Perpetual Executors and Trustees Association of Australia Ltd v Federal Commissioner of Taxation (No 2) (Thomas' Case)
(1955) 94 CLR 129 ALJ 505
[1956] ALR 1
(Judgment by: Kitto J)
Between: Perpetual Executors and Trustees Association of Australia Ltd
And: Federal Commissioner of Taxation (No 2) (Thomas' Case)
Judges:
Dixon CJ
McTiernan J
Fullagar J
Kitto JTaylor J
Subject References:
Estate Duty (Cth)
Judgment date: 29 November 1955
Judgment by:
Kitto J
This is a case stated in an appeal against an assessment of estate duty. It concerns the valuation for estate duty purposes of an interest which the deceased, Frederick Charles Henry Thomas, had at his death in a partnership. The partnership consisted of seven partners who carried on a business of furniture warehousemen in Victoria and Tasmania under the name "Maples". Their mutual rights and obligations were regulated by a deed of partnership dated 22nd December 1939, which was varied, though not in any material respect, by a deed of 4th December 1940. They were entitled to the capital in unequal shares, the deceased's share being nineteen and a half per cent. Profits were divisible and losses were to be borne in proportion to the shares in capital. (at p19)
The partnership deed provided (by cl. 9) that the partnership should not be dissolved by the death or retirement of any of the partners, and that on the death or retirement of the respective partners certain provisions should apply. In the event which happened, namely that Frederick Charles Henry Thomas predeceased all the other partners, neither he nor any of them having retired in his lifetime, it was provided that as at the date of his death his legal personal representatives should be deemed to have given options to five of the other partners to purchase from his estate his interest in the partnership in stated proportions. (These five will be referred to as the surviving partners.) Then the deed provided (by cl. 12) that upon the exercise of the respective options the purchase price payable should be the total of certain amounts which may be shortly described as
- (a)
- nineteen and a half per cent of the balance of assets over liabilities as disclosed in the balance sheet of the partnership for the accounting year of the partnership prior to the death (subject to a proviso as to book debts);
- (b)
- the like proportion of any real estate acquired between the end of that year and the date of death, at cost price plus any amount since expended thereon less any liability to a vendor or mortgagee; and
- (c)
- the like proportion of the profits of the partnership for the current year ascertained in a particular manner.
At the end of cl. 12 the following words appeared:
"Without affecting the generality of the foregoing provisions it is specifically agreed and declared that in computing the amount of purchase money payable on the exercise of any option no sum shall be added or taken into account for goodwill".
Only one other provision of the deed need here be mentioned. It is in cl. 14:
"On the exercise of any option the purchaser shall be deemed to have acquired the interest in respect of which such option shall have been exercised as from the date that such option shall have been... deemed to have been given to the person exercising the same". (at p20)
The death of the deceased occurred on 28th January 1944. Each of the five partners who thereupon became entitled under cl. 9 to an option to purchase a share of the deceased's interest in the partnership exercised the option. Some did so on 19th April 1944, and the others on the following day. The purchase money payable by each was calculated in accordance with the deed, and the amounts payable aggregated 156,253 pounds 11s. 3d. Had the option provisions not appeared in the partnership deed the value of the deceased's interest in the partnership as at his death would have been 176,253 pounds 11s. 3d. The difference of 20,000 pounds is wholly accounted for by the provision against taking into account any amount in respect of goodwill in computing the purchase money payable on the exercise of an option. The Estate Duty Assessment Act 1914-1942 provides by s. 8 (1) and (2) for the levying and payment of estate duty on the value of the estates of deceased persons at rates declared by the Parliament. Section 8 (3) (b) provides that for the purposes of the Act the estate of a deceased person comprises (inter alia) his personal property wherever situate, if he was at the time of his death domiciled in Australia, as the deceased in the present case evidently was. Section 8 (4) provides that property which it describes in six lettered paragraphs shall for the purposes of the Act "be deemed to be" part of the estate of the person so deceased. Examination of each of the six paragraphs shows that the last-mentioned sub-section brings into an estate property which formed no part of the deceased's actual estate at his death but which for various reasons is to be treated as notionally included in his estate.
