Cyril Henschke Pty Ltd v Commissioner of State Taxation
[2009] SASC 148
•29 May 2009
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
CYRIL HENSCHKE PTY LTD & ORS v COMMISSIONER OF STATE TAXATION
[2009] SASC 148
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice Bleby and The Honourable Justice Layton)
29 May 2009
TAXES AND DUTIES - STAMP DUTIES - WHAT TRANSACTIONS OR INSTRUMENTS ARE LIABLE - CONVEYANCE OR TRANSFER ON SALE - SOUTH AUSTRALIA
PARTNERSHIP - RIGHTS AND DUTIES OF PARTNERS INTER SE - TRANSFER OF, AND DEALINGS WITH, SHARES
Appellants operated a business in partnership with D - appellants and D entered into a deed giving effect to D's retirement from the partnership - D was paid an amount representing her interest in the assets of the partnership, including an amount representing her interest in the goodwill of the partnership, and her contributed capital - amount was paid from the assets of the partnership and not by any one of the appellants individually - appellants assessed for stamp duty in respect of the amount paid by the partnership to D referable to D's share of the goodwill of the partnership - appellants lodged notice of objection with respondent - respondent dismissed objection and confirmed assessment - appellants appealed to single Judge of Supreme Court against dismissal of objection - Judge dismissed appeal - whether deed effected a 'conveyance or transfer on sale' or a 'conveyance' of D's interest in the partnership to the appellants within the meaning of s 60 of the Stamp Duties Act 1923 (SA) (the Act) - if not, whether there was a transaction that resulted in a change of ownership of an interest in the partnership for the purposes of s 71E of the Act.
Held: interest of a partner in partnership assets in the nature of an equitable chose in action - the chose carries a right on dissolution of the partnership to receive a share of the proceeds of sale of the partnership assets after the partnership debts have been discharged - the chose does not confer on the partner any proprietary right in the assets of the partnership, but carries with it a 'beneficial interest' in the assets of the partnership - when dealing with an interest in a partnership, a partner is dealing with the chose in action and not with the beneficial interest in the assets of the partnership, which flows from the chose - when D retired from the partnership and received the payment from the partnership, her chose in action was extinguished, and as a result, her beneficial interest in the partnership assets lapsed - there was no 'transfer' of her beneficial interest in the assets of the partnership, including goodwill, to the appellants for the purposes of the Act - s 71E of no application to the transaction effected by the deed - s 71E argument relating to a transaction broader than that effected by the deed not raised prior to the appeal to the Full Court - not appropriate for the Full Court to engage in the factual enquiry necessitated by the new argument - appeal allowed and assessment set aside.
Stamp Duties Act 1923 (SA) s 2, s 4, s 60, s 71E, s 71E(1)(a)(iii), s 71E(1)(b)(ii), sch 2 pt 1 item 3; Taxation Administration Act 1996 (SA) s 99, referred to.
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321; Federal Commissioner of Taxation v Everett (1979-1980) 143 CLR 440; United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673; Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411, applied.
Garnett v Commissioner of Inland Revenue (1899) 81 LT 633; McGowan v Commissioner of Stamp Duties [2002] 2 Qd R 499; Christie v The Commissioners of Inland Revenue (1866) LR 2 Ex 46; Wale v Commissioner of Inland Revenue (1879) 4 Ex D 270; McCaughey v Commissioner of Stamp Duties (NSW) (1914) 18 CLR 475, distinguished.
Cyril Henschke Pty Ltd & Ors v Commissioner of State Taxation [2008] SASC 360; MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494, discussed.
WORDS AND PHRASES CONSIDERED/DEFINED
"conveyance", "conveyance on sale,", "transfer"
CYRIL HENSCHKE PTY LTD & ORS v COMMISSIONER OF STATE TAXATION
[2009] SASC 148Full Court: Doyle CJ, Bleby and Layton JJ
DOYLE CJ: A Judge of this Court dismissed an appeal against an assessment of stamp duty made by the Commissioner of State Taxation pursuant to the Stamp Duties Act 1923 (SA) (“the Act”): Cyril Henschke Pty Ltd & Ors v Commissioner of State Taxation [2008] SASC 360.
The assessment was made in respect of a Deed of Retirement dated 23 December 2004 (“the Deed”). By the Deed Mrs Doris Henschke (referred to in the Deed as “Doris”) retired from a partnership with Cyril Henschke Pty Ltd (“Cyril Henschke”), Henschke Cellars Pty Ltd (“Henschke Cellars”), and Stephen Henschke (referred to in the Deed as “Stephen”). The partnership traded as CA Henschke & Co. I will refer to the partners other than Mrs Henschke as the continuing partners, because they continued the partnership after her retirement.
The continuing partners have appealed to the Full Court against the Judge’s decision.
A Statement of Agreed Facts records (para 19) that the Commissioner had set out his views relating to the assessment of the Deed in a letter of 15 February 2006. In that letter the statement is made that although the Deed states that the continuing partners are not purchasing Mrs Henschke’s interest in the partnership, “an objective view” of the facts was “… that the continuing partners did indeed purchase Doris’ share”. It appears that the Commissioner treated the Deed as a conveyance or conveyance on sale for the purposes of s 60 of the Act.
For some reason the consideration for the transaction or the value of the property transferred is stated in the Notice of Assessment as an amount slightly less than what was agreed on all sides to be the value of Mrs Henschke’s interest in the partnership. It was not suggested on appeal that anything turned on that. The amount stated as the consideration is an amount equal to one sixth of the amount standing to the credit of “Goodwill Revaluation Reserve” in the financial statements of the partnership, rather than the sum of that amount and the amounts standing to Mrs Henschke’s credit in the “Partners’ Capital Accounts” and in the “Trading Stock Revaluation Reserve”.
