit holders created through the deed. However, the trustee was arguably the legal recipient of the income and also primarily liable for the interest payments under the mortgage securing the moneys borrowed for the purchase of the property. (See Exhibit 17, a letter to the Commissioner of Taxation dated 15 June 1981.) Although Div. 6 of the Income Tax Assessment Act provided for the calculation of "the net income of a trust estate" (sec. 95) and (in following sections) for the inclusion of a beneficiary's entitlement to a share of that income in assessable income there was, differently from the analogous position in regard to partners, no provision by which a beneficiary could claim any part of trust losses as an allowable deduction. Thus if the Commissioner treated the income and outgoings by reference to the trust division of the Act rather than the partnership division the investors' claims for allowable deductions from their individual assessable incomes would have to be disallowed. This was in fact the position which the Commissioner took up. Messrs Butler and Pollnow became aware of this by June 1981 and after taking advice on the matter from a solicitor, Mr Bush, decided to adopt a different method of achieving their originally contemplated result. (This advice extended to their method of operation in regard to other properties also.)
What was done in the Bay Road case was to execute certainly one, and possibly two, partnership deeds on 20 June 1981. One of these, called the Bestbridge Investments deed, was in evidence. The position about the other (the "Monvest" deed) will be explained later. There were 15 parties to the Bestbridge Investments deed. Twelve of these, parties one to nine inclusive and 11 to 13 inclusive, were the same as 12 of the 14 individual unit holders under the 1979 deed. The tenth was one of the two individuals who had together been one unit holder under the 1979 deed. One of the 14 individual unit holders under the 1979 deed was not a party to the Bestbridge Investments deed. Nor was either of Amhon or Crumpet a party. The fourteenth party to the deed was Bay Road Properties Pty. Limited, called the managing partner. Butler Pollnow Pty. Limited was the
ATC 4614
investment manager and the fifteenth party to the deed. It was not a partner.The major difference for tax purposes between the 1979 deed and the Bestbridge Investments deed was that Bay Road Properties Pty. Limited, the trustee under the 1979 deed, was named as a partner under the later deed and given the powers of a managing partner, which included the power to control the whole of the business of the partnership and to make all decisions in any way relating to it (cl. 11). As managing partner, Bay Road Properties Pty. Limited held the partnership property for itself and the other partners (cl. 18) and was indemnified against all liabilities incurred arising out of its actions as managing partner (cl. 25).
The partners were entitled to the assets of the partnership business and responsible for liabilities in the proportions set out in the First Schedule to the deed (cl. 9). The managing partner's proportion was 9.524% which is the sum of the beneficial interests of Amhon and Crumpet in the trust property under the 1979 deed. However cl. 16(b) and 17 and the First Schedule provided for the partners to share in different proportions the net profits or losses of the partnership and any surplus on winding up. The managing partner's proportion in regard to these matters was nil. Clause 41 made a provision taken from cl. 24 of the 1979 deed, varied to fit in with the new scheme:
"ACKNOWLEDGEMENT BY THE PARTNERS:
It is hereby expressly acknowledged by the parties hereto and covenanted by the Partners now and at any time hereafter that the Managing Partner is exempt from and shall not be called upon to make any contribution whatsoever and in any manner howsoever arising in respect of any or all of the obligations arising hereunder and without limiting the generality of the foregoing in respect of contribution to principal reduction or mortgage interest payments, council rates, water rates, land tax and maintenance costs, charges, damages, losses or expenses or any liabilities howsoever arising hereunder and any other or all outgoings in respect of the property of the Partnership and shall be indemnified by all the Partners and it is further acknowledged, covenanted and agreed that all other Partners to the exclusion of the Managing Partner shall bear a proportion of the charges and costs hereinbefore recited and all of them in the proportion set out beside their respective names in basis of their interest in the Partnership as referred to in the Fourth Column in the First Schedule hereto."
The next significant event after the 1981 partnership arrangement was set on foot was that in early 1983 the Deputy Commissioner of Taxation in Victoria made it known that he considered that claims for "negative gearing" deductions should be disallowed. Possibly for reasons associated with this news and possibly for other reasons associated with the property market, the business being run by Messrs Butler and Pollnow for their by now numerous investors got into difficulties, the details of which were not in evidence. All that the Court knows is that receivers and managers were appointed to Butler Pollnow Pty. Limited in April 1983 and various legal proceedings were begun arising from different aspects of the very many transactions connected with the Butler Pollnow business.