Hence the operative words: "shall be deemed to be part of the estate". Paragraph (e) comprises "property being a beneficial interest in property which the deceased had at the time of his decease, which beneficial interest, by virtue of a settlement or agreement made by him, passed or accrued on or after his decease to, or devolved on or after his decease upon, any other person". (at p21)
The appellant as executor of the deceased's estate made a return for estate duty purposes and included the deceased's interest in the partnership as an asset of the estate, attributing to it a value of only 156,217 pounds 11s. 3d. This amount was described in the return as the amount at which the executor was obliged to sell the interest pursuant to the partnership deed. It was in fact, as will be seen, thirty-six pounds less than the purchase money which the executor was entitled to receive, and no objection was taken when the commissioner added that sum in his assessment. But the commissioner also added the 20,000 pounds by which the amount payable to the executor fell short of that which would have been payable had the value of goodwill been taken into account in the computation. He drew attention to the addition by including in an "alteration sheet" which he sent to the executor an item reading: "Proportion of goodwill in Maples - s. 8 (4) (e) 20,000 pounds". To this addition the executor objected, and when an appeal against the assessment came before this Court the only question which called for decision was whether the addition was rightly made. (at p21)
The appeal came before Williams J. As appears from his Honour's judgment, the commissioner, without giving up any other contentions open to him upon the true construction of the Act, contended that the share of the deceased in the goodwill of the partnership at the date of his death formed part of his notional estate within the meaning of s. 8 (4) (e) of the Estate Duty Assessment Act 1914-1942. It seemed to his Honour to follow from Trustees Executors & Agency Co. Ltd. v. Federal Commissioner of Taxation (Milne's Case) (1944) 69 CLR 270 that this contention should succeed, and the appeal was therefore dismissed: Perpetual Executors & Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation (Thomas' Case) (1949) 77 CLR 493 . The case was carried to the Full Court, where it was conceded that the appeal must fail unless the Court were prepared to reconsider and overrule Milne's Case (1944) 69 CLR 270 . The Court was not prepared to do so, and accordingly dismissed the appeal: Perpetual Executors & Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation (Thomas' Case) (1949) 77 CLR 493 . (at p21)
The executor then appealed to the Privy Council by special leave. For reasons which it will be necessary to consider, the appeal was allowed and the orders made in this Court were set aside. A declaration was made that the share and interest of the deceased in the assets of the partnership, including the goodwill thereof, were part of his estate within sub-s. (3) of s. 8 of the Act, and that no part of such share or interest was to be deemed to be part of his estate under sub-s. (4) of s. 8. The case was referred back to this Court to reconsider the executor's objection to the assessment in the light of the declaration made, and in particular, but without prejudice to the generality of the foregoing, to determine (a) whether any binding agreement had been made between the parties which fixed the value of the said share and interest in the business and assets of the firm including the goodwill thereof, and if not (b) what value ought to be placed thereon under s. 8 (1) of the Act having regard to all relevant circumstances. The first of these questions arose because there was some uncertainty as to whether an agreement on value which had originally been announced to Williams J. had any application once s. 8 (4) (e) had been put on one side. When the matter came on again in the original jurisdiction of this Court the point was disposed of by a mutual admission that no binding agreement fixing the value of the deceased's share and interest in the partnership had been made between the parties.
I then stated this case for the opinion of the Full Court on three questions of law:
- (1)
- On the facts appearing from this case and the annexures thereto is it open to me to find that the value as at the death of the deceased of his share and interest in the business and assets of the firm or partnership aforesaid including the goodwill thereof was in excess of 156,253 pounds 11s. 3d.?
- (2)
- If so, is it open to me to find that the said value was less than 176,253 pounds 11s. 3d.?
- (3)
- If yea to questions 1 and 2, upon what principle should the said value be ascertained? (at p22)
It will be seen that the Privy Council rejected the view which the commissioner had indicated in his alteration sheet. That was the view that in respect of the deceased's share in the partnership there were two classes of interests to be included in the dutiable estate: on the one hand an interest in each of the assets of the partnership other than goodwill, those interests being part of the property which in fact belonged to the deceased at his death and being caught as such by s. 8 (3) (b); and on the other hand an interest in the goodwill, which was not part of the deceased's property at his death but was caught as part of his notional property by s. 8 (4) (e). The Privy Council's reasons for holding that the deceased's interest under the partnership deed in the goodwill as in all the other assets of the partnership was property belonging to him in fact at his death, and therefore dutiable under s. 8 (3) (b), must now be carefully considered, because the argument presented on behalf of the commissioner attributes to their Lordships a view which would require an affirmative answer to question (1) and a negative answer to question (2). (at p23)
Their Lordships went first to Milne's Case (1944) 69 CLR 270 and in order to understand the view they took of that case some examination of it is necessary. At only one point which need here be mentioned did Milne's Case (1944) 69 CLR 270 differ from the present. The partnership deed there provided that on the death of a partner the surviving partners might at their option dissolve the partnership and wind up its affairs or take over the share of the deceased partner in the capital of the partnership; and it further provided that on the death, retirement or expulsion of any partner no allowance should be made to him or to his representatives in respect of the value of the goodwill of the business. The effect of the latter provision was taken to be that in whichever way the surviving partners might exercise the choice presented to them upon the death of the deceased, the amount of money which his executors would receive in respect of his share in the partnership would include nothing assessed as the value of the interest which he had had in the goodwill up to the time of his death. The first of the questions submitted to the Court was whether the dutiable estate of the testator included any and if any what interest in the goodwill of the partnership? The answer given by the Court was No. Latham C.J. did not state any reason for his answer. Rich J. did not find it necessary to give an answer. Starke J. said that no doubt the partnership interest of the deceased was part of his estate, yet that interest did not include goodwill since the partnership deed expressly provided that no allowance should be made to the deceased or his representatives in respect of the value of the goodwill of the business. McTiernan J. described the result of the provision against allowing for goodwill as being that the testator's interest in the goodwill ceased at his death.