Before the Judge the Commissioner put submissions in support of the assessment made, and in the alternative relied upon the provisions of s 71E of the Act.
The Judge upheld the assessment on each of those bases, and dismissed the appeal. The Judge concluded that the Deed “conveyed” Mrs Henschke’s interest in the partnership property to the continuing partners for the amount stated in the Deed. The Judge found in the alternative that s 71E supported the assessment because there had been a transaction that resulted in a change in the ownership of an equitable interest in a partnership.
On appeal, the continuing partners challenge each aspect of the Judge’s decision.
They argue that the payment made to Mrs Henschke was made in satisfaction of her interest in or claim to partnership assets. They deny that Mrs Henschke transferred her interest in the partnership to the continuing partners. They argue that her interest was extinguished by the Deed. As to s 71E, they argue that it is inapplicable because the retirement was effected by an instrument that is not dutiable and so the case is not one in which, if the transaction had been effected by an instrument, that instrument would be chargeable with duty.
The appeal therefore raises the correct characterisation of the effect of the Deed. Did the Deed transfer Mrs Henschke’s one sixth interest in the partnership, or in the partnership property, to the continuing partners? Alternatively, did the Deed satisfy or discharge Mrs Henschke’s interest in the partnership, without transferring that interest or an interest in the partnership property to the continuing partners?
The Act
Stamp duties are imposed by s 4 of the Act “in respect of” instruments specified in the Schedule to the Act.
The appeal was argued on the basis that the relevant item in Schedule 2 to the Act is Part 1 item 3:
Conveyance or transfer on sale of any property (not otherwise charged) ...
That takes one to s 60 of the Act which contains a definition of “conveyance” and “conveyance on sale”. The Judge referred only to the definition of “conveyance”. As I understand the argument it is the definition of “conveyance on sale” that is in issue, but it was common ground on appeal that the outcome of the appeal would be the same whichever definition was applied.
Section 60 provides as follows:
60—Interpretation
In this Act—
conveyance includes—
(a)every conveyance, assignment, transfer or declaration of trust and every application under the Real Property Act 1886 or the Community Titles Act 1996; and
(b) every decree or order of any court, judge or commissioner; and
(c) every other application or request of any kind; and
(d) every other assurance or instrument of any kind,
by which or by virtue of which or by the operation of which, whether upon registration or otherwise, or by the issue of a certificate of title in pursuance of which, any real or personal property or any estate or interest in any such property is assured to, or vested in, any person, and to convey has a meaning coextensive with the meaning of conveyance, as extended by this section;
conveyance on sale includes—
(a)every conveyance, assignment, transfer or application under the Real Property Act 1886; and
(b) every decree or order of any court, judge or commissioner; and
(c) every other application or request of any kind; and
(d)every other assurance or instrument, by which or by virtue of which any real or personal property, upon the sale thereof, is legally or equitably transferred to, or vested in, the purchaser or any other person on his behalf or by his direction, and also includes -
(e) every application for a foreclosure order under the Real Property Act 1886; and
(f)every lease for which any consideration other than the rent reserved may be paid or agreed to be paid (but only so far as such consideration is concerned).
Clearly enough, to satisfy either definition there must be a transfer or vesting of property. Property is given a wide definition in s 2 of the Act.
Section 71E of the Act is found in Division 8 which is headed:
Transactions effected without creating dutiable instrument
Section 71E relevantly provides:
71E Transactions otherwise than by dutiable instrument
(1) Subject to subsection (2), this section applies to a transaction in the following circumstances—
(a)the transaction results in a change in the ownership of a legal or equitable interest in—
(i) land; or
(ii) —
(A) a business situated in the State; or
(B)a part of a business (being a business situated in the State), excluding goods that are stock-in-trade of a business where the transaction occurs in the ordinary course of business, where the transaction is associated with, or is for the purposes of, a change in the ownership of a legal or equitable interest in the business (including a case where a business is being divided up into separate parts and then those parts are being transferred to one or more persons as part of one transaction or one series of transactions); or
(iii) an interest in a partnership; and
(b) —
(i)the transaction is not effected, or not wholly effected, by an instrument on which ad valorem duty is chargeable; but
(ii)if the transaction had been effected, or wholly effected, by an instrument, the instrument would be chargeable with duty as a conveyance or as if it were a conveyance.
(1a) For the purposes of this section (and for the calculation of the value of any property), a change in the ownership of a legal or equitable interest in a business will be taken to include a transfer of the goodwill of the business.
…
(3) Where a transaction to which this section applies is entered into, a statement in a form approved by the Commissioner must be lodged with the Commissioner setting out—
(a) the nature and effect of the transaction;
(b) a description of the property affected by the transaction;
(c)a statement of the value of any property to which the transaction relates;
(d)a statement of any consideration that has passed or is to pass between the parties to the transaction.
(4) Duty is payable on the statement as if it were a conveyance effecting the transaction to which it relates.
…
The Deed
The parties to the Deed are Mrs Henschke and the continuing partners.
Recital B states:
B The interests of the partners in the Partnership (capital and income) are as follows:
(a) Cyril Henschke - one third;
(b) Henschke Cellars - one third;
(c) Stephen - one sixth; and
(d) Doris - one sixth.