The litigation about the Bay Road property with which this Court is now concerned seems to have begun when, at some time before November 1983, Mr Pollnow caused a caveat to be entered on the title to the land claiming an interest in it and forbidding dealings with it. This led to Bay Road Properties Pty. Limited taking proceedings claiming the removal of the caveat and to Mr Pollnow's making a cross-claim against Bay Road Properties Pty. Limited as second cross-defendant for a declaration that it held a 4.762% interest in each of the Bestbridge and Monvest partnerships on trust either for Mr Pollnow or Crumpet. The case came on for hearing before McLelland J. in late 1984. As there had been no dissolution of partnership no questions arose about the possible difficulties arising from the different proportions provided for by cl. 9, 16(b) and 17, and the First Schedule. If there are any such difficulties they will have to be dealt with if the partnership is dissolved.
Before McLelland J. the case was conducted on the basis that there were in fact two partnership deeds dated 20 June 1981 (the Bestbridge and Monvest deeds), that they were in similar terms, setting up two separate partnerships in relation to the Bay Road
ATC 4615
property, as to separate undivided interests in that property, and that the Monvest deed was missing. When McLelland J. handed down his reasons for his conclusions in regard to all the claims before him he did not then make final orders but directed that short minutes be brought in. Substantially, his conclusions were that Mr Pollnow did have an interest of the kind that he claimed in the partnership assets of the various properties. When the time came for making final orders he was informed by counsel that there never had been a Monvest Investments partnership and that Bestbridge Investments was the only partnership concerned with the Bay Road property. It was to accommodate this problem without disturbing the basis on which the proceedings before him had been conducted and because whether there was one partnership or two in relation to the Bay Road property the percentage interest taken by the managing partner in respect of which Mr Pollnow was entitled to a half share was the same, that he made the final orders in the form in which he did, namely:"Declare that the cross-defendant Bay Road Properties Pty Limited holds in trust for the said cross-claimant: (a) a 4.762% interest in the partnership known as Bestbridge Investments; (b) a 4.762% interest in the partnership, if any, known as Monvest Investments."
McLelland J.'s reasons for finding in Mr Pollnow's favour were twofold. First, the deed of 14 November 1979 showed that Crumpet was beneficially entitled to a 3/63 interest in the assets held pursuant to those deeds. Nothing thereafter happened to disturb Crumpet's entitlement. It was common ground that Crumpet held its interest for Mr Pollnow. Secondly, McLelland J. was of the view that at all material times the common intention of Messrs Crawley and Henry as directors of Bay Road Properties Pty. Limited, and of Mr Pollnow, was that half of Bay Road Properties Pty. Limited's equity under the partnership deed (or deeds) dated 20 June 1981 was to be held by it in trust for Crumpet as nominee of Mr Pollnow.
On appeal to this Court three main arguments were relied upon by counsel for Bay Road Properties Pty. Limited. I will call them for short the construction argument, the non-disclosure argument and the no common intention argument.
The first step in the construction argument was that the deed dated 20 June 1981 superseded the deed of November 1979. It was then contended that on its true construction the deed dated 20 June 1981 did not give any interest in the property of the partnership to anyone other than the investor partners; that is the managing partner Bay Road Properties Pty. Limited was not a partner with the other partners, was a manager only and had no interest in the assets of the partnership.
I do not agree with the first step in this argument; the deed of June 1981 did not, in my opinion, supersede the 1979 deed in the sense for which counsel contended. Under the 1979 deed Crumpet became beneficially entitled to 3/63 of the trust fund which in accordance with cl. 1 to 3 of that deed included the assets of the partnership created by that deed and thus included the Bay Road property. When the deed of June 1981 became operative Bay Road Properties Pty. Limited remained the legal owner of Bay Road Properties. The parties to the new deed were slightly different from those to the earlier one, as already recounted. So far as the parties common to the two deeds were concerned, no doubt the new deed replaced the former one. Crumpet was not a party to the later deed. Its rights in equity in regard to the property held in trust under the earlier deed could not be taken away by an arrangement to which it was not a party when all parties to the new arrangement were aware of the previous one. Like McLelland J., I see nothing in the materials before the Court to suggest that Crumpet's interest as a beneficiary in the trust property was affected by what later happened. So far as Crumpet was concerned there is nothing to show that the deed of June 1981 superseded that of 1979 in the sense that Crumpet's rights under the 1979 deed were somehow brought to an end by that of 1981.