Williams J. thought that because of that provision the estate never became entitled to a share in the value of the goodwill, and that therefore the validity of the assessment could not be upheld under s. 8 (3) (b). The second question asked was whether the dutiable estate of the testator included any beneficial interest held by him immediately prior to his death in a joint tenancy or joint ownership wi th other persons. This question, which referred to s. 8 (4) (d) of the Act, was unanimously answered No, and nothing more need be said about it. The remaining question gave rise to a difference of opinion. It was whether the testator had at his death any beneficial interest in the goodwill of the partnership which passed or accrued on or after his death to, or devolved on or after his death upon, any of the surviving partners. It will be seen that this question followed the language of s. 8 (4) (e). It assumed, however, that the provision in the partnership agreement as to making no allowance in respect of the value of goodwill had the effect of denying to the testator's estate the interest in goodwill which he had enjoyed in his lifetime, and had no effect at all upon his interest in the rest of the partnership property. All the judgments agreed that the interest in goodwill did not pass to the deceased's executors; but they differed as to whether, on the one hand, it accrued to the surviving partners, or, on the other hand, it simply ceased so that the interests of the surviving partners in goodwill became enlarged to a corresponding extent. The members of the Court who took the first view held that the interest fell under s. 8 (4) (e). Those who took the second held that it did not form any part of the dutiable estate. (at p24)
The Privy Council, in considering the matter for the purposes of the present case, concluded that both views were erroneous. Their Lordships' opinion was, in effect, that the first question should have been answered by saying that the testator's actual estate included exactly the same interest in goodwill as in the other assets of the partnership. In truth the share in the capital of the partnership to which Milne was entitled at his death was not and had never been a full five one-hundredths thereof; it had always been a share equal to five one-hundredths subject to the operation of the provisions made for the event of Milne's death, and that it remained when he died. The point insisted upon by the Privy Council may be stated by saying that the effect which the death produced by virtue of the provisions as to goodwill was not to alter the character of the share as conferring an interest in each and every of the partnership assets; it did not sever the goodwill from the other assets, freeing the goodwill from Milne's interest in it while leaving the other assets subject to that interest. Its effect simply was that by reason of a characteristic inherent in the share itself, Milne's interest in the partnership assets was now a fraction being less than five one-hundredths, whereas formerly it was a variable fraction being either five one-hundredths or a lesser fraction according as winding-up should or should not occur before Milne's death. But the point is that the interest was still a fractional interest in every one of the assets, goodwill amongst them.
