Cyril Henschke Pty Ltd v Commissioner of State Taxation

Case [2009] SASC 148

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…

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Cyril Henschke Pty Ltd v Commissioner of State Taxation [2009] SASC 148
Case
[2009] SASC 148
Decision Date

CaseChat Overview and Summary

Cyril Henschke Pty Ltd and others appealed against the decision of a single judge of the Supreme Court of South Australia, who dismissed their objection to an assessment for stamp duty. The appellants operated a business in partnership and entered into a deed with one of the partners, D, to give effect to D's retirement from the partnership. D was paid an amount representing her interest in the assets of the partnership, including her share of the goodwill, from the assets of the partnership. The Commissioner of State Taxation assessed the appellants for stamp duty in respect of the amount paid to D, which the appellants objected to. The single judge dismissed the objection, and the appellants appealed to the Full Court. The central issue before the court was whether the 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 section 60 of the Stamp Duties Act 1923 (SA). If not, the court had to determine whether there was a transaction that resulted in a change of ownership of an interest in the partnership for the purposes of section 71E of the Act.

The Full Court held that D's interest in the partnership was an equitable chose in action, which carried a right to receive a share of the proceeds of the sale of partnership assets after the partnership debts were discharged. The court found that when D retired from the partnership and received payment from the partnership, her chose in action was extinguished, and her beneficial interest in the partnership assets lapsed. There was no "transfer" of her beneficial interest in the partnership assets, including goodwill, to the appellants for the purposes of the Act. The court found that section 71E did not apply to the transaction effected by the deed. The Full Court allowed the appeal and set aside the assessment.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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.

Ratio Decidendi

Legal Principle Established

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