Recital D states that the Deed sets out the terms upon which Mrs Henschke is to retire from the partnership. The Deed provides as follows:
1Notwithstanding anything contained in the Partnership Agreement (including, without limitation, clauses 22 and 23):
(a) Doris hereby retires from the Partnership, with effect at the end of 30 June 2003, (without giving 6 calendar months’ notice and despite the date of this Deed not being 30 June); and
(b) Cyril Henschke, Henschke Cellars and Stephen (the Continuing Partners) shall continue the Partnership under the Partnership Agreement (without purchasing Doris’ interest in the Partnership and without the Partnership being dissolved).
2The Partnership shall distribute to Doris her share of the partners’ funds of the Partnership (capital and income), amounting to $5,885,298, in full satisfaction of all claims she has against the Partnership.
3The Continuing Partners:
(a) release Doris from all obligations under the Partnership Agreement; and
(b) shall indemnify and keep indemnified Doris against all or any claims against the Partnership after the date of this deed.
4Subject to clauses 2 and 3(b), Doris releases the Partnership from all or any claims she may have against the Partnership at any time.
5The Continuing Partners acknowledge that their interests in the Partnership (capital and income) are now as follows:
(a) Cyril Henschke - two fifths;
(b) Henschke Cellars - two fifths; and
(c) Stephen - one fifth.
Before the Judge and on appeal reference was made to the financial statements of the partnership for the period ended 22 December 2004 (immediately before the Deed) and for the period ended 31 December 2004 (immediately after the Deed).
The particular part of the financial statements which was treated as significant was in each case Note 7 “Partners’ Funds”. The parties agreed that Note 7 recorded the partners’ equity or the value of the partners’ interest in the partnership. Set out below in tabular form, and distinguishing the position immediately before the retirement and immediately after the retirement, are the relevant figures from Note 7 in each case.
Component of Partners’ Funds Total Partners’ Funds Pre-retirement Total Partners’
Funds Post-RetirementTrading Stock Revaluation $75,229 $62,690 Goodwill Revaluation $35,218,559 $29,348,799 Contributed capital $9,000 $6,000 TOTAL $35,302,788 $29,417,489
The tables below demonstrate that the value of the continuing partners’ entitlement to or interest in the partnership is unchanged.
Partner Trading Stock Revaluation Reserve Pre-Retirement Post-Retirement Fraction Partner’s Entitlement Fraction Partner’s Entitlement Doris Henschke 1/6 $12,538 - - Stephen Henschke 1/6 $12,538 1/5 $12,538 Cyril Henschke Pty Ltd 1/3 $25,076 2/5 $25,076 Henschke Cellars Pty Ltd 1/3 $25,076 2/5 $25,076 TOTAL 1 $75,229 1 $62,690
Partner Goodwill Revaluation Reserve Pre-Retirement Post-Retirement Fraction Partner’s Entitlement Fraction Partner’s Entitlement Doris Henschke 1/6 $5,869,760 - - Stephen Henschke 1/6 $5,869,760 1/5 $5,869,760 Cyril Henschke Pty Ltd 1/3 $11,739,520 2/5 $11,739,520 Henschke Cellars Pty Ltd 1/3 $11,739,520 2/5 $11,739,520 TOTAL 1 $35,218,559 1 $29,348,799
The amount paid to Mrs Henschke on retirement is the difference between the value attributed to Total Partners’ Funds at 22 December 2004 and Total Partners’ Funds at 31 December 2004. The consequence of the retirement is that in Note 7 to the accounts to 31 December 2004 no amount is recorded as standing to the credit of the capital account of Mrs Henschke, and the amount to the credit of “Trading Stock Revaluation” and “Goodwill Revaluation Reserve” is in each case diminished by one sixth.
These figures demonstrate that while the proportionate interest of the continuing partners is greater after effect is given to the Deed (compare Recital B and Clause 5), the value of the interest of the continuing partners in the partnership has not changed.
Commissioner’s submissions
It is convenient to begin by summarising the Commissioner’s argument in support of the original assessment and of the decision of the Judge.
The Commissioner’s first point is that a partner has a beneficial interest in all of the property of a partnership. So much is common ground.
The next point, which appears to me to contain an assertion that might assume the answer to the question at issue, is that on the retirement of a partner from a partnership, the beneficial interest of the retiring partner is conveyed to the continuing partners. The Commissioner argues that that submission is supported by two cases to which I will refer in due course. They are Garnett v Commissioner of Inland Revenue (1899) 81 LT 633 and McGowan v Commissioner of Stamp Duties [2001] QCA 236; [2002] 2 Qd R 499.
The third submission is that when a partner retires from a partnership, the retiring partner’s interest does not “evaporate” (an expression used by the continuing partners in their submissions). The interest of the retiring partner is conveyed to the continuing partners.
The next step in the Commissioner’s submission is that before executing the Deed Mrs Henschke held a one sixth interest in the partnership. The Commissioner argues that by executing the Deed, the partners conveyed Mrs Henschke’s interest in the partnership property to the continuing partners for the sum stated in the Deed.
The Judge’s decision
I gather that before the Judge some matters were canvassed that were not canvassed on appeal. However, as I understand it the central submission on each side remained the same before the Judge and on appeal.
The central part of the Judge’s reasons begins with the proposition that before the Deed was executed, Mrs Henschke held a one sixth interest in the partnership, being an equitable chose in action: [57]. The Judge then said:
[58]Whether the Deed of Retirement purported to effect a retirement or a dissolution is not to the point. The deed evidenced the end of the partnership, with a new partnership being formed by those members of the former partnership who remained. Doris, by executing the Deed, conveyed her interest in the partnership property to the continuing partners for the sum of $5,885,298 which was paid in full satisfaction of all claims she had against the Partnership.
