Federal Commissioner of Taxation v. Everett.

Judges: Bowen CJ
Deane J

Fisher J

Court:
Full Federal Court

Judgment date: Judgment handed down 26 October 1978.

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Fisher J.: This is an appeal brought by the Commissioner of Taxation against a decision of the Supreme Court of New South Wales in its Administrative Law Division. That Court allowed the appeal of Peter Robert Everett (hereinafter called ``the taxpayer'') against the assessment of income tax issued against him by the Commissioner of Taxation in respect of the year of income ended 30th June 1973.

In his return the taxpayer disclosed the amount of his share in the partnership income of Dibbs Crowther and Osborne, Solicitors, as $35,418 from which he deducted the sum of $11,185 which deduction was entitled ``Assignment to D.J. Everett.'' The Commissioner in making his assessment added back this amount of $11,185, describing the adjustment as follows:

``Deduction of $11,815 for remuneration paid to your wife disallowed.''

It is common ground that the deduction of $11,815 claimed by the taxpayer was not claimed or properly described as ``remuneration'' but represented that portion of his professional income which the taxpayer claimed to have effectively assigned to D.J. Everett, his wife.

The consequence of this adjustment by the Commissioner (and two other small adjustments not relevant to this appeal) was to increase the taxable income of the taxpayer to $25,953 upon which sum, after crediting provisional tax paid and charging provisional tax, tax assessed was $15,767.

The taxpayer objected on various grounds contending, inter alia, that the sum of $11,815 was the subject of a valid and effective deed of assignment and thus neither that sum, nor any part of it represented income derived by the taxpayer during the year of income. Additionally, the taxpayer denied that either sec. 19 or sec. 260 had the effect of requiring him to include the said sum as part of his assessable income. The Commissioner on 3 September 1974 disallowed the objection and the taxpayer subsequently requested that his objection be treated as an appeal and forwarded to the Supreme Court of New South Wales.

The taxpayer's appeal was heard by that Court and judgment was given on 1 November 1977, allowing the appeal and awarding the appellant his costs. The Commissioner lodged a notice of appeal to this court contending, in substance, that the trial judge was in error in holding that there had been an effective assignment by the taxpayer to his wife of any part of his beneficial interest in partnership income.

The question thus to be determined on this appeal is whether the consequence of the assignment is that what would otherwise have constituted part of the taxpayer's professional earnings no longer formed part of his assessable income but comprised assessable income derived by his wife. Essentially the resolution of the question depends upon the construction of the deed of assignment. Neither here nor in the court below did the Commissioner contend that the transaction was a sham or illegal, nor was it suggested that it was void by virtue of the application of sec. 260 of the Income Tax Assessment Act 1936 (hereinafter called ``the Act'').

The taxpayer is a solicitor being at all relevant times a partner in the firm of Dibbs Crowther and Osborne practising in Sydney. His wife is also a solicitor, holding a practising certificate and she has from time to time been employed as a case reporter, as a locum tenens and as a University lecturer. At the time of deposing to an affidavit sworn for the purposes of the proceedings in the Supreme Court, Mrs. Everett was a full time tutor in the Faculty of Law, Macquarie University. At no time has she worked in any professional capacity in the firm of Dibbs Crowther and Osborne. On 1 July 1966 the taxpayer became a partner in that firm, acquiring from one of the existing partners a 13 percent share in the partnership business and assets which share carried an entitlement to 13 percent of the profits of the partnership. The 13 percent share was purchased for consideration, which consideration was payable by half yearly instalments over 10 years with interest. The partnership business is long established and its assets comprised leasehold premises, office furniture, fittings and equipment, law library, sundry debtors, work in progress and the goodwill of the practice. In addition to the partners, employed solicitors and articled clerks were engaged in the business. It was in these circumstances that the taxpayer

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ATC 4614

purported to dispossess himself (to use a neutral expression) of portion of his professional income and to vest that portion in his wife.

