Everett v. Federal Commissioner of Taxation.

Judges:
Meares J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 1 November 1977.

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Meares J.: The appellant and his wife were at all material times solicitors. On 7th January, 1969, the appellant by deed purported to assign as beneficial owner to his wife six-thirteenths of his share in the solicitors' partnership of Dibbs, Crowther & Osborne together with ``all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of sec. 31 of the Partnership Act 1892 as from the date of these presents to hold the same unto the purchaser absolutely''. Ever since the execution of this deed, Messrs. Dibbs, Crowther & Osborne have paid to Mrs. Everett six-thirteenths of his share in the profits of the partnership and there is no suggestion that this arrangement was a sham or that it was void as against the respondent by virtue of sec. 260 of the Income Tax Assessment Act 1936. The respondent having assessed both the appellant and his wife to tax on the whole of the amount paid to Mrs. Everett under the deed for the year ending 30th June, 1973, the appellant appeals against the respondent's decision concerning his assessment:

Section 31 of the Partnership Act is in the following terms:

``(1) An assignment by any partner of his share in the partnership, either absolutely or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee during the continuance of the partnership to interfere in the management or administration of the partnership business or affairs, or to require any account of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners.

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ATC 4480

(11) In case of a dissolution of the partnership, whether as respect all the partners, or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and for the purpose of ascertaining that share, to an account as from the date of the dissolution.''

The interest of a partner in the partnership assets constitutes an equitable interest:
Canny Gabriel Castle Jackson Advertising Pty. Limited & Anor. v. Volume Sales (Finance) Pty. Limited (1974) 48 A.L.J.R. 217; the effect of an assignment of the whole or any part of a share in a partnership, in my opinion, produces the consequences that the assignor holds the interest assigned upon trust for the assignee:
Hocking v. The Western Australian Bank (1909) 9 C.L.R. 738, per Griffith C.J. pp. 743 and 744 and per Barton J. p. 749. The result of such an assignment is the divestment of the assignor's rights to receive the share of profits that the assignor would otherwise have been entitled to receive and the vesting of such a right in the assignee.

Section 25(1) of the Act provides, inter alia:

``The assessable income of a taxpayer shall include -

• (a) where the taxpayer is a resident -
• the gross income derived directly or indirectly from all sources whether in or out of Australia.''

Section 19 of the Act provides:

``Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.''

Apart from a consideration of sec. 92, to which I shall refer later, the appellant broadly submits that Pt. III of the Act, in which the abovementioned sections are, is directed to a tax on incomes to which persons are beneficially entitled and that income is not ``derived'' within the meaning of those sections unless so acquired. In
Shepherd v. F.C. of T. (1965) 113 C.L.R. 385, a taxpayer was entitled under a licence agreement to royalties directly proportionate to the number of products manufactured. By a deed he then purported to assign by way of gift absolutely and unconditionally to persons whose names were there set out all his ``right title and interest in and to an amount equal to ninety per cent of the income which'' might accrue during a period of three years under the licence agreement. It was held by Barwick C.J. and Kitto J., Owen J. dissenting:

``... that on its true construction the deed was not an attempt to assign expectancies or a covenant to assign future property but was a present assignment of an existing chose in action. Accordingly the proportion of the royalties paid during a year of income to the named persons was not part of the assessable income of the taxpayer.''

Barwick C.J. at p. 390 said:

``The Commissioner's principal contention is that the gift was a gift of part of the taxpayer's income to be derived from royalties. The income was thus first derived by the taxpayer and then, pursuant either to a voluntary promise so to do, or to a voluntary assignment of the royalties themselves, portions of his income were handed over to the donees. The taxpayer on the other hand contends for an immediate gift of parts of his right to the royalties.''

And at pp. 392-393:

``I have come to the conclusion that upon a true construction of the deed poll the taxpayer did thereby equitably assign to the named donees the stated proportions of his right during the ensuing three years to royalties from the licensee under the licence to manufacture the patented article.''

And Kitto J. at p. 397 said:

``In the result, I am of opinion that when the distributions of royalty moneys were made amongst the five persons nominated as assignees the moneys each received were the fruits of an undivided share of a contractual right which share had become beneficially his or her own property. Accordingly I would hold that the royalty moneys which were paid to the five persons, up to ninety per centum of the whole, were not assessable income of the appellant.''

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ATC 4481

Apart from such special considerations as may apply to the income from partnerships under the provisions of the Act, I can see no difference in principle between this and the subject case. In both the taxpayer was entitled to income, the actual amount of which depended in any one year upon contingencies; in both the taxpayer had equitably assigned a part of his beneficial interest in such income, and in both the fruits of such an assignment were, in fact, received by the assignee.

It follows, in my view, that none of the income from the appellant's share in the partnership which he had assigned to his wife was ``derived'' by him.

But the respondent further submits that the appellant is caught by sec. 92 which provides:

``(1) The assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income, and his individual interest in the partnership loss incurred in the year of income shall be an allowable deduction.

(2) The exempt income of a partner shall include his individual interest in the exempt income of the partnership of the year of income.''

``Partnership'' is widely defined in sec. 6 as including an association of persons in receipt of income jointly. For the respondent it was submitted that, by virtue of this section, a partner is liable to tax in respect of the whole of his share in the partnership regardless of where the beneficial interest in that share, or any part of it, may be.

In my opinion sec. 92 is designed to catch the whole of a partner's interest in any year of income rather than merely the amount of his drawings, but it does not catch any part of that interest which has been beneficially and effectively assigned. Cf
F.C. of T. v. Happ (1952) 9 A.T.D. 447 per Williams J. at p. 451. In this case the appellant held the share he had assigned as a trustee within the meaning of the definition of ``trustee'' in sec. 6, and as such is exempted from paying income tax upon the income of the trust estate. To decide that the appellant is liable to tax would be contrary to what I believe to be the fundamental scheme of the Act relating to assessable income, namely that tax is payable on such income to which the taxpayer is beneficially entitled.

Finally, notwithstanding the view expressed by Henry J. in
Spratt v. Commr. of I.R. (N.Z.) (1964) N.Z.L.R. 272 at p. 277 adopted by Woodhouse J. in
Kelly v. Commr. of I.R. (N.Z.) (1970) N.Z.L.R. 161 at p. 165, I am unable to accept the respondent's broad proposition that no taxpayer can by way of assignment escape assessment of tax on income resulting from his personal activities.

The appeal is accordingly allowed with costs.