[59]Recital B of the Deed of Retirement records that Doris held a beneficial interest in the property of the partnership reflecting her entitlement to one sixth of the capital and income of the partnership immediately before the execution of the Deed. Clause 5 records that on the execution of the Deed Doris was no longer entitled to that interest and that her interest was taken up proportionately by the other partners.
[60]The value of Doris’ equitable interest was the subject of negotiation and agreement, and then payment. The equitable interest related to the assets of the partnership, predominantly but not exclusively goodwill. Doris conveyed her one sixth interest in the partnership assets in exchange for the agreed consideration. This was the substantive effect of the deed.
The Judge distinguished some decisions upon which the continuing partners rely, and I will come to them in due course.
The reasoning of the Judge appears to be that by the Deed, Mrs Henschke conveyed an interest “in the partnership property” or in the “assets of the partnership”, and that by the Deed she conveyed that interest in those assets to the continuing partners.
A little later at [63] the Judge said that the Deed:
… if not expressly then by necessary implication, conveyed Doris’ one sixth interest in the partnership to the continuing partners …
He went on to say at [66] that:
… there is no doubt that Doris’ interest in the partnership property has been transferred to the continuing partners. The question is whether that interest was conveyed by the Deed of Retirement. …
He concluded that it did: [70].
As to s 71E, the Judge said that there had been a transaction that resulted in a change of the ownership of an equitable interest in the partnership: [73]. He added:
[73]The manifest purpose of section 71E is to extend the imposition of duty to transactions which achieve, in substance, a conveyance that might ordinarily be expected to have been achieved by means of a dutiable instrument.
In deciding each of the two questions that arose for decision, the Judge appears to have taken the approach that the Act should not be interpreted so as to permit “form to prevail over substance”: [68] n 54 and [74].
Appellants’ submissions
The appellants, like the Commissioner, begin with the proposition that Mrs Henschke held an equitable chose in action against the continuing partners with respect to, and to a beneficial interest in, all of the partnership property.
Their submission is that that equitable chose in action was not transferred to or acquired by the continuing partners. The appellants submit that the chose in action was satisfied out of the partnership assets. It “evaporated” when Mrs Henschke received her payment.
The appellants point to the fact that the value of the continuing partners’ interest in the partnership was the same before and after Mrs Henschke retired. That, they argue, is consistent with the continuing partners not having acquired anything they did not own before Mrs Henschke retired.
The appellants submit that s 71E does not apply. There was no transaction which resulted in a change in the ownership of a legal or equitable interest in the partnership for the purposes of s 71E(1)(a)(iii), and accordingly the section does not apply. They argue also that the transaction the subject of the Deed was “wholly effected by an instrument” and that instrument, the Deed, is not chargeable. Accordingly, the requirement of s 71E(1)(b)(ii) is not met.
Consideration of submissions
The starting point is to identify the property of Mrs Henschke with which the Deed deals.
The property in question is a one sixth interest in the partnership. But it remains necessary to identify the legal nature of that interest.
In the well known case of Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited [1974] HCA 22; (1974) 131 CLR 321 the High Court was concerned with the effect of the grant of an equitable charge over what the High Court considered to be a partner’s interest in a partnership. The question was one of priorities. That caused the High Court to consider the nature of a partner’s interest in partnership property. The Court said at 327, in an often cited passage:
The nature of a partner's interest in the partnership property has often been explained. The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a "beneficial interest", notwithstanding its peculiar character. The assets of a partnership, individually and collectively, are described as partnership property (Partnership Act, 1892, as amended (N.S.W.), s. 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership.
The Court went on to add (at 328) that the interest of a partner in an asset of the partnership is “sui generis”. But, as the Court said, it is recognised as a beneficial interest.
In Federal Commissioner of Taxation v Everett [1980] HCA 6; (1979-1980) 143 CLR 440 the Court was concerned with the effect of an assignment by a partner of a specified fraction of the partner’s share in the partnership including the right to receive an appropriate share of profits. The question before the Court was whether the partner’s income tax liability was to be assessed on the footing that his assessable income included the portion of the partnership net profit that was paid to the assignee, who was the taxpayer’s wife.
The majority (Barwick CJ, Stephen, Mason and Wilson JJ) began their consideration of the effect of the assignment by considering the nature of a partner’s interest in a partnership. They said at 446-447:
Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership … His share in the partnership consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership … Historically the interest of a partner in a partnership has been considered to be an equitable interest because it is a right or interest enforceable in equity and not at law …
A partner's interest in the partnership is a chose in action assignable in whole or in part ...
Footnotes omitted
I understand these authoritative statements to mean that the assets or property (real and personal) of a partnership belong to the partners, as is self-evident. As against third parties there is no limitation on the interest of partners in partnership property. But the nature of a partnership is such that, as between themselves, the partners’ interest in partnership property is “sui generis”. The interest of a partner in partnership property is an interest in every asset, but that interest is expressed as a right to a share of the surplus (if any) after the realisation of assets and the discharge of liabilities. The right is an equitable right and is categorised as an equitable chose in action.
I add that the right to share in the profits of a partnership is distinct from the partner’s entitlement to an interest in the assets of the partnership. The entitlement to share profits need not be in the same proportion as the partner’s interest in the assets of a partnership: Everett at 448-449.