Because it seems clear to me that the coming into operation of the deed of June 1981 did not affect Crumpet's rights regarding the Bay Road property it is unnecessary to deal with the second step of this first argument for the appellant although I note that I thought it contained difficulties which the appellant did not overcome.
The non-disclosure submission was to the effect that Messrs Pollnow and Butler stood in a fiduciary position to the investors and did not sufficiently disclose to them the extent of their
ATC 4616
beneficial interest in the financial aspects of the Bay Road property arrangements. There was a good deal of evidence on this issue before McLelland J. and it was carefully gone through before this Court. Assuming in the appellant's favour that Messrs Butler and Pollnow were in a fiduciary relationship with investors, it seems to me that it was not necessary for Mr Pollnow to show affirmatively in his case that he and Mr Butler had fulfilled their obligation of disclosure; it would only be if it appeared from the evidence as a whole and from whatever source that there had been a breach of the obligation to disclose that the appellant would be able to rely on it. No investor gave evidence that he had been misled in any way about the benefits to Messrs Butler and Pollnow under the arrangements concerning the property. Mr Pollnow was cross-examined on the subject. McLelland J. said that that cross-examination did not persuade him that the extent of the interests of Messrs Butler and Pollnow was not disclosed to investors; on reading the materials for myself I agree with him that they do not support such a finding. Thus the position is reached that the fact which the appellant must rely on for this submission, that of non-disclosure, is not supported by the evidence relied on. McLelland J. made a second point, with which again I agree, in answer to the non-disclosure argument. This was that assuming, as the appellant contended, that Mr Pollnow both had fiduciary obligations to investors and was in breach of them, nevertheless that would not affect his rights as beneficiary against his trustee Bay Road Properties Pty. Limited. On the assumptions made, namely that there was a fiduciary obligation (about which I have not expressed any opinion) and a breach of it (as to which my opinion is that none was shown on the evidence) the investors would have rights against Mr Pollnow. The investors make no claim in these proceedings asserting such rights and such rights, if they do exist, do not provide Bay Road Properties Pty. Limited with an answer to Mr Pollnow's claim.The third argument, that of common intention, would arise in regard to Bay Road Properties Pty. Limited only if the Court took the view that the deed of June 1981 had superseded the 1979 deed in the sense contended for by counsel for the appellant. If, contrary to my opinion, that were the case it would be necessary for the Court to consider whether on the construction of the deed of June 1981 in light of the facts surrounding its making, a trust had come into existence in favour of Mr Pollnow (or Crumpet). For him to succeed in such a contention it would be necessary for the Court to find that there was a common intention between him and Bay Road Properties Pty. Limited (that is, for practical purposes, between him and the directors of that company) that the trustee should hold an interest on trust for him (or Crumpet). As I do not think this question needs to be decided in regard to the Bay Road property, I will not do so although it will be necessary subsequently to deal with similar questions which arise in regard to later partnerships and partnership property.
In my opinion the declaration made by McLelland J. in regard to Mr Pollnow's interest in the Bestbridge Investments partnership and the Monvest Investments partnership (if any) should not be disturbed.
Properties bought after the Bay Road property
It seems that Messrs Butler and Pollnow caused eight further properties to be bought after the Bay Road property. Of these Mr Pollnow claimed an interest in six. Each of these became an asset vested or partly vested in the managing partner of a partnership.
