Stapleton v. Federal Commissioner of Taxation

Sheppard J

Federal Court

Judgment date: Judgments handed down 25 July and 9 August 1989.

Sheppard J.

At the applicant's request, the Commissioner of Taxation has referred to the Court the Commissioner's decision to disallow an objection to the inclusion of an amount in an amended assessment of income tax made in respect of income earned by the applicant in the year of income ended 30 June 1983. The Commissioner claims that the amount was income; the applicant claims that it was capital.

On 1 January 1975, the applicant became a partner in a firm of solicitors then known as Sly & Russell. The firm did not have a written partnership agreement at the time of the applicant's admission to partnership nor at any time during which he remained a partner. The applicant said that matters affecting the partnership were determined by ``consensus as they arose''.

On becoming a partner, the applicant was given a memorandum which was as follows:

``1. PJS [the applicant] admitted a partner and acquires a 1.25% capital interest in the goodwill of the partnership, as from 1st January, 1975.

2. The value of the goodwill is fixed at $200,000.

3. The cost of that 1.25% interest is $2,500.00 and is payable by eight (8) equal half-yearly instalments of $312.50 each, commencing 1st July, 1975, subject to any mutually agreed arrangement for shorter term payment. In addition, the partner is required to contribute, in like proportion, to the Working Funds of the partnership in accordance with the basis from time to time established.

4. Salary $12,500.00 per annum, payable monthly, in addition to percentage distributions.

5. Distributions within the new partnership will be made from the distributable cash profits of the partnership (i.e. gross receipts less outgoings, which include partners' salaries) as cash funds are available.

6. The new partner (PJS) will commence to participate in the distributions from 1st January, 1975, and will acquire an entitlement to a share in `work in progress' from that date.

7(a) The amount of each retiring partner's entitlement in `work in progress' is to be paid by monthly payments continuously over the five (5) years following his retirement.

7(b) In any event the distributions (in respect of `work in progress') under this arrangement shall not exceed 15% of the total distributions in any financial year, and any `short fall' is to be added to and be proportioned over the remaining years during which the arrangement would operate so far as each partner is concerned.

8. The continuing partnership arrangements are subject to any income payments to an outgoing or retiring partner or consultant.

9. The partnership is not determined by any re-arrangement within the partnership resulting from retirement, death or otherwise, but the partnership continues as a partnership with the existing partners. The partnership cannot be terminated by any partner, but only by mutual consent.''

On 31 March 1982 the applicant retired from the partnership. At that time he was entitled to a 6% interest in the equity of the firm. The applicant said that, on the assumption by the continuing partners of his interest in the firm, he became entitled, in accordance with the provisions of the memorandum, to receive an amount of $105,885 calculated and payable as set out in a further memorandum dated 14 December 1982 given him by the firm.

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Before I refer to that memorandum, I should say that the directly relevant provisions of the memorandum of 1 January 1975 are to be found in para. 7 which provided that the amount of each retiring partner's entitlement in ``work in progress'' was to be paid by monthly payments continuously over the five years following his retirement and that distributions in respect of work in progress were not to exceed 15% of the total distributions in any financial year. Any shortfall was to be added to and apportioned over the remaining years during which the arrangement would operate. The fact that the payments were made half-yearly rather than monthly is of no consequence for the outcome of the case.

The memorandum of 14 December 1982 dealt with the applicant's entitlement to payments for goodwill and for distributions of work in progress. This was, however, referred to as ``future income entitlement''. So far as it is relevant the memorandum was as follows:



  • Payable over 5 years by ½ yearly instalments.


  • $95,918.
  • This is payable over 5 years beginning in December 1982 at $9,592 per ½ year.
  • ....................''

During the year of income in question, the applicant received two payments each of $10,304. Each payment included the sum of $9,592 in respect of work in progress so that during the year the applicant received $19,184 in respect of that matter. Presumably he was paid similar amounts in each of the ensuing four years.

The applicant lodged his return of income for the 1983 year on 30 March 1984. Included in it was a schedule headed, ``DISCLOSURE OF CAPITAL RECEIPT''. The schedule was as follows:

``On 31 March 1982, P. Stapleton resigned as a Partner in the Firm of Sly & Russell. The Firm did not have a written partnership agreement, however, some of the terms of the oral partnership arrangements were that...''