The means that the taxpayer used to achieve this end was to have prepared and executed by himself and his wife a deed which bears the date 7 January 1969. As the meaning and effect as a matter of law of this deed is crucial, it is desirable to set the relevant parts out in full:

``THIS DEED made the seventh day of January one thousand nine hundred and sixty nine BETWEEN: PETER ROBERT EVERETT of Sydney Solicitor (hereinafter called `the vendor') on the one part AND DIANNE JOYCE EVERETT Solicitor wife of the said Peter Robert Everett (hereinafter called `the Purchaser') of the other part WHEREAS the vendor with DAVID RONALD OSBORNE, MAXWELL SUTHERLAND EDWARDS and JAMES BERKELEY FITZHARDINGE carries on the practice of solicitors under the firm name of Dibbs Crowther and Osborne AND in terms of the partnership arrangements the vendor is entitled to 13% of the assets and income of the partnership and bears a similar percentage of the liabilities and losses of the partnership AND WHEREAS the vendor is indebted to the aforesaid Maxwell Sutherland Edwards in respect of the purchase of his said interest and has been and is in the future obliged to make the remaining payments as appear from the figures set out in the Schedule hereto AND WHEREAS the vendor is experiencing difficulty in meeting such repayments and is therefore desirous of selling to the purchaser 6/13ths of his share in the partnership on the terms as hereinafter appearing NOW THIS DEED WITNESSETH that in consideration of the sum of Three thousand eight hundred and thirty two dollars and fifty cents ($3,832.50) to be paid to the vendor by the purchaser as she doth hereby covenant and agree by instalments bearing as nearly as possible the relationship of 6/13ths of the instalments as set forth in the aforesaid schedule as they fall due to be paid to the vendor by the purchaser at the times specified in that schedule any balance remaining thereafter to be paid on or before the first day of January 1977 and the capital sum to bear interest at 7% per annum on a reducing balance: the vendor as beneficial owner DOTH HEREBY CONVEY AND ASSIGN to the purchaser 6/13ths of the vendor's share in the partnership as aforesaid 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 Section 31 of the Partnership Act 1892 as from the date of these presents to hold the same unto the purchaser absolutely PROVIDED HOWEVER that nothing herein contained shall entitle the purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the vendor at the date hereof has been distributed to the vendor AND IT IS HEREBY DECLARED that the purchaser shall not by reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the vendor would otherwise have been entitled had this assignment not been made. IN WITNESS whereof the parties hereto have hereunto set their hands and seals the day and year first hereinbefore mentioned.''

As I have already said, the deed has to be construed for the purpose of determining whether the taxpayer has thereby achieved an effective divesting of a portion of his share in the partnership and consequentially of portion of his right to participate in the partnership income. Has he effectively alienated this right, so that the income it produces is in consequence derived by his

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ATC 4615

wife and not by him? The success or otherwise of his efforts to this end will to a substantial extent be determined upon consideration of the following questions:

• (a) What is the nature of the property which he purports to deal with under the deed, i.e. is it an existing proprietary right or a mere expectancy?
• (b) Is this property capable of assignment at law?
• (c) Does the deed purport to effect an immediate transfer or does it amount merely to an agreement to transfer?
• (d) Is the transaction evidenced by the deed a voluntary disposition, a disposition under seal or a disposition for valuable consideration?

The significance attaching to the nature of the property in question can be gauged by the fact that assignments in equity, if voluntary, are only effective if limited to existing rights and interests (
Tailby v. Official Receiver (1888) 13 A.C. 523 and In
Re McArdle Decd. (1951) 1 Ch. 669 as followed by Menzies J. in Norman v. F.C. of T. (1963-64) 109 C.L.R. 9 at p. 21). Thus the voluntary assignments in Norman's case were ineffective both in law and in equity in that the subject matter thereof was held (by a majority in respect of interest on loan moneys) to comprise future property, i.e. a mere expectancy, whereas the voluntary assignment in
Shepherd v. F.C. of T. (1964-65) 113 C.L.R. 385 was effective in that what was assigned was an existing right. By way of contrast the subject matter under consideration in
Olsson v. Dyson (1969-70) 120 C.L.R. 365 was an existing right, a legal chose in action and thus capable of assignment at law but not so assigned. It followed that being voluntary the purported disposition was not effective either in law or in equity. In law it was not effective because there was no compliance with the Statute, and it was not enforceable in equity because there is no equity to perfect an imperfect gift.

