Taite v Federal Commissioner of Taxation

(1967) 116 CLR 620
41 ALJR 82

---

(Judgment by: Barwick C.J., McTiernan, Taylor JJ.)

TAIT
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judge:
Barwick C.J., McTiernan, Taylor JJ.

Judgment date: 18 August 1967

---

Judgment by:
Barwick C.J., McTiernan, Taylor JJ.

THE COURT delivered the following written judgment:-

This is an appeal from an order made in the original jurisdiction by which an appeal against an assessment made pursuant to the Estate Duty Assessment Act 1914-1950 (Cth) was dismissed : Tait v. Federal Commissioner of Taxation (1963) 109 CLR 349 . (at p621)

Prior to his death on 27th September 1951 the deceased, Peter Tait, and his son Douglas Gray Tait carried on in partnership the business of graziers and sheep breeders near Molong in the State of New South Wales. The deceased and his son had equal shares in the partnership assets and the son survived the deceased. Their agreement provided (cl. 24) that notwithstanding anything thereinbefore contained in case of the death of either of the said partners before the termination of the partnership the surviving partner might (subject to the provisions of the agreement so far as the same might be applicable) nevertheless if he so desired carry on the partnership business for the benefit of the surviving partner and the estate of the deceased partner and that he should have power to operate on the banking account of the partnership and sign or draw cheques or orders thereon.

The agreement also provided (cl. 23) that if either partner should die or become insolvent bankrupt or enter into any composition with his creditors or liquidate his affairs by arrangement with his creditors or if either of the partners should become lunatic or of unsound mind or if either partner should be expelled or retire during the partnership term the other partner should be at liberty to purchase the share of such deceased insolvent lunatic "winding up retiring or expelled partner" upon giving to his liquidator trustee committee personal representative of such partner (as the case might require) notice in writing to that effect within three calendar months from the death insolvency lunacy unsoundness of mind retirement or expulsion of such partner such purchase to take effect as from the day of such death insolvency lunacy unsoundness of mind or expulsion. Clause 25 provided that the price to be paid for the purchase of the share of a deceased insolvent lunatic retiring or expelled partner under the provisions therein contained should be the "nett value" thereof after providing for the debts and liabilities of the firm on the day of the deter mination of the partnership and if the parties should be unable to agree as to the value thereof the same should be referred to arbitration as thereinbefore provided. (at p622)

Section 33 of the Partnership Act, 1892 (N.S.W.) provides that "Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner". But notwithstanding the opening words of this section there can be no doubt that the death of the deceased brought an end to the partnership antecedently existing between him and his son. Nevertheless it seems quite clear to us that the provisions of the agreement, containing, as it did, cll. 23 and 25, constituted "a contract in the clearest and most distinct sense of the term, a contract between persons who were entirely sui juris, and who were able to decide among themselves what should be their rights and in what relations they or the representatives should stand towards each other after their death" (Vyse v. Foster (1874) LR 7 HL 318, at p 334 ; Hordern v. Hordern [1910] AC 465 , at p 473 ) and that such provisions were determinative of the rights of the surviving partner and the legal personal representatives of the deceased. This being so the presence in the partnership agreement of cll. 23 and 25 was a relevant matter for consideration in valuing the share of the deceased in the partnership assets for the purposes of estate duty (Perpetual Executors & Trustees Association of Australia Ltd. v. Federal Commissioner of Taxation (Thomas' Case No. 2) (1955) 94 CLR 1 ). However, no occasion for the exercise of the option arose because the deceased, by his will, left his share in the partnership to his son, the surviving partner. (at p623)

The problem in the case is caused substantially by the fact that in the accounts of the partnership the livestock on the property had, pursuant to the provisions of ss. 32 and 34 of the Income Tax and Social Services Contribution Assessment Act (Cth), been taken into account at values less than their market values so that as at the date of the death of the deceased their value stood at 2,798 pounds. The market value at that time, however, was 33,937 pounds, a difference of 31,139 pounds. Another comparatively minor, but analogous, problem arises with respect to the amount of depreciation provided in the accounts but it is unnecessary to deal separately with this problem. It is sufficient to say that in the circumstances of the case it is apparent that, if upon the death of the deceased, the livestock had been disposed of a considerable income tax liability would have been incurred by the surviving partner and the personal representatives of the deceased as the result of the application of s. 36 of the Income Tax and Social Services Contribution Assessment Act 1936-1951 (Cth). The liability of the personal representatives for such income tax, it is said, would not constitute a deduction from the gross value of the deceased's estate pursuant to s. 17 of the Estate Duty Assessment Act 1914-1950 (Cth) and that, accordingly, for the purposes of assessing estate duty it would be necessary to take into account, without deduction, the price at which the livestock had been sold, or, if they had been sold at an undervalue, then their real value. (at p623)

However, the livestock were not sold or disposed of by the deceased. What he disposed of was his share as a partner in the partnership assets and under the law as it then stood the livestock which belonged to the partners in equal shares were not "disposed of" within the meaning of s. 36 nor were any depreciated assets disposed of within the meaning of s. 59 of the Income Tax and Social Services Contribution Assessment Act 1936-1951 (Rose v. Federal Commissioner of Taxation (1951) 84 CLR 118 ). This, of course, meant that the death of the deceased did not operate to create an income tax liability in respect of the difference between the book value and the market value of the livestock or in respect of assets which had been excessively depreciated in the accounts of the partnership. But it is clear that the successor to the deceased's share would inherit a potential tax liability if and when the livestock or depreciated property should be sold or otherwise disposed of. Accordingly, it is necessary to take into account this potential liability, in common with the ordinary liabilities of the partnership, contingent or otherwise, for the purpose of valuing the deceased's share. (at p624)