The schedule then set out para. 6, 7, 8 and 9 of the memorandum of 1 January 1975 earlier quoted. It continued:

``On retiring, the Partners of Sly & Russell assumed P. Stapleton's interests in the Goodwill of the Firm and his interests in the other assets of the Firm. These assets consisted primarily of `work in progress' together with disbursements incurred and paid on behalf of clients but not collected, and recoverable bad debts. Accordingly, as at 31 March 1982, P. Stapleton became entitled to a fixed sum of $105,885 from Sly & Russell in respect of that Firm assuming his interest in the Partnership (Goodwill and other interests).

The $105,885 was approportioned [sic] and was payable as follows:

  • - Goodwill - $9,967.
  • This was payable over seven years by 14 six monthly payments of $712.
  • - Other Interests - $95,918.
  • This was payable over five years as from 31 December 1982 by 10 six monthly payments of $9,592.

During the year of income, P. Stapleton received two instalments of $10,304 consisting of $714 per instalment, on account of Goodwill and $9,592 per instalment on account of other interests.

The two instalments received, being proceeds received on the disposal of P. Stapleton's interests in the Partnership of Sly & Russell to the continuing Partners, constituted capital in the hands of P. Stapleton.''

On 4 May the applicant received a request from the Commissioner for further information concerning his income tax return for the 1983 year. The applicant was asked for a copy of ``the oral [sic] partnership arrangement of the firm'', documentary evidence of his retiring from the partnership, ``the agreement of

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payment upon your retirement'', and some other information to which it is unnecessary to refer. The applicant's accountants replied on 5 June 1984 informing the Commissioner that, as the arrangement was oral, a copy of the understanding could not be supplied. However, a copy of the memorandum of 1 January 1975 was sent. The letter said that no documentary evidence of the applicant's retiring from the partnership existed. The accountants enclosed a copy of the memorandum of 14 December 1982.

On 12 June 1984 the applicant received a notice of assessment of income tax in respect of the 1983 year. No part of the sum of $19,184 received by the applicant in respect of work in progress was included in his assessable income. However, on or about 21 February 1985 the applicant received a notice of amended assessment and an adjustment sheet in respect of the 1983 year. The adjustment sheet showed that the Commissioner had added to the applicant's assessable income the sum of $19,184. The adjustment sheet described the amount as, ``Distribution received from the partnership... now included in assessable income''. In evidence is a note of the basis of the assessment of the sum of $19,184 as income. The officer who made the assessment referred to the fact that the amount was referred to in the memorandum of 14 December 1982 as ``future income entitlement'' and to the partnership return in which the amount was said to represent ``a distribution from the partnership''.

The applicant objected to the inclusion of the sum of $19,184 in his assessable income. The objection was disallowed. The question to be decided is whether the sum was properly included in the applicant's assessable income. There is also a question whether the Commissioner was entitled to issue an amended notice of assessment. This is because it is the applicant's contention that he made full and true disclosure of the payment which he received within the meaning of subsec. 170(3) of the Income Tax Assessment Act 1936 (``the Act'').

I propose first to deal with the question whether the two payments which the applicant received in respect of work in progress in the year of income in question were capital or income. Counsel for the applicant contended that the payments were capital for the following reasons:

  • (a) They were instalments of a fixed sum due to the applicant, namely, the sum of $95,918 assessed by the firm as the applicant's entitlement to work in progress.
  • (b) That sum, along with the sum to which he was entitled for goodwill, was the amount or agreed value of the applicant's interest in the partnership at his retirement. Thus the amount was capital and not revenue.
  • (c) The method of computation did not give to the receipts the character of income.
  • (d) Although the payments were categorised as work in progress, this categorisation did not make them income. They did not constitute income derived by the firm during the time the applicant was a partner. In support of this proposition counsel for the applicant relied upon the decision of the High Court in
    Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 612. There Barwick C.J., in whose judgment the other judges agreed, said (ATC p. 4020; C.L.R. p. 650):
  • ``In ascertaining such earnings [the earnings of the partnership in question in that case], only fees which matured into recoverable debts should be included as earnings. In presenting figures before his Honour allowance was made for what was termed `work in progress'. But this, in my opinion, is an entirely inappropriate concept in relation to the performance of such professional services as are accorded in an accountancy practice when ascertaining the income derived by the person or persons performing the work. When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and [sic] it or they will be income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot properly

    ATC 4823

    be demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period.''
  • (e) The fact that in its return of income lodged on 21 December 1983 the partnership treated the sum of $19,184 as a share of income payable to the applicant was not relevant. This was a reference to a statement of distribution of net income included in the partnership return for the 1983 year. At the end of the statement, there appeared the applicant's name beside which was the figure of $19,184 set out under a column headed, ``Share of Income''.
  • (f) The regularity with which the payments were to be made was not sufficient to change what otherwise might have been a capital payment into a payment of income.