Turning to the deed here under consideration and bearing in mind criteria which have in other cases been crucial, one's first impression is that the taxpayer's case is in equity arguably as strong as it could be. He has, by way of immediate transfer (and not by way of agreement to transfer), purported to assign for valuable consideration (and not by way of gift or deed alone), an existing proprietary interest (and not a mere expectancy of future property) which proprietary interest is not capable of assignment in law (being part only of a chose in action).

At the time he entered into the deed the taxpayer had, as abovementioned, a 13 percent interest in the partnership business, which interest carried with it the right to 13 percent of the profits of the firm. These profits were composite earnings produced by the exertions of the partners and their employees, whether professionally qualified, articled clerks or otherwise, using the assets, including the goodwill, of the firm's business. It is common ground that there was no formal partnership agreement but that the partners signed certain heads of agreement which are of little relevance to the questions here in issue.

Under the deed, after recitals, the taxpayer purported ``as beneficial owner'' to convey and assign to the purchaser 6/13ths of his share in the partnership. The document provides that the conveyance of the share is ``together with'' certain rights. As I see it, the rights specified are merely some of the rights which go with the ownership of the share and the reference to these rights neither expands nor restricts the subject matter of the assignment. It is clear beyond argument from the language used that the taxpayer intended an alienation and an alienation of portion of his share in the partnership. In no way could the disposition be construed as an agreement to alienate at some future date. Rather it is a present conveyance, not an agreement to do something in the future, and this present conveyance is of a proprietary right. The undoubted intention is to alienate portion of the taxpayer's interest in the partnership and to do so absolutely. The alienation goes well beyond his entitlement to participate in distribution of partnership profits and indeed beyond his right to profits. It is an attempt to alienate the property interest which produces the profits and not merely the profits or the right to the profits. To adopt the analogy used by Kitto J. in Shepherd v. F.C. of T., (supra) at p. 396 the proprietary interest in the partnership existed at the date of the assignment as the tree which produced the fruit, and as such was capable of assignment. The taxpayer assigned portion of the tree.

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ATC 4616

The question arises whether there is anything exceptional about or peculiar to a share in a partnership which prevents its alienation, or precludes the alienation from producing normal consequences.

There is ample authority for the proposition that a partner has a beneficial interest in the assets of the partnership, and in fact in each of the assets ( Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 48 A.L.J.R. 217 at p. 218-9.
Livingston v. Commr. of Stamp Duties (Q) (1960) 107 C.L.R. 411 per Kitto J. at p. 453). However the partner has no title to any specific asset, and his interest can only be quantified as a share of the surplus after realization of assets and payment of liabilities (
Arbuckle v. F.C. of T. (1963-65) 13 A.T.D. 378 at p. 382 per Windeyer J.). As to the interest of a partner in the partnership, as distinct from the assets comprising the partnership property it is a chose in action ( In
re Bainbridge Ex parte Fletcher (1878) 8 Ch.D. 218 per Bacon C.J. at p. 223). Doubtless it is by its nature an equitable chose in action in that originally it was enforceable only by a suit in equity. As an equitable chose in action there is authority for the proposition that it is assignable under the Statute (see Halsbury Laws of England 4th ed. vol. 6, para. 15) but it is unnecessary in the present instance to consider this point further as the taxpayer purported to deal only with portion of his share in the partnership. An assignment of part of a chose in action does not come within the Statute (
Re Steel Wing Company (1921) 1 Ch. 349 at p. 354 ), and it follows that its assignment can only operate in equity.

Moreover, even if it was possible to assign under the Statute the matter would be taken no further because as a matter of law the assignee can never become a partner of the existing partnership. If with the consent of the partners she does become a partner, it is as a partner in a new partnership, in consequence of novation and not assignment.