Unless the surviving partners should exercise their option to take over the share, there would have to be a winding-up, and the executors would then receive only the reduced fraction of the distributable balance of the proceeds of realization; but they would receive it as the estate's share of the proceeds of realization of all the assets. Similarly, if the surviving partners exercised their option they would take over an interest in all the assets; and although t he price to be paid would not include any element calculated by reference to the value of goodwill, it would nevertheless be a price for the interest in goodwill as surely as in the other assets. (at p25)
It may be pointed out that in Milne's Case (1944) 69 CLR 270 it might have made no difference, in a practical sense, if the High Court had proceeded on the basis which their Lordships held to be the correct one; for the question would then have arisen: did the reduction in the testator's proportionate interest in the assets which took place on his death mean a passing or accruing to the surviving partners of a beneficial interest which he had at that time? Presumably the judges would have been divided on this question in the same manner and for the same reasons as they were divided on the question which appeared to them to call for decision. Cf. Commissioner of Stamp Duties (N.S.W.) v. Bradhurst (1950) 81 CLR 199 . (at p25)
But in the present case the point upheld by the Privy Council makes a difference in practical result as well as in theory, because under the provisions of the partnership deed the deceased's interest was not a proportion reducing on his death or necessarily reducing at any time thereafter. Immediately before he died his interest was nineteen and a half per cent of the capital, subject to the options exercisable on his death by the surviving partners; and immediately after he died it was still the same percentage of the capital, subject to the same options. The time for the exercise of the options had commenced to run, and that is all that had happened. It was not as if the deceased had had an absolute interest in the assets other than goodwill and a life interest in goodwill, and the life interest had come to an end. His interest in all the assets, in goodwill as well as in the others, such as it was, with all its incidents including that which the option clauses supplied, was an interest which was his absolutely and it therefore fell within s. 8 (3) (b). Their Lordships held that as a consequence it could not fall within s. 8 (4) (e). The reason (the judgment appears to mean) is that the one piece of property cannot be caught both by a provision applying to property which is comprised within the deceased's personal estate at his death and by a provision applying to an interest which, though it did not belong absolutely to the deceased, he "had" at his death under provisions (of a settlement or agreement made by him) which then or thereafter caused it to pass or accrue to or devolve upon some other person. Moreover, their Lordships expressed grave doubt whether s. 8 (4) (e) could be applied, considering only its language.
Although the partnership interest of the deceased in this case did, in the event, pass to the surviving partners at a date after his death, it did so only because the options were exercised and contracts of sale were thereby brought into being between the legal personal representatives and the option-holders. Such a transaction seemed to their Lordships somewhat remote from a transaction of the kind which s. 8 (4) (e) appeared to contemplate. (at p26)
The case is therefore very different from Milne's Case (1944) 69 CLR 270 , but their Lordships found it necessary to overrule that case, because it stood in the way of the proposition which in their view was crucial. That is the proposition that where a partnership agreement provides that on a partner's death his share in the capital shall be diminished, or may be taken over by the other partners at less than its value, the amount of the diminution or of the subtraction from value being dictated by a provision that the value of the goodwill of the partnership business shall not be taken into account in favour of the share in a winding-up, or in the computation of the purchase price to be paid for the share, the interest in assets which the share confers does not become on the partner's death an interest restricted to the assets other than goodwill; it remains an interest in every one of the assets, including goodwill. For the same reason the case of Attorney-General v. Boden [1912] 1 KB 539 was disapproved in so far as it was authority for the view that where a partnership deed provides that no allowance for goodwill shall be made to a partner or his estate upon his death his interest in goodwill is not property which passes on his death, but is property in which the partner has an interest which ceases on his death: see the paragraph which begins at the foot of p. 555. Their Lordships dealt with the point in this sentence: "In their opinion the deceased partner's interest in goodwill in such a case must pass with his interest in the other assets to his legal personal representative, and the fact that its value is not to be taken into account in calculating the price receivable by the estate for his interest in the partnership is irrelevant" [1954] AC 114 , at p 131; (1954) 88 CLR 434 , at p 446. It is irrelevant, that is to say, to the question whether an interest in goodwill forms, together with his interest in the other partnership assets, part of the estate which is in fact his at his death. (at p27)
We were pressed by counsel for the commissioner to read certain passages in the Privy Council's judgment as meaning, not only that the deceased's interest in the partnership assets was caught by s. 8 (3) (b), but that in valuing it for duty no account should be taken of the existence of the provision excluding the value of goodwill from consideration in the computation of the price to be paid upon the exercise of the options of purchase. For instance, the word "irrelevant" in the passage which has just been quoted was relied upon as if it meant irrelevant for all purposes in the assessment of estate duty. The context shows that this is not so. The suggestion, put strongly on behalf of the commissioner, was that the Privy Council intended to hold that the option provisions of the partnership deed had no effect upon the extent of the proprietary interest which passed to the deceased's executor on his death. The view which was attributed to their Lordships was that an agreement between partners whereby on the death of one an option to purchase his share at less than its value is given to the survivors is unlike a mortgage or a binding contract of sale, which admittedly would leave the mortgagor or vendor with less than an absolute interest in the property mortgaged or sold, and that such an agreement, though it binds the partners personally, does not affect anyone else, such as the commissioner. It was conceded that a binding option of purchase in respect of a share in a partnership creates an equitable interest in that share, and indeed Rich and Williams JJ. had so held in Milne's Case (1944) 69 CLR 270 , at pp 285, 298; so that if the options in question here had been given for value to strangers, then (assuming that their exercise would result in contracts enforceable in equity) the effect of granting them would have been that the partner's estate on his death could not include any more in respect of the partnership than his share shorn of the equitable interest vested in the optionees.