In the submission of counsel for the Commissioner there was a conceptual error in looking at the case as one which involved the acquisition by the firm of an asset - the applicant's share in work in progress - for a price paid to him. The underlying basis of the arrangement was dependent upon there being a continuing contractual relationship. There were two ways in which it was put that the payments were income. Firstly, it was said that the applicant remained a partner for income tax purposes. When he received sums for work in progress, the distribution was of partnership income. Reference was made to para. 6 of the memorandum of 1 January 1975 which provided that the applicant would acquire an entitlement to a share in ``work in progress'' from that date. It followed, so counsel submitted, that the applicant had not ``walked away'' from the partnership. Like the applicant, the Commissioner also relied on Henderson's case but principally on what had been said by Windeyer J. at first instance. It was contended that the reversal of his Honour's decision on appeal did not affect the correctness of what he there said about work in progress. I shall come to the detail of Henderson's case a little later. It was also said that the evidence did not satisfactorily establish what in fact was included in ``work in progress'' and that there was, indeed, such a dearth of evidence that it was not possible to be sure about either the precise details of the partnership arrangement in relation to it or how the amount due to the applicant in respect of it had been calculated.

The Commissioner's case was put in the alternative as one in which the payments were entirely referable to acts done in the course of the partnership business, that is to say, acts done in the pursuit of income. The applicant, so it was said, was given a contractual right to share in work in progress, that is, share in an income activity. Thus the right referred to acts done in the course of a business in which the applicant was a partner. Furthermore, what the firm returned in its own income tax return was indicative of what the partners intended by their arrangement. The Commissioner placed substantial reliance on the decision of the New Zealand Court of Appeal in
Jamieson v. Commr of I.R. (N.Z.) 74 ATC 6008.

The initial task is to come to a conclusion on what the partnership contract provided for in relation to work in progress. Paragraph 6 of the memorandum of 1 January 1975 earlier set out provided that the applicant would commence to participate in distributions, that is, of income, from 1 January 1975 and would acquire an entitlement to a share in ``work in progress'' from that date. Paragraph 7 went on to provide for payment of a retiring partner's entitlement in ``work in progress'', but did not define the method whereby it was to be calculated or what in fact it was. It was this circumstance which gave rise to the Commissioner's submission that the evidence about work in progress was unsatisfactory with the consequence that the Court could not be satisfied precisely what it was.

Substantial assistance in relation to the problem is to be found in the judgment of Windeyer J. in Henderson's case. Windeyer J. was the primary Judge whose judgment was reversed on appeal. But nothing that he said about work in progress was called into question by the judges who sat on the appeal and, in the passage earlier quoted from the judgment of Barwick C.J., it is to be discerned that the Chief Justice was in agreement with what Windeyer J. said about it (69 ATC 4049 at pp. 4059-4061; 119 C.L.R. at pp. 634-638). All that his Honour said is important, but it is inconvenient to incorporate it all in these reasons.

His Honour commenced (ATC pp. 4059-4060; C.L.R. pp. 634-635) by referring

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to the fact that the value of work in progress was a familiar item as an asset in the accounts of manufacturers. After referring to
Duple Motor Bodies Limited v. I.R. Commrs (1961) 1 W.L.R. 739, he said that the propositions stated therein related to work in progress as a synonym for tangible things, ``goods in process of manufacture from raw materials, goods which when completed will become stock-in-trade''. His Honour said that ``work'' in that sense did not connote abstract activity, that is, work done and later expended. It denoted concrete tangible things.