An interest in a partnership, be it the whole or portion of a partner's share, is without doubt assignable as a matter of law.
Hocking v. Western Australian Bank (1909) 9 C.L.R. 738 especially at p. 743 clearly proceeds upon the basis that it is perfectly in order as a matter of law for a partner to assign whether by way of sale or otherwise the whole or portion of his interest in the partnership. The consequence of the assignment is not that the assignee becomes a partner, rather that the vendor remains a partner, but as trustee for the assignee of the portion subject to the assignment (see per Barton J. at p. 749).

In this matter the intention of the taxpayer was to dispossess himself of portion of his interest in the partnership. He chose the tool of an assignment to achieve this end. The assignment being for valuable consideration binds the conscience of the assignor and he is trustee of this interest for the assignee. The same result could have been achieved if he had declared himself a trustee (after reciting the terms of the sale and purchase) by executing a declaration of trust. Whatever be the form of the disposition, its effect is the same (
G.E. Crane Pty. Ltd. v. F.C. of T. 71 ATC 4268 at p. 4270, (1971) 126 C.L.R. 177 at p. 183 ). However, it must be acknowledged that for a sale and purchase transaction, the present form of inter partes deed is the more appropriate.

In these circumstances the deed has the effect which was intended, namely to vest in the assignee as against the assignor all the rights of the assignor in a 6 percent share of the partnership, together with all the benefits attaching to such share, including in particular the right to this percentage of the partnership profits. There are however two qualifications to be mentioned, both of which arise by virtue of the subject matter of the assignment. The assignee does not as already mentioned become a partner, and her rights as against the partners (other than the assignor) are limited as set out in sec. 31 of the Partnership Act 1892 (N.S.W.).

The question which now arises is as to the consequences of such assignment under the Act, it having under the general law the intended consequence of divesting the assignor of the assigned property and vesting it in the assignee. Two aspects of the Act fall for consideration. ``Partnership'' is defined by sec. 6 as ``an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company'', and defined in this way the word would appear to cover persons who are not in

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ATC 4617

partnership under the general law. It was argued that in the present matter the assignee was for the purpose of the Act a partner, being in receipt jointly with the partners of a share in the partnership income. My tentative view is that there is considerable force in this argument, in the particular circumstances of this matter, where as I see it, the trustee of the 6 percent share is a bare trustee without any duties to perform. The assignee, it could be said, is entitled to the receipt of a share of partnership profits conjointly with the other partners and not merely to the income of a trust estate an asset of which is a share in a partnership. However, it is not necessary to reach a final conclusion on this point here, and the arguments which are available in respect of a bare trustee situation will not necessarily be as persuasive in circumstances where the beneficiary is entitled to something other than a direct interest in the net income of the partnership, or, to use the terminology of sec. 31 of the Partnership Act, (supra) , something other than ``the share of the partnership profits to which the assignor is otherwise entitled.''

Division 5 of Pt. III of the Act has particular reference to partnerships and its consequence is to place a taxpayer who is in partnership in an exceptional situation qua his partnership income. Whereas under sec. 25 of the Act it is provided that his assessable income includes his gross income derived directly or indirectly from all sources, yet by virtue of Div. 5 his assessable income is directed to include his individual interest not in the gross income but in the net income of the partnership.

In other words, in this instance the allowable deductions of the partnership are deducted prior to arriving at the assessable income of the partner and not subsequently as under the ordinary scheme of the legislation and in particular under sec. 48. Thus it is not until the net income of the partnership and the taxpayer's individual interest therein is ascertained that the taxpayer derives any assessable income from his activities as a partner.

It was in this general area that the Commissioner launched his primary assault on the decision of the trial judge. His contention was founded on the premise that if income is the result of a man's personal exertion, it is his, and incapable of assignment or alienation. Thus, the argument runs, at the date memoranda of fees were rendered by or on behalf of the partners, they individually derived assessable income and it was not until the end of the year of income that the profits in which the assignee participated were ascertained. It followed that the assignment only took effect upon ascertained profits, and this taking of effect occurred subsequent to the derivation of assessable income by the taxpayer. Thus he had not achieved an alienation of his share of profits, but rather he bound himself to apply portion of his share as and when ascertained.