Although contracts to purchase five of these six (the exception being the Garden Mews property) seem to have been entered into before June 1981, and at least one, Lake Village Apartments, completed before then, and there was some shadowy evidence that a procedure in regard to the five was being followed similar to that by which the Bay Road property was first dealt with, there was no evidence that any deed corresponding to the 1979 Bay Road deed was ever executed. The evidence went on the footing that all dealings with the later properties were in accordance with Mr Bush's advice of June 1981 notwithstanding that various documents were expressed to operate "as of" dates earlier than June 1981. No point was taken about the possible factual difficulties associated with this revisionist view of history and the Court must therefore deal with the cases as though it was at all times intended that all properties bought after the Bay Road property should be dealt with in accordance with Mr Bush's advice, and not on the earlier plan.
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The terms of the deeds by which each of the partnerships related to the later six properties was constituted were substantially similar to the terms of the Bestbridge Investments deed. In regard to each property Mr Pollnow claimed that the managing partner of the relevant partnership held a specified proportion of its interest in the partnership on trust for him. The circumstance that in all of these later cases the relevant partnership deed had not, so far as the evidence goes, been preceded by a trust deed such as the 1979 Bay Road property deed made the cases significantly different from the Bay Road case. Thus, whereas in the case of the Bay Road property Mr Pollnow was able to rely on the 1979 deed as evidencing his initial interest in trust property which became partnership property, he had no such starting point in regard to the latter acquired properties.
Mr Pollnow's case in proof of his interest in each of the partnerships was put in the alternative before
McLelland
J. Proof by means of documents was attempted; some original documents were in Canberra and, by inference, not stamped pursuant to the
Stamp Duties Act.
Copies of these documents were tendered but not allowed into evidence.
McLelland
J. held that the attempted documentary proof failed. The alternative relied on, apparently rather late in the case, was that from the circumstances concerning each partnership the Court should infer that it was the common intention of Mr Pollnow and the managing partner in each case that the managing partner should hold the interest it had under the partnership deed in trust for Messrs Butler and Pollnow or their nominees and that the managing partner should not be allowed to rely upon either the non-stamping of the documents or the lack of writing (under sec. 23C of the
Conveyancing Act)
to prevent proof of what had happened, because for the Court to permit such reliance would allow the managing partner to get an advantage from what equity regards as fraud. The rules relating to these aspects of trust law are stated in
Allen
v.
Snyder
(1979) FLC
¶
90-656
;
(1977) 2 N.S.W.L.R. 685
and were not in dispute before
McLelland
J. or this Court.
McLelland J. found that Mr Pollnow's alternative case succeeded in regard to all six later properties and made declarations accordingly. I will approach the various defences raised by the six managing partners by first examining the case concerning property in Narrabeen which became known as the Lake Village Apartments, but before doing so I should mention two procedural matters.
Procedural matters
The first arose in the course of the hearing of the appeal concerning the parties which relates to all the partnership's interests which are in question in the appeal. Counsel for the appellants in the course of submitting that Mr Pollnow had never had any partnership interest in any of the assets went further and contended that if the managing partners of the various partnerships had any partnership interest in assets it was held by them for the individual partners or investors. Upon this argument being raised the Court was concerned that that particular argument might be decided in the absence of the investors as parties to the proceedings. It was then agreed by both counsel for the appellants and for Mr Pollnow that the issue advanced by the appellants was confined to a denial that the managing partners held their interests in trust for Mr Pollnow. The Court accordingly proceeded with the appeal on the footing that counsel for the appellants was not contending that the managing partners were trustees for the individual partners or investors and that the Court would not be asked to decide that question.
The other matter was the absence of Mr Butler from the proceedings. It would seem probable that if Mr Pollnow had any interest in any of the partnerships then Mr Butler had a like interest and in the ordinary course it would be desirable to settle his position at the same time as that of Mr Pollnow so that double litigation over essentially the same ground could be avoided. However, Mr Butler made no claims and Mr Pollnow's claims were litigated between him and the managing partner companies without demur by any party or the Court. Mr Butler's absence does not prevent Mr Pollnow's claims being decided. At this stage it is not necessary for this Court to do more than note the position that has arisen.