His Honour continued (ATC p. 4060; C.L.R. pp. 635-636):

``In my opinion it is a mistake to suppose that the notion of the value of work in progress, in the sense of things uncompleted by a manufacturer or craftsman, can be simply transferred to uncompleted services by a tradesman or the practitioner of some profession, and to assume that it can there be applied in the calculation for taxation purposes, of income derived. I realize that in accountancy there is a similarity of a sort between unfinished goods and uncompleted services, and that the latter are sometimes described as work in progress. No doubt accounts can be kept in which a value is ascribed to uncompleted tasks by persons engaged in the practice of various trades and professions and rewarded by fees. Such accounts may be useful for many purposes, especially in the case of several persons practising a profession in association. The contribution of each to the earning of the collective income can be shewn by such accounts. And they may be useful in relation to the terms on which a partner retires from or a new partner enters a firm. But it is one thing to record when, and by whom, work is done which will produce income: it is another to say when income, the rewards of such work, was derived.''

His Honour went on to make the same point as was later made by Barwick C.J. on appeal, namely, that work in progress, understood in the sense which he had explained in relation to work done by professional people, was not something for which an account could be rendered to a client, customer or patient. Liability to pay fees would, in the normal course, not arise until work was complete. That was not to say that there might not in a given case be an arrangement whereby a client would pay an accountant or solicitor for services from time to time even though the whole of the work was not complete. His Honour then said (ATC p. 4060; C.L.R. p. 637):

``In the present case a record was kept of the time spent on each task by each accountant in the firm, partner or employee. A value was put on this work by reference to an hourly rate fixed by the managers for each person concerned according to his skill and experience. In this way the fee to be charged for services rendered might be said to shew accruals, using that term in a sense which it appears often to have for accountancy practice, especially in the United States: see, e.g. pp. 471-473, 708-711 of the work Accounting Practice Management Handbook, edited by MacNeill, which was tendered in evidence. But accruals in this sense are not I think equivalent to earnings for the application of an earnings basis for the assessment of income according to our law. As I see it, they shew in terms of money the value of work which has been done towards the earning of money, not money which has been earned. Money is not I think earned income until it is in law recoverable as a debt. Of course, if an amount were recoverable as a quantum meruit although a task was not completed, it could be said to be earned. And, as I have said, services may create debts before a bill is sent to the debtor. But services rendered do not produce taxable income until they create a debt. And it must be a debt which is in fact recoverable, not a bad debt.''

Whether a payment in respect of an accruing entitlement is on capital or revenue account is frequently a difficult question. I find it useful to refer to what was said generally about the matter by Brennan J. (when a Judge of this Court) in
Federal Coke Co. Pty. Limited v. F.C. of T. 77 ATC 4255; (1977) 34 F.L.R. 375. His Honour said (ATC p. 4273; F.L.R. pp. 401-402):

``When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action

ATC 4825

discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received. Thus, when moneys are received in consideration of surrendering a benefit to which the recipient is entitled under a contract, it is relevant to enquire whether or not that benefit was a capital asset in his hands. To adapt the words of Lord MacMillan in
Van den Berghs Limited v. Clark (1935) A.C. at p. 443 and of Williams J. in
Bennett v. F.C. of T. (1947) 75 C.L.R. 480 at p. 485, the enquiry is whether the congeries of the rights which the recipient enjoyed under the contract and which for a price he surrendered was a capital asset.''

What his Honour said was recently applied by this Court in
Allied Mills Industries Pty. Limited v. F.C. of T. 89 ATC 4365. The dicta of the Court in the Allied Mills case are important and shed further light on the matter, but each case has to be considered in relation to its own facts. The facts in the Allied Mills case were very different from those of the present.

On the basis that the entitlement to the moneys was an entitlement which derived from the provisions of para. 7 of the memorandum of 1 January 1975, and that work in progress there referred to has the characteristics described by Windeyer J. in Henderson's case, it must follow that the total entitlement of the applicant, that is, the sum of $95,918, was a payment for an item to which the applicant as a retiring partner would have had no right except for the provisions of para. 7. That circumstance is the base upon which the applicant's case rests. Counsel for the applicant conceded that the work in progress had a connection with income in the sense that it would eventually yield income once the work was complete. But that had not occurred; the intention of all the partners including the applicant was that there should be an accrual of an entitlement to it from time to time which would result in the payment to a retiring partner of an appropriate amount for it, but only in the event of retirement. The ascertainment of an amount for work in progress was otherwise irrelevant to the relationship which the partners had with each other. Once work was completed, it would not fall into the category of work in progress; it would become part of the accrued earnings of the partnership available to be taken into account for the purposes of ascertaining profits and making distributions to partners.