In my opinion there is a fallacy in this argument. It is based on two assumptions, firstly that a taxpayer partner derives assessable income upon the rendering of memoranda of fees and secondly that the assignee of a share has no proprietary interest in the gross income of the partnership as it is acquired from time to time consequent upon the rendering of fees.

As I have said earlier, in my opinion a taxpayer solicitor who carries on a business in partnership determines and quantifies his assessable income for tax purposes in a manner which differs fundamentally from a sole practitioner. As a sole practitioner his assessable income comprises the totality of his fees rendered (assuming he operated on a profits earned rather than a cash receipts basis) and he deducts pursuant to sec. 48 his business expenses. Moreover in so far as it is of any relevance, he derives each item of gross income which goes to make up his assessable income at the moment of rendering the account for fees earned.

Division 5 of Pt. III of the Act directs a different approach for adoption by a taxpayer in partnership. Under sec. 92 his assessable income includes his individual interest in the net income of the partnership of the year of income. Thus his assessable income is not his share of the fees rendered by the partnership i.e. his share of its gross income but his share of the net income of the partnership. Net income is defined by sec. 90 as meaning ``the assessable income of the partnership calculated as if the partnership were a taxpayer, less all allowable deductions except...''. Thus the assessable income i.e.

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ATC 4618

gross fees of the partnership are brought to account by the partnership calculated ``as if the partnership were a taxpayer'' and likewise the business expenses of the partnership are in similar manner deducted by the partnership. The consequent result would, in the ordinary course, produce a taxable income but for the fact that by sec. 91 the partnership is not ``liable to pay tax thereon''. It follows that a taxpayer partner does not derive assessable income at the moment of the rendering of fees or at the time of distribution of partnership profits by way of partners' drawings. Rather he derives assessable income upon the ascertainment of the net income of the partnership for the year of income. Such net income will crystallize at the end of the year of income when all fees have been rendered and all expenses incurred. There is thus no support for the Commissioner's contention that for the purposes of the Act the partner derives assessable income prior to the time when his assignee becomes entitled to a share of profits. Admittedly however there may not always be exact coincidence between the profits of the partnership as determined by the partners and the net income of the partnership as calculated for tax purposes, but such a problem does not arise here. There is, however, always certain to be a difference between the profits which the partners determine to be available for distribution and the net income for tax purposes of the partnership, a situation which causes difficulties if assignee/beneficiaries have limited interests. Again this is not the case under consideration.

The other essential element in the Commissioner's submission that there was a hiatus between the time when the partners derived assessable income and the time when the assignee's entitlement arose, was his contention that the assignee had no proprietary interest in the assessable income derived by the partnership at the time of rendering of accounts. It seems however that this can not be so, for not only is the assignee entitled to a beneficial interest in the assets of the partnership generally, but in particular has an interest in the work in progress which produces the fees for which the account is rendered. Such an interest must remain when the work in progress is transmuted into a book debt on the completion of the work and rendering of an account therefor. It can be strongly argued that support for this continuing interest of the assignee in the assessable income of the partnership is to be found in the deed of assignment. The first proviso which now falls for consideration acknowledges that the assignee has an interest in the prospective profits of the partnership currently undrawn by the partnerships but held ``subject only to distribution''. On the Commissioner's argument the assignee would have no interest in the prospective profits, but only in the profits for the year when ascertained.

The deed contains this proviso and a further provision to which I should refer. The first proviso is as follows:

``Provided however that nothing herein contained shall entitle the purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the vendor at the date hereof has been distributed to the vendor.''