In November 1952, however, which was some fourteen months after the death of the deceased, ss. 36A and 59AA were introduced into the Act and those sections had the effect of making ss. 37 and 59 applicable to circumstances such as the present. The first-mentioned section did so, in effect, by providing that where for any reason, including (a) the formation or dissolution of a partnership or (b) a variation in the constitution of a partnership or in the interests of the partners, a change has occurred in the ownership of, or in the interests of persons in, property, constituting the whole or part of the assets of a business and being, inter alia, trading stock, and the person or one or more of the persons who owned the property before the change has or have an interest in the property after the change, s. 36 applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, disposed of the whole of the property to the person, or to the persons, by whom the property is owned after the change. Section 59AA made a substantially similar provision with respect to the element of depreciation and it is unnecessary to traverse that section. However, s. 36A provided that, in circumstances which are present in the instant case, the persons by whom the property was owned before the change together with the person or persons by whom the property is owned after the change might give notice that they have agreed that sub-s. (2) of s. 36A shall apply in respect of the property, whereupon the value of the property for the purposes of s. 36 shall be, in lieu of the value specified in sub-s. (8) (a) of that section, the value (if any) that would have been taken into account at the end of the year of income if no disposal had taken place and the year of income had ended on the date of the change.

A corresponding provision was contained in s. 59AA. By s. 24 of the amending Act these sections were to apply to income of the year of income which commenced on 1st July 1951 and in re spect of all subsequent years. How far such retrospective provisions should be taken into account in assessing the value of the deceased's share in the partnership as at 27th September 1951 is very much open to question but it seems to us that even if they should, it is, on the facts of the case, a matter of no consequence. Notices were duly given pursuant to ss. 36A and 59AA the effect of which was to avoid the application of ss. 36 and 59 and leave the matter in precisely the same case as it was at the time of Rose's Case (1951) 84 CLR 118 . (at p625)

It should be observed that the only relevance of these provisions in the present case is the extent to which they operate to create a liability to income tax may be said to affect the value of the deceased's share ; they do not operate, for the purposes of the Estate Duty Assessment Act, to give to the change in the partnership created by the deceased's death the character of a disposal of livestock of the partnership or of property of the partnership in respect of which it appears that excessive provision for depreciation has been made. (at p625)

However, the critical question, as the learned judge of the first instance said, was whether the value of the deceased's partnership interest should be determined as on a winding up following upon a dissolution or whether, as the appellants contend, it is to be ascertained by inquiring what would be paid by a person who proposed to become a partner with the surviving partner for the purpose of carrying on the business. His Honour considered that the respondent was right in adopting the first-mentioned method. This led him to value the deceased's interest at 78,442 pounds though it seems clear enough that had he adopted the second method he would have accepted the figure contended for by the appellants, 64,970 pounds. In the course of his reasons his Honour referred to the remark of Philp J. in Robertson v. Commissioner of Stamp Duties (1958) Qd R 342 where, after referring to the right of the executors of a deceased partner to have the partnership wound up and the net assets distributed, he said (1958) Qd R, at p 350 : "It is clear that the minimum which the executors would require from a purchaser would be the amount of the testator's share in the result of a winding up. That amount they could get for themselves - why should they be willing to sell for less ?" His Honour thought that this observation was equally applicable in the present case. There was, however, nothing in Robertson's Case (1958) Qd R 342 to indicate that the incidence of income tax affected the value of the succession then under consideration and this was the subject of an express observation in the case. But in our view the vital matter for consideration in this case is the value of the deceased's share in the partnership. His interest in the partnership did not entitle his personal representatives to compel a winding up if the option given by the agreement should be exercised.

As Dixon C.J. said in Thomas' Case (1955) 94 CLR 1 , "Thomas' interest was delimited and described by the provisions of the deed of partnership and the 'value' of the interest as at his death - or indeed at any other time - must depend upon the measure of enjoyment those provisions allow and the extent to which the share or interest may be expressed in or converted into money. The provisions which control the value of the interest at death are those which confer on the surviving partners a right to take over the whole interest for a sum computed under the terms of the deed. They are provisions which describe and characterize the interest as much as any other. They go to the essential nature of the interest. If at the date of death there were any uncertainty as to the exercise of these rights, no doubt their existence would not be decisive. It would be a factor, a powerful factor no doubt, but not more" (1955) 94 CLR, at p 15 . The case cannot therefore be decided by saying that the minimum which the executors would require from a purchaser would be the amount of the testator's share ascertained by reference to the result of a notional winding up - and by asserting that that amount they could get for themselves and, then, by posing the question, "Why should they be willing to sell for less ?". The question is what they could have got for his interest having regard to the fact that the agreement entitled the surviving partner to acquire the share as an interest in a going concern. It is true, of course, that the occasion for the exercise of the option did not arise because the share passed under the testator's will to the optionee. But it seems that if the occasion had arisen for its exercise the probabilities are that it would have been exercised. Be this as it may, however, the fact remains that the share has passed to the optionee.

In these circumstances it is, we think, sufficient to say that the value of the share was what the personal representatives could otherwise have obtained for it from the surviving partner and that, in resolving this question, the potential tax liability to which he became subject was a relevant factor. There is no dispute that on this basis the value of the share was 64,970 pounds and, accordingly, the appeal should be allowed. (at p627)