In the submission of counsel for the Commissioner, these considerations were answered by the New Zealand Court of Appeal in Jamieson v. Commr of I.R. (supra). There the taxpayer was a partner in a firm of barristers and solicitors. He withdrew from the partnership on 30 September 1968. An agreement was reached between the taxpayer and the continuing partners that he would be paid $3,156 for his share of fees on uncompleted and current files for work done to the date of dissolution of the partnership. The taxpayer contended that the sum of $3,156 was a capital payment for the sale of a chose in action. The Court held that the amount received was income because it was the taxpayer's share of partnership profits for work done to the date of dissolution. Wild C.J. referred to an earlier New Zealand case,
Robertson v. Brent and Haggitt (1972) N.Z.L.R. 406, and to what Barwick C.J. had said in Henderson's case in the passage already quoted from his judgment; see 69 ATC at pp. 4019-4020; 119 C.L.R. at pp. 650-651. Wild C.J. relied on the fact that Barwick C.J. had said that it might be that a different course could be taken if an estimation of profits were being made for some other purposes than that which was involved in the Henderson case. Wild C.J. said that the agreed statement of facts in the Jamieson case showed that the taxpayer and the continuing partners had taken a different course for a different purpose, ``namely, to arrive at their respective shares of profit from their practice up to the taxpayer's withdrawal on 30 September 1968''. Wild C.J. held that, in those circumstances, the payment was in the nature of income and not capital.

In reaching that conclusion, the Chief Justice said that he agreed with the judgment of the primary Judge, Woodhouse J. (as he then was), (1972) 3 A.T.R. 361. Woodhouse J. concluded his reasons for judgment by saying (at p. 364):

``The real point of the case before me is not whether the uncompleted work had any present asset value but whether the share in it that was actually credited to the retiring

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partner was income in his hands. In my opinion it was a revenue or income sum computed to enable a fair and just distribution of the achievements of the partnership up to the date of dissolution.''

McCarthy P. referred to Henderson's case and continued (Jamieson at p. 6013):

``I think that Mr Downey [counsel for the taxpayer] places himself in a real difficulty in claiming that the present case is of the type discussed in Henderson v. F.C. of T. (supra) and the other cases to which he referred us, for example
Rutherford v. Commr of I.R. (1926) 10 T.C. 683, and
I.R. Commrs v. Paget [1938] 2 K.B. 25. If it be of that class, appellant had no rights at all in respect of uncompleted work; certainly until the work had reached the stage for which payment could be properly demanded. There is no evidence that any of the work had reached that stage, though some may have. If that were the position in this partnership at 30 September 1968, then the payment to Mr Jamieson by his former partners of $3,156.34 must have been made as an act of grace. As such in the hands of appellant it would be a capital payment and non-deductible by the remaining partners. But this was never advanced as the situation by appellant. It has consistently been alleged by him and his former partners that he was entitled to a share of the value of work in progress at the date of dissolution.''

After referring to part of the statement of facts his Honour concluded (p. 6013):

``I can only read these statements as accepting that this right to payment flowed from a term of the total partnership arrangement, probably a tacit term, as it existed up to the date of dissolution. `Entitled' in my view must mean entitled as of right.''

Later his Honour said (p. 6014):

``all the partners accepted, at all times, that appellant had this right by virtue of his being a member of the partnership up to 30 September. That being so it seems to me that the amount received must be treated as income in the hands of the taxpayer in the year of receipt.''

Speight J. agreed (p. 6014). He said that, had the case been one where the payments were by way of a capital sum to purchase rights which had not yet crystallised, he would favour the taxpayer's argument. But that was not the situation. There was an express agreement between the taxpayer and the continuing partners that the payment was made because ``it was agreed that the Objector (i.e. the taxpayer) was entitled to a proportionate share of fees''. Although that was not the method previously used on the annual division of income, it was a variation agreed to by all parties as the taxpayer's share of fees earned up to the date of dissolution.