It was suggested by counsel for the Commissioner, but somewhat faintly, that this proviso had the effect of reducing the ambit of the earlier conveyance of portion of a share in the partnership. However, subject to the qualification that there is no evidence as to the significance attaching to the expression ``control accounts'', I see this as a transitional provision dealing with the funds which at the date of the assignment were available for distribution by way of drawings on account of profits ultimately to be ascertained, but not in fact distributed at that date. It deals not with the right or entitlement of the assignee to ownership of portion of these funds (which is acknowledged) but rather with the timing of distribution thereof. The assignee could not call for distribution prior to the date when a distribution was in fact made to the vendor. But I do see this proviso as acknowledging the right of the assignee to funds accruing from time to time as presumptive profits, i.e. throughout the year of income and as denying the validity of the Commissioner's contention that her right to profits accrued only at the end of the year when the net

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ATC 4619

income of the partnership (as defined for income tax purposes pursuant to sec. 90) was ascertained.

The second provision is as follows:

``And it is hereby declared that the purchaser shall not by reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the vendor would otherwise have been entitled had this assignment not been made.''

As I see this provision it has direct reference to sec. 31 of the Partnership Act (supra) , which section is primarily intended for the protection of the taxpayer's partners (
Dodson v. Downey (1901) 2 Ch. 620 at p. 622 per Farwell J.). The section has no direct impact on the rights and obligations of the assignor and assignee inter se, which are regulated by the deed of assignment. However, in so far as sec. 31(1) (and the general law) restricts the right of the assignee in certain specified respects as against the partners, such restrictions have been inserted in the deed so as to apply as a matter of contract between the assignee and the assignor. The provision goes beyond the specific provisions of sec. 31 in two respects. It states the general law to the effect that the assignee does not by virtue of the assignment become a partner. It provides that the assignee is entitled not only ``to the portion of the share of profits to which the vendor would otherwise have been entitled'', but also to ``other moneys or property referable hereto... to which the vendor would otherwise have been entitled''. The additional entitlement specified is express acknowledgement that the assignee is not only entitled to moneys in the nature of firm profits, but any other moneys, doubtless capital in nature, to which the vendor would be entitled either during the currency of the partnership or upon its dissolution (sec. 31(2) of the Partnership Act ).

It is my opinion that nowhere in the deed is there to be found anything which cuts down or indicates any intention to cut down the primary disposition by the taxpayer of portion of his share in the partnership.

As to the effect of sec. 92 of the Act in the present situation, two comments can be made. If the argument prevailed that in the circumstances of this matter the assignee is a partner within the expanded definition then she has an individual interest in the net income of the partnership which she is by that section required to include in her assessable income.

However, as I am considering this appeal on the assumption that she is not a partner it follows that the taxpayer is prima facie required to include the whole of his interest as a partner in the net income as part of his assessable income unless there is some specific direction in the Act to the contrary. In this regard he is in a somewhat similar situation to that of a shareholder under sec. 44 of the Act. It seems to me that Div. 6 of Pt. III applies as a specific direction in the present circumstances where I see the taxpayer as a bare trustee of portion of his share in the partnership. This portion of his share is the trust estate which produces the income. Thus the taxpayer as a bare trustee is obliged to account to the assignee for the full amount of the share of profits whether distributable or not which the partnership share produces and without any deduction therefrom by him in his capacity as trustee and is not liable himself to pay tax thereon unless specifically directed (sec. 98). This situation is analogous to that of the shareholder trustee who is exempted by sec. 96 from his prima facie obligation under sec. 44, to the extent that the shares (and not merely the dividends) are assets of the trust estate ( Norman v. F.C. of T. (supra) , per Dixon C.J. at p. 16 and Menzies J. at p. 23).

I can acknowledge that the matter is more complex if the assignee's entitlement was to something other than the full share of partnership profits as such, and the trustee had positive duties and obligations to perform. However, such is not the case here.