Lake Village Apartments - facts
In July 1980 Messrs Butler and Pollnow contracted to buy land in Narrabeen from a vendor who in the contract also agreed to build home units on the property. A company, Lake Village Apartments Pty. Limited, was acquired to become managing partner in the partnerships
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whose asset Lake Village Apartments would become. Messrs Crawley and Henry became the only members and directors of the company. Subsequently Lake Village Apartments Pty. Limited became the purchaser under the contract of purchase, by novation. The purchase was completed in March 1981. Moneys for the acquisition came from loans secured by mortgage of the property and moneys provided by investors. In or about June 1981 two partnership agreements were entered into expressed to be made "as of" 20 August 1980. One agreement contained the terms of a partnership called Beauvest Investments the parties to which were the managing partner, Lake Village Apartments Pty. Limited and a number of investors as partners and Butler Pollnow Pty. Limited as non-partner investment manager. In the Beauvest Investments partnership the managing partner was entitled to the assets of the partnership business in the proportion of 15.252%. The other document made "as of" 20 August 1980 contained the terms of a partnership called Restbridge Investments. It was in the same terms except that a different number of investors were partner parties to it and the managing partners asset proportion entitlement was 15.798%.No doubt in consequence of the general advice received by Messrs Butler and Pollnow from Mr Bush in about June 1981, the managing partner gave Mr Bush power as its attorney, by a document dated 25 June 1981, to execute in the Australian Capital Territory deeds "in the form and text" annexed to the document. One of the annexures took the form of a deed between Crumpet and the managing partner in which the managing partner acknowledged that 7.626% of the Beauvest Investments partnership and 7.899% of the Restbridge Investments partnership was held by it as nominee of Crumpet and as part of a trust fund of which Crumpet was trustee. No executed deed in the form annexed to the power of attorney was proved in evidence. Considerable time before McLelland J. was taken up with efforts by counsel for Mr Pollnow to prove the fact of the execution of the deed through secondary evidence. Mr Pollnow's counsel also sought both before McLelland J. and in this Court to submit that the absence of the executed deed from evidence was something beyond his client's control. The secondary evidence was rejected. McLelland J. said "The reality of the situation is that the original document of which secondary evidence was tendered was in the Australian Capital Territory, was (if otherwise valid) chargeable with stamp duty under the Stamp Duties Act 1920, and was not duly stamped under that Act". In my opinion the materials in the appeal papers fully justify that conclusion by his Honour. Further it is in my opinion clear that the reason the original deed was not produced was not its unavailability but the need for the party seeking to tender it to pay the stamp duty. The Court was not told the amount of stamp duty involved, although counsel for the appellants observed that presumably it was substantial. Whatever the reason, Mr Pollnow elected to try to prove his case without causing the original deed to be produced to the Court.
In the absence of the deed showing that the managing partner held its interest for (ultimately) Mr Pollnow, McLelland J. had to conclude as he did, that Mr Pollnow could not establish a documentary title to the interest he claimed.
Lake Village Apartments - common intention
However, for the reasons I have earlier outlined McLelland J. found for Mr Pollnow on the alternative basis which was, for short, referred to in the course of the appeals as the "common intention" basis. In this connection he said:
"It is in my view sufficiently established that at all material times and in particular at the time of acquisition of the property and at the time of the establishment of the relevant partnerships, it was the common intention of Messrs Crawley and Henry as directors of the managing partner company and of Mr Pollnow that the beneficial interest in the property (and the shares of the assets of the respective partnerships) acquired by the managing partner company were so acquired as to a half share therein in trust for Mr Pollnow or his nominee, which in this case was Crumpet."
On this basis his view was that it would be unconscionable for the managing partner to claim to hold its interest in the partnership property free of trust. I think with respect that this conclusion would be debatable even if I agreed with his Honour's view of the facts. However, the somewhat different view of the
ATC 4619
facts which I take would in any event lead me to a different conclusion.In the case of Lake Village Apartments, for the Court to be able to conclude that it was the common intention of Messrs Crawley and Henry as directors of the managing partner company on the one hand and of Mr Pollnow on the other that the managing partner company's share in Beauvest Investments and Restbridge Investments partnerships were to be acquired and held as to a half share in trust for Mr Pollnow or his nominee there would have to be evidence before the Court upon which the Court could conclude on the probabilities that there was communicated between Messrs Crawley and Henry on the one hand and Mr Pollnow on the other an intention on the part of Messrs Crawley and Henry to the effect that whatever interest the company of which they were directors had as managing partner in the two partnerships would be held as to one half in trust for Mr Pollnow or his nominee. Perhaps a more widely expressed communicated intention would be sufficient, namely one to the effect that whatever interest any company (of which they were the two directors) had as managing partner in partnerships formed from time to time would be held etc. I do not examine the question whether a common intention found in either of the forms just suggested would be sufficient to found a trust of the kind held by McLelland J., but whether or not such an intention would be sufficient, it seems clear it would be necessary, so that if neither of such intentions can be found then it would not be possible to conclude that a trust had been created.