Notwithstanding submissions by counsel for the applicant that I should do so, I find myself unable to distinguish Jamieson's case from the present. The members of the Court of Appeal rejected the taxpayer's submission in that case because they concluded that the evidence established that the payment of the amount in question was a payment to which the taxpayer was legally entitled by reason of a legally enforceable arrangement made by the members of the firm. That applies also in the case of the amount here in question. The evidence in this case is clearer than it was in Jamieson. Paragraph 7 of the memorandum of 1 January 1975 expressly provided for the entitlement. The purpose of such a provision was said by Wild C.J. and Woodhouse J. to be to enable the respective shares of profit of the partners to be determined up to the date of the taxpayer's withdrawal or retirement from the partnership. The amount was therefore income and not capital. It, perhaps, goes without saying that the underlying assumption made by the judges in Jamieson was that the work in progress to which they referred was work in progress in the conventional sense, that is, as explained in Henderson's case, work which was incomplete and for which clients were not then obliged to pay.

Is there some reason why I should not follow Jamieson's case? It is not binding upon me, but it is highly persuasive of what I should do. It is a unanimous decision of the New Zealand Court of Appeal. Having considered the judgments of the members of the Court, I do not perceive any basis upon which it can be said that they are incorrect. On the contrary I find myself in agreement with them. In particular I agree with the passage which I have quoted from the judgment of Woodhouse J. at first instance in which judgment Wild C.J.

ATC 4827

agreed. Work in progress in this context has the particular features and characteristics described by Barwick C.J. and Windeyer J. in Henderson's case, but it is nevertheless an affair of revenue rather than capital. It represents that which will in due course of time become income when the work in question is complete. The purpose of para. 7 of the memorandum of 1 January 1975 was to enable a retiring partner to have taken into account the value of potential income, that is, something which would not otherwise be brought to account. But para. 7 did not change the nature of what was involved. It was dealing with something which directly related to income and not to capital.

In the course of this discussion I referred to the judgment of Brennan J. in the Federal Coke case. The point which his Honour made was that, more often than not, the question of whether or not a receipt is on revenue account will be ascertained by reference to the consideration for which the money was received. He said that the consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received. Here the receipt is characterised by the nature of the matter in respect of which it was received, that is, work in progress which bore no relation to capital and was directly connected with or related to income.

Before proceeding to other aspects of the case I should deal with a further submission made by counsel for the Commissioner which I think should be rejected. The submission was based on sec. 6 of the Partnership Act 1892 (N.S.W.). That section provides that an Act or instrument relating to the business of the partnership and done or executed in its name is binding on all the partners. It was the Commissioner's contention that both the partnership income tax return itself, in so far as it showed the moneys in question as income of the applicant, and the memorandum of 14 December 1982 when it referred to the applicant's entitlement as ``his future income entitlement'', bound the applicant to treat the amount as income. In this respect it was said, as I have mentioned, that what the firm returned in its own income tax return was indicative of what the partners intended by their arrangement.

In my view it is a misuse of sec. 6 of the Partnership Act to apply it to a case of this kind. Section 6 appears in a part of the Act which is headed, ``Relation of Partners to Persons Dealing with Them''. There follow sec. 5 to 18 inclusive. There then appears a further heading, ``Relations of Partners to One Another''. There then follow sec. 19 to 31 inclusive. What the Commissioner is saying is that the terms of the partnership relationship and sec. 6 bind the applicant to whatever the partnership may state in an income tax return lodged with the Commissioner, no matter that it may be quite erroneous. In my opinion the applicant is entitled to have considered the nature of the transaction which gives rise to the suggested liability for tax unaffected by what the partnership may do or say in relation to his income. That must be especially so in a case where, at the time the partnership return was lodged, the partner had ceased to be a member of the partnership. There were suggestions in the course of argument that the partnership agreement had not come to an end. To the extent that submissions along these lines were relied upon, I reject them. The whole of the facts and circumstances of the case plainly establish that the applicant retired from the partnership on 31 March 1982. This conclusion does not, however, affect my view that the amount received for work in progress was assessable income.