Here, Mrs Henschke held an equitable chose in action which gave rise to a beneficial interest in the partnership assets, but that chose in action remained a right to a proportion of the surplus after the realisation of the assets and payment of liabilities.
The distinction between a partner’s share in the partnership and the assets of a partnership appears from what Mason J said in United Builders Pty Limited v Mutual Acceptance Limited [1980] HCA 43; (1980) 144 CLR 673. That case was concerned with a charge over an interest in a partnership. Mason J made the point (at 688) that a mortgage or charge over a partner’s interest in a partnership:
… is considered to vest rights over that chose in action but it is not considered to carry any title to the specific assets until dissolution.
The point he was making is that what the partner charges is the equitable chose in action, not an interest in the assets of the partnership. As he said at 688:
A fixed charge is appropriate to create a security over a partner's share. It gives rise to a present security over the chose in action which is the partner's share. Although it creates no specific interest in the partnership assets until dissolution, this is not because the charge is dormant; it is because the rights conferred by the charge relate to the existing chose in action and that the security over the chose in action confers no entitlement to the assets of the partnership until dissolution. A fixed charge is equally appropriate to secure to a lender rights over a corporate partner's share in a partnership.
He earlier made the point at 687 that a partner’s beneficial interest in partnership assets is an interest “… of a special and non-specific kind”, referring to Canny Gabriel and to Everett. He then added at 688:
The vital consideration is that the partner's interest is in truth a chose in action, which, as Everett acknowledged, "consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership". A mortgage or charge is considered to vest rights over that chose in action but it is not considered to carry any title to the specific assets until dissolution.
Footnote omitted
The other members of the majority agreed with the reasons of Mason J: Barwick CJ at 677, Gibbs J at 677, Wilson J at 688.
The conclusion that I draw from this is that it is the equitable chose in action which gives rise to what is called a beneficial interest in the assets of the partnership, but that what a partner possesses is the equitable chose in action, and it is that with which a partner can deal.
That this is so is supported by what Kitto J said in Livingston v Commissioner of Stamp Duties (Qld) [1960] HCA 94; (1960) 107 CLR 411. In the course of his reasons Kitto J had this to say (at 453) concerning a partner’s interest in partnership assets:
That he has a beneficial interest, which the law will recognize and enforce, in every piece of property which belongs to the partnership is clearly established … and none the less so because the nature of the interest is peculiar in that his share in the partnership, by virtue of which the interest in a given asset exists while the asset belongs to the partnership, consists not of a title to specific property but of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership … that is to say, not a “definite” share or interest in a particular asset, no “right to any part” of it, but an interest which “can be finally ascertained only when the liquidation has been completed, and … consists of his share of the surplus” …
Footnotes omitted
I draw attention to the fact that Kitto J made the point that the beneficial interest in the assets of the partnership exists by virtue of the partner’s share in the partnership, the equitable chose in action.
Applied to the present case, Mrs Henschke had a one sixth interest in the partnership. What she held was an equitable chose in action. That equitable chose in action is described by reference to the proportionate right that it conferred to share in a surplus after assets were realised and liabilities were met. That interest is described as a beneficial interest in the assets of the partnership, but it is one of a unique nature, and one that flows from the equitable chose in action.
From this I draw the preliminary conclusion that the Deed effects a transaction by which that equitable chose in action was converted into an entitlement to payment of a specific amount. Mrs Henschke did not deal with a beneficial interest in the assets of the partnership. Her equitable chose in action was satisfied by the payment of the agreed amount, and thereafter that chose in action ceased to exist. A consequence of that is that her beneficial interest in the assets of the partnership (which beneficial interest flows from her equitable chose in action) ceased to exist, but not as a result of a transfer from her to the continuing partners of a beneficial interest in those assets.
Accordingly, by the Deed Mrs Henschke did not transfer a one sixth interest in the assets of the partnership (which included the goodwill) to the continuing partners. She did not do so as a matter of form or as a matter of substance. Her share in the partnership, or chose in action, was satisfied by the payment of the specified sum. A consequence of this was the cessation of her interest in the partnership assets.
In a given case the effectuation of the retirement of a partner might require consequential transactions between the retiring partner and the continuing partners to vest title to particular assets. Whether any such transaction is dutiable would depend upon the nature of the transaction and on the circumstances of the case.
I respectfully differ from the conclusion of the Judge in [58] (above). The point of difference is that I consider that Mrs Henschke dealt with her equitable chose in action, not with an interest in the assets. It is the chose in action that, while it existed, enables one to talk of her having a beneficial interest in the assets of the partnership.
Likewise, I respectfully disagree with the Judge’s finding at [59] that “her interest was taken up proportionately by the other partners”.
I now refer to some decisions that were relied upon in the course of the appeal.
Mr Flynn, counsel for the appellants, submits that the reasoning of the High Court in MSP Nominees Pty Limited v Commissioner of Stamps (SA) [1999] HCA 51; (1999) 198 CLR 494 assists him. This case raised an issue under s 71 of the Act. The question was whether the redemption of units in a unit trust scheme and the consequent cancellation of those units by the trustee evidenced or recorded a transfer of a beneficial interest in or in relation to property. The trust was a discretionary trust. It had been held in this Court that the unit holders (whose units were redeemed then cancelled) offered or yielded up their beneficial interest in the trust in exchange for the value to them, and that the remaining unit holders had acquired that beneficial interest. The High Court allowed the appeal, and rejected this approach. The Court said at [8]:
[8]A redemption under cl 34 did not yield up those rights and interests so as to discard them or to swell the interests of any remaining Unit Holders. Rather, the redemption effectuated, fulfilled or realised those rights and interests. Upon a favourable exercise of the Trustee's discretion under cl 34, the Unit Holder in question had, at least, an absolute right to the price for the redemption.