But the situation was said to be different where the options arise under the provisions of the partnership deed itself. So it is. Such a case is not one in which a person entitled to a share in a partnership has carved an interest out of that share and disposed of it by a dealing which equity will enforce. But neither is it a case in which a share in a partnership exists as something independent of the rights and obligations created by the option provisions, so that those provisions are to be disregarded in ascertaining the extent of the interest of the partner in the partnership property. The following passage in the dissenting judgment of Rich J. in Sharp v. Union Trustee Co. of Australia Ltd. (1944) 69 CLR 539 accurately states all that need be said on this point: "Business partners own between them the whole of the partnership assets, and each partner has a proprietary interest in each and every item. But his interest is not a fixed proportion of each item, nor is it an immediately ascertainable quantity of the item. It is an indefinite and fluctuating interest, which at any given moment is in proportion to his share in the ultimate surplus coming to him if at that moment the partnership were wound up and its accounts taken (Ashworth v. Munn (1880) 15 Ch D 363, at pp 369, 370; Marshall v. Maclure (1885) 10 App Cas 325, at p 334; Manley v. Sartori (1927) 1 Ch 157, at pp 163, 164; In re Fuller's Contract (1933) Ch 652, at p 656; Trustees Executors & Agency Co. Ltd. v. Federal Commissioner of Taxation (1944) 69 CLR, at p 285). No doubt, as between himself and his partners, his interest in individual items is subject to their right to have all the assets of the partnership for the time being dealt with in accordance with the partnership agreement, but his interest in them is none the less real for that (In re Holland; Brethel v. Holland (1907) 2 Ch 88, at p 91)" (1944) 69 CLR, at p 551. (at p28)
Now there is nothing in the Privy Council's judgment in the present case which conflicts in the least with these well-recognized principles. Nowhere did their Lordships say or imply that the deceased at his death had an asset consisting of an interest in goodwill which was unaffected by the existence of the rights conferred on the surviving partners by the option clauses. They did hold that the estate included the same interest in the goodwill as in the other assets, but the estate's interest in the other assets too was subject to the option clauses. The whole point of the judgment is that the existence of the option clauses in the partnership deed meant that the extent of the interest which the deceased and his estate had in all the assets was less than it would otherwise have been, and not that after the death of the deceased it was an interest in less than all the assets. The notion that the reasons given by their Lordships precluded the appellant from contending that in the valuation of the deceased's interest in the partnership that interest should be treated, by reason of the option provisions, as less than a full nineteen and a half per cent interest finds no support in any of the passages upon which reliance was placed, and cannot be reconciled with the express statement that the reference back to this Court would enable the appellant (in the events which have now happened) to allege that "the existence of the option must be taken into account in arriving at the value of Mr. Thomas' interest in the partnership assets" [1954] AC 114 , at pp 133, 134; (1954) 88 CLR 434 , at p 448. (at p29)
But for an admission made by counsel for the commissioner during the argument, the result would be that the questions before us would have to be answered by saying in effect that although the deceased's interest in the partnership property could not be valued at less than 156,253 pounds 11s. 3d. or more than 176,253 pounds 11s. 3d., it should be valued at a figure falling short of the latter sum by the amount of any actual detraction from value which might be found to have resulted from the existence of the options. That amount might be less than 20,000 pounds because of the possibility that the optionees might not exercise their options, for some reason such as ignorance of values or difficulty in financing the purchase. And, theoretically at least, the options might be found not to have detracted at all from the value of the interest, for the circumstances at the date of the death could have been such as to make it practically certain that the options would not be exercised; and no doubt it was a recognition of this possibility which led the Privy Council, instead of treating the question as a matter of law which was covered by their general thesis, to speak of the appellant being able "to allege" in this Court that the existence of the options must be taken into account in arriving at the value of the interest. It is now agreed, however, that at the death there was a practical certainty that the options would be exercised; and, that being so, the value of the deceased's interest cannot be assessed at a higher figure than 156,253 pounds 11s. 3d. If an analogy be desired, it may be found in Trustees Executors & Agency Co. Ltd. v. Commissioner of Taxes (Vict.) (1941) 65 CLR 33 . (at p29)
For these reasons, question (1) in the case stated should be answered No, and the other two questions do not arise. (at p29)