It seems to me that it was essential to the creation of the trust found by McLelland J. in regard to the Lake Village Apartments property that a communicated intention to either effect mentioned above should relate to the managing partner company's interest as partner in an identifiable partnership or partnerships, even assuming in favour of Mr Pollnow both that the identification might come about at a date later than the communication of intention and that the intention could precede the creation of any relevant partnership.
The only evidence that I can see in the materials before the Court relating to a common intention of Messrs Crawley and Henry on the one hand and Mr Pollnow on the other is in regard to the kind of interest held by Bay Road Properties Pty. Limited on behalf of (ultimately) Messrs Butler and Pollnow, that is, an interest held by the registered proprietor of the land as trustee for a number of beneficiaries among whom were Messrs Butler and Pollnow. There was no question in regard to any of the arrangements made before Mr Bush came upon the scene in June 1981 of any registered proprietor company having a partnership interest in the property of which it was trustee, which partnership interest was held for (ultimately) Messrs Butler and Pollnow. I can see no evidence in the materials of any communication between Messrs Crawley, Henry and Pollnow following the coming of Mr Bush upon the scene (and with him the first suggestion that the registered proprietor companies should have partnership interests in the properties) relating even indirectly to the rights of Messrs Butler and Pollnow under the new system.
The evidence, which is not precise nevertheless seems to be all one way that it was in May or June of 1981 that the Commissioner of Taxation made known his intention to disallow deductions claimed by investors under the 1979 system, that Mr Bush was retained soon thereafter and was advising about the reformed system in or about June 1981 and that Mr Crawley's retainer came to an end later in 1981. So far as I can see there is no evidence anywhere in the materials before this Court of any communication of any kind with Mr Crawley or Mr Henry concerning the position of Messrs Butler and Pollnow under the Bush system. It seems to me to be a very plausible conjecture that if there was any discussion between the relevant parties in or after June 1981 about the position of Messrs Butler and Pollnow under the new scheme Messrs Crawley and Henry would have said that of course Messrs Butler and Pollnow should continue to have an equity interest, mutatis mutandis. In the absence of any such conversation or communication it would be equally plausible to conjecture that the relevant parties were all proceeding on the unstated common assumption that Messrs Butler and Pollnow should hold their equity interests in properties thereafter acquired in the same way as in regard to the Bay Road property, mutatis mutandis. But in what seems to me to be the complete absence of evidence on the topic, I do not think it is right that the Court should turn such
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conjectures into findings of fact of common intention in regard to the Lake Village Apartments property, or for that matter any of the other five properties in question.In addition to reaching the foregoing negative conclusion about common intention, I have reached a positive one, but not the one contended for by Mr Pollnow. There is nothing in the evidence to suggest that after Mr Bush came into the various matters the later transactions were not carried out in the manner advised by him; indeed the evidence all suggests that they were. To my mind the probabilities are that it was the contemplation of the parties and their mutual intention that Messrs Butler and Pollnow were to have the relevant interests in the relevant partnerships but that they were to have them in the manner proposed by Mr Bush and that it was not contemplated or intended that they were to have them in any other way. It may be that, had the parties found it necessary again to alter the model to be adopted by them, another way would have been agreed upon for securing those interests to Messrs Butler and Pollnow. But that did not happen. Consequently, I have reached the conclusion that the common intention was at all times relevant to the Village Bay Apartments property no more extensive than that stated earlier in this paragraph.
From each of the factual conclusions I have reached it follows that Mr Pollnow was not entitled to the declarations which were made in his favour in regard to the Beauvest Investments and Restbridge Investments partnerships.