Footnote omitted
Later, at [33] their Honours said:
[33]However, there remains the essential characteristic of the enlargement of one interest by absorption or "drowning" of the other. This is of particular significance where the statutory context is directed to transfers and conveyances and, in particular, to the passing of value without reciprocal consideration. In the present case, contrary to the view taken in the Full Court, the effect of the redemptions was not the receipt or acquisition by the remaining Unit Holder of any "beneficial interest" held by the Unit Holders who had obtained the redemption of their respective units.
Mr Flynn argues that in the present case, to use the language used in MSP Nominees, the effect of the Deed was not to “yield up” to the continuing partners Mrs Henschke’s interest in the partnership, nor did the Deed effect an “enlargement” of the continuing partners’ interest by the “absorption” or “drowning” of Mrs Henschke’s interest. He submits that the effect of the Deed is better characterised in the manner in which the High Court in MSP Nominees described what had happened at [34], where the Court said:
[34][T]he rights enjoyed by Budget and Galaxy as Unit Holders were, upon favourable exercise by the Trustee of its discretion conferred by cl 34, transmuted by the redemption process into the entitlement to the price arrived at by the valuation for which cl 36 provided. This, as indicated earlier in these reasons, was in fulfilment of the rights of Budget and Galaxy, not the "surrender", in the sense of that term in the definition of "transfer" in s 71(15) of the Act, of a beneficial interest or potential beneficial interest in or in relation to the assets represented by the Trust Fund.
As I have already indicated, I agree with the substance of Mr Flynn’s submission. I agree that in the end result the decision in MSP Nominees reflects similar reasoning, drawing the same distinction between on the one hand a transfer or release or surrender of a beneficial interest and on the other hand the fulfilment or realisation of such an interest. But in the end, each case turns on its own facts.
Mr Flynn also relies on the decision of the High Court in McCaughey v Commissioner of Stamp Duties (NSW) [1914] HCA 45; (1914) 18 CLR 475. There the taxpayer owned the land, stock and premises of a pastoral partnership on trust for himself and his fellow partners. By an agreement in writing dated 15 January 1912, the other partners agreed to sell their interests in the partnership property to the taxpayer, with effect from 31 December 1911. Next, the taxpayer agreed to sell to a third party the whole of the property belonging to the partnership. By a further Deed made on 23 April 1912 between the taxpayer and the former partners, the partners agreed to dissolve the partnership. The Commissioner argued that the Deed of 23 April 1912 was a conveyance or transfer on sale of the interest of the outgoing partners to the taxpayer.
Griffiths CJ (with whom Barton J agreed) held that the agreement of 15 January 1912 dissolved the partnership. No conveyance was necessary to transfer partnership property to the taxpayer because he was already the sole legal owner of the land and was in possession of the chattels and other personal property of the partnership. When the taxpayer sold the partnership property to the third party, he was in a position to transfer all of the partnership assets to the third party. Griffiths CJ held that the Deed of 23 April 1912 did not transfer any property, because the partners in question had already disposed of their interest in the partnership to the taxpayer. Isaacs J dissented. In his opinion the previous agreements were “merely executory” (at 490) and the Deed of 23 April 1912 was a necessary step in winding up the inter-relationship between the partners (at 491-492).
Mr Flynn submits that although the decision in McCaughey is based on the effect of the agreement of 15 January 1912, the case supports the general proposition that if one partner (or continuing partners) has or have possession of chattels including goodwill, there is no need for the outgoing partner or partners to convey any property to the continuing partners to give effect to the disposition of the outgoing partners’ interest in the partnership.
It seems to me that the decision in McCaughey does rest in substance on the detailed effect of the two agreements in question. I do not consider that general observations made by Griffiths CJ in that context can safely be used to found an argument that is decisive in this case.
I turn now to the three decisions on which Mr Wait, counsel on appeal for the Commissioner, relies.
The first is Christie v The Commissioners of Inland Revenue (1866) LR 2 Ex 46. The question there was whether a certain indenture, executed against the background of a dissolution of a partnership, was liable to stamp duty as a conveyance upon the sale of property. There was no dispute, as I understand the case, that the relevant indenture was a conveyance. The issue was whether it was a conveyance on sale. The argument appears to have been that upon dissolution of the partnership the retiring partner was to receive the moneys due to him, and although by the indenture he released all his estate in partnership property, real or personal, to the other partner, nothing was being sold in the ordinary meaning of the term. Not surprisingly the Court rejected that submission and held that there was a conveyance on sale. I must say, with respect, that to me it seems a clear case. Mr Wait drew the Court’s attention to dicta by Kelly CB (at 51) and by Channell B (at 52) that the Court should look to the substance of the transaction. But that was in the context of deciding whether what occurred could be described as a sale. I do not agree that the observations by Kelly CB and Channell B can be used in the present case as a substitute for an analysis of the effect of the Deed.
Mr Wait also referred to the decision in Wale v Commissioner of Inland Revenue (1879) 4 Ex D 270 at 276-277, where Kelly CB said that what was decisive was a comparison of the situation before and after the instrument in question was executed, and that:
… the particular mode and form in which the change or transfer was carried out, do not affect the question.