Before I come to deal with three authorities which could appear to have application, there is one final matter which was much discussed before us, to which I

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ATC 4620

should shortly refer. It concerns the rights of the assignee to challenge or to restrain the partners (other than the taxpayer) if they acted or sought to act in a manner prejudicial to her interests. Admittedly, under sec. 31 of the Partnership Act she has no right to interfere in the administration or management of the partnership or to require any accounting and is positively obliged to accept the account of profits agreed to by the partners. However, I am of opinion that this restriction operates on the assumption that the partners are acting bona fide in the administration or management of the partnership affairs and with proper regard to the interests of all parties. The partners have actual notice of the interest of the assignee in the partnership property which is in their hands, and to this extent they are constructive trustees of this property for, and in a fiduciary relationship with, the assignee. To the extent that they act in a manner detrimental to her interests, except to the extent bona fide necessary in matters of administration or management, their fiduciary obligations as such constructive trustees would be subject to the supervision and direction of a court of equity. Thus I conceive the assignee could herself take action against the partners (and not only the assignor) to restrain improper dealings with her beneficial interest.

The three authorities to which particular reference should shortly be made are Arbuckle v. F.C. of T. (supra) , a decision of Windeyer J. in the High Court and
Johnstone v. Commr. of I.R. (N.Z.) (1966) N.Z.L.R. 833 and
Kelly v. Commr. of I.R. (N.Z.) (1970) N.Z.L.R. 161 . In the two New Zealand cases the importance attached by the court to the nature of the property interest under consideration is noteworthy.

In Arbuckle's case each of four accountants who were in partnership purported to assign to himself or to another partner in each instance as trustee, fractional interests in the partnership. The assignments purported to be for value but this was not accepted by Windeyer J. who dealt with them on the basis that they were voluntary transactions. Moreover, the assignments as mentioned were not to third parties but either by the assignor to himself in the capacity as a trustee or to another partner in such capacity. In so far as two of the arrangements were in favour of another partner the assignor in one transaction was assignee in the other and vice versa. Moreover, these two assignments were each of a like interest in the partnership, namely, 17%. It was thus open to Windeyer J. to find as he did, that the assignments achieved nothing and no transfers of shares in the partnership took place and there was no immediate variation in the beneficial interests of the partners in the capital and income of the partnership. Thus by way of contrast with the present matter the transactions were at law nugatory and achieved nothing. The taxpayer therefore failed on the threshold argument, namely, as to what was achieved in law on the true construction of the documents. There was little if any consideration necessary to be given to the tax implications. Certainly no consideration was necessary of the crucial point here, namely, the consequences under the Act of an effective assignment for consideration.

In Johnstone's case the taxpayer was a member of a firm of solicitors and he purported to assign not his share in his partnership (or a portion thereof) but his fixed capital invested at interest in the partnership. It was a voluntary assignment. The court accepted that it was possible for a partner to assign the share in the partnership to which he is entitled ( supra , p. 356) but denied his ability to assign, at least by way of gift, his interest in fixed capital. This was because his interest in fixed capital was not a debt due by the partnership, but an amount payable on dissolution to which the assignor had no present right.

Nor, was there an effective assignment of the interest payable on the fixed capital, on the ground that there was no present obligation to pay interest, but only an agreement to apply the first £ 700 of profits as interest on fixed capital. Thus the property interest was in the nature of future property, a mere expectancy, an equitable assignment of which, without consideration, was ineffective. In this regard Johnstone's case has much similarity to the interest on loan account problem in Norman's case .

The second New Zealand decision is Kelly's case (supra) . The taxpayers who were in partnership sought to divest themselves by

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ATC 4621

way of gift of their respective interests in partnership profits. The means used in each instance was that of a declaration of trust. However, the subject matter of each of the declarations was ``his interest in the said business as to such income as aforesaid from time to time earned thereby.'' In the circumstance that the transactions were voluntary, the nature of the interest sought to be alienated was crucial. It was very obvious that there was no attempt or indeed intention to dispose of a share in the partnership but only in the partnership income. The court was of opinion that the property interest to be assigned was only a share in prospective partnership income and thus future property. There was thus nothing in the ratio of the case which impinges on the determination of a very different question here. There were however certain dicta to the effect that no taxpayer can by way of assignment escape assessment of tax on income resulting from his personal activities. I agree with the opinion of the trial judge in the present case that, stated thus widely, the proposition is unacceptable.

In my opinion the appeal should be dismissed with costs.

ORDER:

Appeal dismissed with costs.