The decisions which hold that a court will not allow a party to rely on Statute of Fraud type provisions to obtain an equitably fraudulent advantage for himself all depend upon there having been evidence available to the Court that the property in question was acquired by the party seeking to rely on the Statute of Fraud type provisions with the intention common to that party and another party that the property was being acquired in trust for the other party. On the facts in the present case, once the documentary evidence of the trust was rejected, there seems to me to have been no other evidence of common intention.
Lake Village Apartments - Stamp Duties Act 1920
Before giving my reasons for not agreeing with
McLelland
J.'s conclusion about common intention I mentioned that even if that conclusion were correct it would in my opinion be debatable whether it would justify his ultimate decision. This question seems to me to be a more difficult one than the factual one I have just dealt with. While recognising the strength of the arguments supporting the final conclusion arrived at by
McLelland
J. (if his finding about common intention were accepted) I myself would arrive at the opposite conclusion. This is because of
Dent
v.
Moore
(1919) 26 C.L.R. 316
and sec. 29 of the
Stamp Duties Act 1920
of New South Wales. That Act levies stamp duty upon, inter alia, the documents in the present case whereby the managing partner companies declared that they held their respective interests in the partnerships on trust for Mr Pollnow's companies. Section 29 provides:
"(1) Except as aforesaid, no instrument executed in New South Wales or relating (wheresoever executed) to any property situate or to any matter or thing done or to be done in any part of New South Wales, shall, except in criminal proceedings, be pleaded or given in evidence, or admitted to be good, useful or available in law or equity for any purpose whatsoever, unless it is duly stamped in accordance with the law in force at the time when it was first executed:
Provided that any instrument chargeable with duty before the appointed day shall be deemed to be duly stamped in accordance with the law in force at the time when it was first executed, notwithstanding that the duty chargeable on such instrument is denoted in terms of the currency provided for by Part II of the Currency Act 1965 of the Parliament of the Commonwealth of Australia or any Act passed in amendment of or substitution for the same.
(2) Subsection (1) of this section applies to and in respect of an unexecuted copy of an instrument referred to in that subsection (being an instrument that was first executed on or after 20 October, 1982) in the same way as it applies to the instrument unless -
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- (a) the court is satisfied that the instrument of which it is a copy is duly stamped; or
- (b) the copy is duly stamped in accordance with section 73D."
I do not think that, as far as concerns the terms of sec. 29 of the
Stamp Duties Act,
a distinction is to be drawn between that section and the provision dealt with in the unanimous judgment of the Court in
Dent v. Moore.
The reasoning in that case seems to me to require that this Court accept that it was the legislative purpose of sec. 29 in its form at the time relevant to the present case to deprive an unstamped document and the transaction which it evidences of any effect, or more accurately, the effect as a transaction of the relevant kind specified in the Act. In terms of the present case, it was the purpose of the legislature to deprive the transaction of any effect as a declaration of trust. As was pointed out in
Dent v. Moore
at p. 326, the conventional view (see
Ingram
v.
I.R. Commrs
(1986) Ch. 595
at p. 593
[
sic
]) that stamp duty is imposed upon a document and not upon a transaction requires qualification. Duty is imposed upon a document which, as far as is here relevant, constitutes a transaction of the class specified in the statute. In the case of a document such as the present, the transaction is, in the relevant sense, the document and the document is the transaction.
The
Stamp Duties Act
sec. 29 does not sanction the non-payment of the stamp duty by providing merely that the document shall not be, e.g., tendered in evidence. The sanction is that until duly stamped the document is of no effect. If and when the duty is paid, the document is seen to have effect from the date of its ordinary operation, in the manner discussed by
Dixon
J. (as he was) in
Shepherd
v.
Felt and Textiles of Australia Ltd.
(1931) 45 C.L.R. 359
at p. 383
. In the present case, the document under which, according to the intention of the parties, Mr Pollnow was to derive his interest in the partnership, is to be treated as of no effect.
I come now to consider whether, if this be so, that interest may be held to arise because of the common intention of the parties that such an interest should arise. It has been submitted that where a transaction which was intended to create an interest, legal or equitable, fails in the achievement of such for what may be described as a technical reason, equity will, in appropriate circumstances, bind the conscience of the parties to act in the way they had intended. To determine whether equity so operates in the present case, it is relevant to consider the process of reasoning upon which equity acts in such cases, the nature of the interest which arises, and the basis upon which equity has seen it appropriate so to bind the parties.