Once again, I do not agree that a general statement like that can be the answer to this case.
Some attention was paid in argument to a further decision on which Mr Wait relied, namely Garnett v Commissioner of Inland Revenue (1899) 81 LT 633. The case also concerned a dissolution of a partnership. One of the partners gave notice to the other (the appellant) to determine the partnership. The appellant gave notice to the other partner taking over the share of the other partner in accordance with an option granted by the partnership agreement. Accounts were taken, and an amount to the credit of the other partner was ascertained, and the appellant gave the other partner a promissory note for that amount. It appears that the partnership assets included real property and personal property. Two instruments were entered into between the former partners. By one of them the real estate of the partnership was released by the other partner and transferred to the appellant. No issue arose in relation to that.
The other deed, the one in question, among other things recited that the chattel property of the partnership was in the possession of the appellant; recited that the appellant had given the other partner a promissory amount for the amount due to the other partner; declared that the partnership was dissolved as from an earlier date, and declared that the other partner accepted the promissory note in full discharge of all claims by him in respect of his share in the partnership. The question was whether this second deed was liable to ad valorem duty.
The argument to the contrary was that the second deed released nothing and conveyed nothing, that property had already passed to the appellant and the partnership had already been dissolved. The second deed was merely recorded for the “mutual satisfaction” of the parties, and recorded something which had been done before. In particular, the appellant appears to have argued that as the “personal chattels” had previously been “taken over” by him, and were in his possession, and the bank debts had been or would be received by him, the deed did not pass any interest in property.
That argument failed. It appears to me that the decision turns entirely on its particular facts. Darling J said at 637:
But I have really to look at what was done here; and the conclusion I should come to – looking at the deed – which is the only record of what took place – is this, that when the deed was made, this arrangement for dissolution and the handing of the property to these people in the proportions agreed took place; that the deed really was that which effectuated the dissolution of the partnership, and the distribution of the partnership effects as the deed recited, and that was done by the deed and not by something else. I come to the conclusion, therefore, that there did pass upon the making of that deed an interest in the property upon the sale of that property; that it was transferred – that it was transferred then; that something passed then which had not passed before – that there was a release of something which had not been released before …
Channell J agreed, and appears to have rested his decision on the basis that the recitals in the Deed were there “… purposely for the purpose of recording the transaction, and preventing any further disputes between the parties in reference to it …”.
As I have said, it seems to me that this decision turns upon its own facts and does not support a general proposition that when a partner retires from a partnership, and the partnership holds property, there must be a conveyance or transfer of the outgoing partner’s interest in that property to the continuing partners. As I understand it, it is for some such general proposition that Mr Wait took us to the decision in Garnett, but it seems to me that Garnett does not support that general proposition.
Finally I refer to the decision of the Court of Appeal of Queensland in McGowan v Commissioner of Stamp Duties [2001] QCA 236; [2002] 2 Qd R 499. In that case three solicitors practised in partnership. One of them wished to retire. By a deed of assignment the retiring partner transferred to the appellants his interest in the partnership, including his share in work in progress. There was no argument in the case that that deed was not dutiable as a conveyance or transfer. The only issue was whether the Commissioner was right in including as part of the partnership interest transferred two items in the balance sheet of the partnership which represented the value of work in progress. The argument was that work in progress was not recognised in law as property for the purposes of the Queensland legislation.
The contention that work in progress could not be transferred or assigned, or was not for relevant purposes property, was rejected by the Court. The issue raised in the present case does not appear to have been raised in any way in McGowan. In the course of his reasons McPherson JA referred to the description of a partner’s interest in a partnership in Everett. Referring to that interest he said at [16]:
[16]Here it was agreed to transfer that interest for a price from Mr Shine to the members of the new firm of Roche and McGowan. To accomplish it, the parties chose the avenue of an assignment as provided in cl 2 of the Deed. Their purpose might equally well have been achieved if Mr Shine had executed an instrument releasing his interest to the other partners, in which event the instrument would still have been dutiable as a conveyance or transfer under the Act: Garnett v Commissioner of Inland Revenue (1899) 81 LT 633. The interest of a partner in the partnership assets is equitable and, as FCT v Everett shows, assignable, and an equitable assignment is, under s 54 of the Act, liable to stamp duty as a conveyance or transfer. So is an agreement taking effect as a declaration of trust in favour of an intended transferee. See Chesterfield Brewery Co v Commissioner of Inland Revenue [1899] 2 QB 7, where Wills J considered (at 12) that equity would have produced that result even if an express declaration of trust had not been included in the instrument in question. Both he and Bruce J also considered it amounted to a "conveyance on sale" in the character of a contract for the sale of an equitable interest in property falling within s 59 of the Stamp Act 1891 (UK). That section was originally reproduced verbatim in s 54 of the Queensland Stamp Act of 1894; but the specific reference to sale of an equitable interest has now been subsumed under the general terms of s 54(1) read with the definition of "property" in s 36 of the Acts Interpretation Act 1954. That it continues to extend to a contract for the sale of an equitable interest in property is evident not only from the language of s 54(1) itself, but also from the explicit reference in s 54(2) to a contract for the sale of an equitable interest in any property.
Mr Wait relies upon this passage in the reasons of McPherson JA to support a submission that the retirement of a partner from a partnership necessarily involves a conveyance or transfer of a beneficial interest in partnership property. But that question was not raised. Although the observations by McPherson JA reflect an assumption favourable to the argument advanced by Mr Wait, it seems to me that they cannot be treated as decisive of the questions now before the Court.