If I had not reached that conclusion, I would, nevertheless, have reached a conclusion adverse to the applicant. The principle which is to be derived from the judgments in Henderson's case is that a person engaging in the practice of a profession, such as that of an accountant or solicitor, does not in ordinary circumstances become entitled to payment of fees until the work he or she has been engaged to do is complete. Until then, there is no debt. A corollary of this principle is that the partners of a partnership, which carries on such a practice do not, in the absence of agreement, become entitled to share in the value of uncompleted work. That is why provisions such as are found in para. 6 and 7 of the memorandum of 1 January 1975 here are included in partnership agreements. Nevertheless, it is implicit in what the members of the High Court in Henderson's case said,

ATC 4828

that the usual rule may be displaced by agreement. It is well known that many firms of accountants and solicitors have legally binding arrangements with their clients pursuant to which payments for ongoing work are to be made periodically irrespective of whether work is complete. Such arrangements create a legal liability in the clients to pay for work in progress and displace the ordinary rule to which Barwick C.J. and Windeyer J. referred.

In the present case the evidence does not deal with the question whether the amount calculated for work in progress was, wholly or partly, for work in progress in the ordinary sense or, wholly or partly, for work which, although incomplete, was work for which the partnership was legally entitled to claim payment. That is the gravamen of the Commissioner's complaint about the state of the evidence.

The onus of establishing that the assessment is excessive is upon the applicant; para. 190(b) of the Act. In the Commissioner's submission, that onus has not been discharged. That is because the evidence does not enable one to tell whether the amount calculated as the applicant's share of work in progress was wholly or partly comprised of amounts expended in relation to uncompleted work, but for which, because of contractual arrangements, the partnership was legally entitled to claim payment. So much of the amount as represented work in progress for which the partnership was entitled to charge would plainly be income even on the applicant's own case.

I have reached the conclusion that these submissions should be upheld. There is no evidence, one way or the other, of precisely what amounts were taken into consideration for the purposes of the calculation or how the amount was arrived at. The memorandum of 14 December 1982 tells one nothing about the items which made up the amount or how the amount was calculated. It states a bare conclusion. The applicant himself may not have the knowledge or the access to records to provide the information, but undoubtedly an appropriate employee of the partnership would have been able to do so. In the absence of such evidence, one does not know whether all or part of the amount in question comprised debts due to the partnership and thus income.

My earlier conclusion was that an amount paid for work in progress pursuant to an agreement, such as the one in question here, is assessable income whether it represents work in progress in the sense explained by Barwick C.J. and Windeyer J. in Henderson's case or is work which, although incomplete, is work for which a partnership, because of contractual arrangements with its clients, is legally entitled to charge. If that conclusion be wrong - if an amount paid to a retiring partner for work in progress for which the partnership is not entitled to claim payment is not assessable - the applicant here must nevertheless fail. That is because he has not established that the entirety of the amount received was for work in progress in the conventional sense; the evidence he has led does not enable one to tell. In those circumstances he would not have discharged the onus, which the statute casts upon him, of showing that the amount of the assessment was excessive.

I turn to the question whether the Commissioner had power to make the amended assessment which is in question. Subsection 170(3) of the Act (as it was at the time in question), in so far as it is relevant, was as follows:

``(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact;...''

The subsection has been discussed in a number of authorities, most recently, so far as I am aware, by this Court in
The Chamber of Manufactures Insurance Limited v. F.C. of T. 84 ATC 4315. In
Australasian Jam Co. Pty. Limited v. F.C. of T. (1953) 88 C.L.R. 23 Fullagar J. referred (p. 33), inter alia, to
Foster v. F.C. of T. (1951) 82 C.L.R. 606 and to the judgment of Williams J. in
Scottish Australian Mining Co. Limited v. F.C. of T. (1950) 81 C.L.R. 188 where Williams J. said (pp. 197-198) that the section seemed to impose on a taxpayer the duty of disclosing every fact which he knows or is capable of knowing material to a correct assessment. Fullagar J. continued (p. 33):

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``The words `or is capable of knowing', if read quite literally, may be thought to go a little too far, but I would think that even a merely inadvertent omission of a material fact may be enough to enable the Commissioner to maintain that the full and true disclosure required has not been made. I think further - what is of some importance in the present case - that, if there is a material omission in the taxpayer's return, it is nothing to the point for the taxpayer to say to the Commissioner: `It was obvious on the face of the return that there was something I had not told you: you could have asked me about it, and, if you had done so, the information would have been immediately and willingly supplied.'''

The emphasis is mine.