The matter may be illustrated by an example. A agrees with B that, for consideration, he will transfer land to B. The statute provides that such an agreement shall not be enforceable unless appropriately made in writing. A receives the consideration but fails to transfer the property and pleads the statute. In such a case, given appropriate circumstances, equity will declare that A holds the property subject to equities which require him to transfer it to B as on a performance of the agreement. In appropriate circumstances, it will achieve this by a decree for specific performance.
In my opinion, equity so acts not in order to perform the contract as such but in order to give effect to an equity which has arisen extra the contract and as the result of what the parties have done. This view has been taken in relation to proceedings for specific performance where, against a statute of this kind, B seeks specific performance of a contract. It has been said that, in ordering specific performance, equity gives effect not to the agreement which, as the statute has said, is unenforceable, but to the equity which has arisen extra the contract as the result of what the parties have done: for the analogous situation concerning unjust enrichment see
Pavey
&
Matthews Pty. Ltd.
v.
Paul
(1987) 61 A.L.J.R. 151
. If that principle be applicable in the present case, equity would hold that the managing partner companies hold the relevant partnership interests for Mr Pollnow, not upon the basis that the unstamped documents had operated, but upon the basis that, they not having operated, equities have arisen from the resulting circumstances. On this basis, as the argument of Mr Farmer Q.C., for Mr Pollnow, suggested, reference to the unstamped documents, in so far as it may be necessary, would be purely collateral and therefore not prevented by the
Stamp Duties Act.
The reason why equity will see such interest to have arisen is, to adopt the conventional language, that otherwise the statute would be
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used to give effect to a fraud. Fraud in this sense means, of course, not fraud at common law but that which is regarded in equity as warranting the description: seeRochefoucauld v. Bousted (1897) 1 Ch. 196 at p. 206 .
The question to be determined in the present case is whether reliance upon the operation of the Stamp Duties Act would give rise to such a fraud. In my opinion it would not. As was pointed out in Dent v. Moore at p. 324, there is in such a case a public interest, viz. the interest of the State to collect revenue. The purpose of the Stamp Duties Act is to deprive the transaction of effect as a sanction directed to achieving payment of stamp duties. The view adopted in Dent v. Moore requires the conclusion, in my opinion, that to give effect to such a statute would not be seen as creating such a fraud.
Dent v. Moore is a long standing decision of the High Court. I do not think that this Court should properly seek to distinguish the broad principle upon which in this regard the decision was based. In a sense all statutes are directed to the achievement of a public interest. No doubt, the Statute of Frauds and cognate legislation sought to achieve the public interest in certainty in relevant transactions. But the public interest served by the relevant provisions in the Stamp Duties Act is in my opinion different from these in the manner referred to by Isaacs J. in Dent v. Moore at p. 324. In my opinion, therefore, the present circumstances should not be seen as giving rise to an equitable fraud. The result is that the doctrine of Rochefoucauld v. Bousted has no application.
Lake Village Apartments - construction argument
It was argued for the appellant managing partner that on the proper construction of the Beauvest Investments and Restbridge Investments partnership deeds the managing partner itself had no interest in partnership assets. This matter was not dealt with in detail in McLelland J.'s reasons (I am not sure to what extent it was argued) but his opinion was clearly contrary to the appellant's contention. It is not necessary because of the opinion I have reached to decide the construction question, but I note that, after being carefully taken by the appellant's counsel through every part of the deed having any bearing on the question, I was not persuaded that the appellant's contention was sound.
The other properties relevant to the appeals
For the same reasons as those given concerning Lake Village Apartments it seems to me that the appeals concerning Ash Street Properties, Bydown Gardens, Garden-Mews St Leonards, Queensboro and Rosalind Gardens must fail. In no case can I see evidence justifying a conclusion that the necessary common intention had been shown.
This conclusion makes it unnecessary to deal with certain factual complications only brought to McLelland J.'s attention after delivering his reasons of 5 July 1985 and detailed by him at pp. 2-4 of further reasons he delivered on 31 July 1985.
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