For the reasons given, I consider that the Commissioner’s assessment cannot be upheld on the basis that the Deed was or effected a conveyance on sale.
I turn now to the question of the application of s 71E of the Act.
The submissions on each side relating to s 71E were brief. The Court was not referred to any decisions on s 71E, nor have I found any.
The Commissioner argues that the purpose of s 71E of the Act is to “... extend the imposition of duty to transactions which achieve, in substance, a conveyance that might ordinarily be expected to have been achieved by means of a stampable instrument.” The Commissioner goes on to argue that “in substance” the transaction was a sale and that s 71E should not be interpreted as permitting “form to prevail over substance.”
On this approach the Deed is treated as evidencing a transaction, and (as I understand the argument) it is claimed that the end result of the transaction is that an equitable interest in the partnership or in partnership property has been transferred from Mrs Henschke to the continuing partners. This analysis is said to reveal the substance of the transaction, even if the transaction did not in form transfer an equitable interest in the partnership or in partnership property.
I do not agree. On the approach that I favour, Mrs Henschke’s equitable chose in action has been extinguished in return for a payment. Neither in form nor in substance was there a change in the ownership of an equitable interest in the partnership. The extinction of her equitable chose in action means that thereafter she no longer holds a beneficial interest in partnership property as a result of holding an equitable chose in action.
If the transaction is founded on the Deed, it must reflect the manner in which the Deed operates. The Commissioner’s argument is an attempt to rewrite what the Deed does by invoking considerations of substance over form, and to call that the transaction for the purposes of s 71E. I do not consider that s 71E can be used in this way.
The Commissioner also argues that before the Deed was entered into, the continuing partners had intended or contemplated a conveyance to them of Mrs Henschke’s share in the partnership. To support this submission the Commissioner points to documents that were exchanged between the partners in the process of a mediation that took place between members of the Henschke family with a view to settling issues between them, and some subsequent correspondence directed towards implementation of the result of the mediation.
The submission to the effect that a finding of fact should be made as to the existence of a “transaction” for the purposes of s 71E, the transaction being found in circumstances including the mediation, appears to have been made for the first time to this Court. There is no reference to this argument in a letter from an officer of Revenue SA in which, immediately prior to making the assessment, the Commissioner outlined his approach to the matter. The “Statement of Agreed Facts” states that this letter sets out the Commissioner’s views. Nor is this argument referred to in the outlines of submission filed by the Commissioner before the Judge below. The Judge made no such finding. That being so, it would not be appropriate in my opinion for this Court now to embark upon a factual inquiry which was not opened up by the contentions advanced for the Commissioner at an earlier stage. Had it been, the underlying factual issues undoubtedly would have been explored in evidence before the Judge.
There is no suggestion that the Deed is a sham or a mere device, concealing or cloaking the true or underlying transaction. Nor did the Judge make any such finding.
In short, I respectfully differ from the approach that the Judge took. In my opinion the Deed did not result in a transfer of Mrs Henschke’s interest in the partnership to the continuing partners. Nor does the Deed evidence such a transaction. Nor do I agree that the answer to the situation lies in a comparison of the situation as it was immediately before the Deed was executed and then after the Deed had been carried into effect. So, considering the matter and the manner in which it was approached by the Judge, my conclusion is that s 71E does not lead to a conclusion that the Commissioner’s assessment should be upheld.
Conclusion
I would allow the appeal and agree with the orders proposed by Bleby J.
BLEBY J: I agree that the appeal should be allowed. I would set aside the orders of the single Judge. I would substitute for those orders an order that the appeal against the determination of the Treasurer made on 23 December 2007 be allowed and that the determination be set aside, that the appellants’ objection dated 27 April 2006 be allowed, that the assessment of stamp duty made by the Commissioner of State Taxation in the sum of $316,669.00 in stamp duty be set aside and that the respondent pay to the appellants the amount of stamp duty paid together with interest calculated pursuant to s 99 of the Taxation Administration Act 1996 (SA).
I respectfully agree with the reasons of the Chief Justice and add a few comments of my own.
As the balance sheets of the partnership show, there was a reduction in the net partners’ funds upon the retirement of Mrs Henschke by one sixth, representing the agreed value of the equitable right or chose in action that Mrs Henschke had upon a winding-up of the partnership. The payment to her represented what the partners agreed would have been her entitlement if the partnership had been wound up on the date of her retirement. The total value of the remaining net assets after her retirement and then shared by the continuing partners was reduced accordingly. The value of their respective interests in the partnership remained the same because of that reduction. There was no conveyance on the sale to them.
No doubt the same result for Mrs Henschke could have been achieved in a different way had the parties so desired. If the continuing partners wished to maintain the capital of the partnership at the same level as it was before the retirement, Mrs Henschke could have sold her chose in action to an incoming partner or to one or all of the continuing partners for the same amount. However, any such transaction would have been quite different in nature and, in all probability, in stamp duty consequences, if it had been effected in that way.
This is not to allow form to triumph over substance. The retirement effected by the deed had very real and differing financial consequences for the partnership and the continuing partners from what would have been the case if Mrs Henschke had sold her interest to someone else. There are many sound commercial reasons why partners may prefer or may be required to take one course of action rather than another.
LAYTON J: Having read the draft reasons for decision of both the Chief Justice and Bleby J, I agree that the appeal should be allowed. I respectfully adopt the reasons provided by the Chief Justice and also the further comments given by Bleby J. I agree with the orders suggested by Bleby J.
24
10
1