Austin Distributors Pty. Limited v. F.C. of T. (1964) 13 A.T.D. 429 Menzies J. said (pp. 432-433):

``The requirement of s. 170 of the Income Tax and Social Services Contribution Assessment Act is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient.... The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom the advice was sought have required more information than this return disclosed to the Commissioner?''

Counsel for the Commissioner submitted that, to use the language of Menzies J. in the Austin Distributors case, the question to be answered was whether, assuming the applicant to have sought advice about the matter, the person advising him would have required more information than was disclosed in the return. The gap in the information which it is said the return and the accountant's subsequent letter provided has earlier been referred to. There is insufficient information to enable one to know the precise nature of what is encompassed by work in progress and how the amount was calculated. I agree that a prudent person advising the applicant would require this information before giving advice.

That conclusion does not, however, determine the matter against the applicant. I have decided that the amount in question here would be assessable income even if the entirety of it represented work in progress in the conventional sense, that is work which was incomplete and for which the partnership was not legally entitled to claim payment. The absence of the more detailed information which I think a competent adviser would have asked for was not, as events have turned out, material. Whether the amount was for work in progress in the conventional sense or work in progress for which the partnership was legally entitled to claim payment, it was properly assessable as income.

The dictum which I have quoted from the judgment of Menzies J. in the Austin Distributors case was apt for the circumstances of that case and, with respect, provides important guidance in how the provisions of subsec. 170(3) are to be applied. But his Honour ought not to be taken to have intended what he said to foreclose the question whether there has been full and true disclosure in a case where a prudent adviser would require information which might, nevertheless, eventually prove to be immaterial to the question at issue. Materiality is a factor as the judgments of Williams J. in the Scottish Australian Mining Co. case and Fullagar J. in the Australasian Jam case emphasise. The two judges were doing no more than echoing the words of the subsection which required ``full and true disclosure of all the material facts''.

Ultimately the question is whether the taxpayer in a given case has made full and true disclosure of such facts. In substance the purpose of the subsection is to ensure that the Commissioner is given an adequate opportunity of considering whether a particular receipt is assessable income or a particular outgoing an allowable deduction. In the view of the matter which I have formed, the Commissioner needed no more information than he had to reach the conclusion that the amount was assessable as income. That is because the amount in question was received in respect of the applicant's entitlement to a share in work in progress. Whether it was work in progress in the conventional sense or not, it was income in the applicant's hands and, subject to the operation of subsec. 170(3) of the Act, part of the applicant's assessable income, as the Commissioner himself properly concluded on

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the information supplied to him by the applicant.

In those circumstances I think that there was full and true disclosure within the meaning of the subsection. The disclosure made was true and it was sufficient (full enough or adequate) to enable the Commissioner correctly to deal with the matter. I should add that, had my conclusion about the assessability of the amount in question been different, I would have had a different view of the submission based upon subsec. 170(3) of the Act. The information provided by the applicant would not have amounted to a full and true disclosure because the Commissioner would have had insufficient information to enable him to tell whether the amount paid was for work in progress in the conventional sense or for incompleted work for which the partnership was, because of contractual arrangements, lawfully entitled to charge its clients.

In the result the applicant is entitled to succeed but, for reasons which I shall explain to counsel when these reasons are published, I think it is not appropriate now to make orders. Instead, the matter will be stood over for a short time to enable the parties and their legal representatives to consider what I have said. When the matter is next in the list, counsel for the applicant is to bring in short minutes of order to give effect to my decision. I shall also then deal with the question of costs.

Supplementary reasons for Judgment (9 August 1989)

This matter is in the list today for short minutes of order. The parties are not agreed on the question of costs. The applicant seeks his costs, he having succeeded on the appeal. The Commissioner opposes that order upon the basis that, although the applicant was successful in the appeal, he was successful only on one point which was relied upon and failed on the other, namely, upon the question whether the amount in question was income or capital.

A substantial portion of the hearing time was occupied with argument on that issue, but overall the case finished within a day. The applicant had to come to court to obtain the relief which he did. It does not appear to me that costs were materially increased by the other issue upon which the applicant lost. In those circumstances, I think the appropriate order is that the Commissioner pay the applicant's cost of the appeal, and that is the order which I propose to make.

Accordingly, I make the declaration provided for in para. 2 of the short minutes of order, which I have initialled and dated and placed with the papers. I make orders 1 and 3 as provided for in those short minutes.

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