Danvest Pty Ltd v Commissioner of State Revenue
[2017] VSC 125
•31 March 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TAXATION LIST
S CI 2016 04151
| DANVEST PTY LTD (ACN 096 067 006) & ANOR | Appellants |
| v | |
| COMMISSIONER OF STATE REVENUE | Respondent |
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JUDGE: | CROFT J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 March 2017 |
DATE OF JUDGMENT: | 31 March 2017 |
CASE MAY BE CITED AS: | Danvest Pty Ltd & anor v Commissioner of State Revenue |
MEDIUM NEUTRAL CITATION: | [2017] VSC 125 |
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DUTIES – Transfer of dutiable property – Whether transfer of interests in partnership a “transfer of dutiable property” – Nature of interest of a partner in partnership property – Duties Act 2000, ss 3, 7 and 10 – Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12; CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98; Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592; Inland Revenue Commissioner v Gray [1994] STC 360; R v Toohey; ex parte Meneling Station Pty Ltd (1982) 158 CLR 327; Stow v Mineral Holdings (Aust) Pty Ltd (1977) 51 ALJR 672; BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172; In Re Bourne; Bourne v Bourne [1906] 2 Ch 427; Re Bainbridge; ex parte Fletcher (1878) 8 Ch D 218; Watson v Ralph (1982) 148 CLR 646; Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508; Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321; Bolton v Federal Commissioner of Taxation [1965] ALR 481 at 485, 491; Hurst v Bryk [2002] 1 AC 185; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476; United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673; Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29; and Sze Tu v Lowe [2014] 89 NSWLR 317.
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APPEARANCES: | Counsel | Solicitors |
| For the Appellants | Mr S.S. Steward QC with Mr D. Morgan | Norton Rose Fulbright Australia |
| For the Respondent | Mr C. Young | Solicitor to the Commissioner of State Revenue |
HIS HONOUR:
In broad terms, the only issue in this proceeding is whether the sale by two former partners, and the purchase by Danvest Pty Ltd (“Danvest”) and Bullhusq Pty Ltd (“Bullhusq”) (collectively, “the Appellants”), of interests in the Faircourse Unit Partnership (“the Partnership”) constituted a “transfer of dutiable property” within the meaning of s 7(1)(a) of the Duties Act 2000 (“the Act”). More specifically, substituting the phrase “an interest in an estate in fee simple” for the term “dutiable property” (see ss 10(1)(a)(i) and 10(1)(ac) of the Act), the issue is whether that sale and purchase constituted a “transfer of an interest in an estate in fee simple”.
In this context, it is necessary first to construe the statutory phrase “an interest in an estate in fee simple” and then to determine whether the interests that were sold and purchased, properly characterised, fall within the statutory phrase.
The Appellants contend that the interests that were sold and purchased were nothing more than “a species of personal property” that “confer[red] no equitable proprietary interests in partnership assets”.[1] Moreover, the Appellants contend that the interests do not comprise “an interest in an estate in fee simple”.
[1]Appellants’ Outline of Submissions (17 February 2017) [43].
The Commissioner contends that the interests that were sold and purchased were sui generis equitable interests in each of the assets of the partnership; and, thereby, that such interests fall within the phrase “an interest in an estate in fee simple”.
So understood, the resolution of the controversy will, in essence, be determined by resolving the jurisprudential character of the interests in the assets of the Partnership.
Factual background
There are no factual disputes in this proceeding. Nevertheless, some detailed consideration of the facts is necessary to provide context for the consideration of the position, on the authorities, with respect to the proper characterisation of the interest of a partner in the partnership property.
The Appellants rely upon affidavits of a director of each: the affidavit of Gregory Gunn sworn 26 October 2016 on behalf of Bullhusq (“the company; namely, Gunn Affidavit”) and the affidavit of Richard Jenkings sworn 26 October 2016 on behalf of Danvest (“the Jenkings Affidavit”). The Commissioner did not require cross-examination of either deponent.
The Partnership was formed pursuant to a Deed of Unit Partnership[2] (“the Partnership Deed”) dated 7 August 2002. The Partnership Deed included the following terms:
(a)the Partnership was established on 7 August 2002 on the terms and conditions of the Partnership Deed and the Partnership Rules which were an appendix to the Partnership Deed (“the Partnership Rules”) (cl 1);
(b)the duration of the Partnership was to be 10 years from 7 August 2002, or such other period as the parties agreed upon (cl 2);
(c)the capital of the Partnership was to be divided into 100 units, and “unit” for the purposes of the Partnership Deed meant an equal and undivided interest in the capital of the Partnership (cl 5(1)); and
(d)the net profits of the Partnership, after payment of all necessary outgoings, would belong to the partners proportionately according to the number of units held, and the partners would bear all losses in the same proportions (cl 6).
[2]Exhibit RJ-1 to the Jenkings Affidavit; Exhibit GG-1 to the Gunn Affidavit.
The Partnership Rules included the following:
(a)Fair Course Pty Ltd (“Fair Course”), or such other person the partners appoint, was to be the Manager of the Partnership (rule 1);
(b)subject to any direction given by the Partners, the Manager was to control and manage the business of the partnership (rule 2);
(c)the Manager was to be paid such remuneration as the Partners determined from time to time (rule 3);
(d)the Manager was to hold the property of the Partnership in its name “in trust for the Partners as an entirety” and deal with the property as directed by the Partners. Further, “[e]ach [p]artner [undertook] not to attempt to obtain a partition and/or a separate legal title to his interest in the partnership property” (rule 4);
(e)the Manager was authorised to borrow and to secure such borrowing on the property of the Partnership (rule 5);
(f)the partners in general meeting were to decide what amount of the profit (if any) was to be carried to reserve funds and what amount (if any) was to be distributed (rule 9). There was no obligation for amounts to be distributed proportionately to the number of units held;
(g)a partner could dispose of its units in the Partnership after following the procedure set out in rules 11 to 16. The partner could give a notice in writing to the Manager specifying that it wished to sell all of its units in the Partnership and all of its shares in Gold Age Pty Ltd (“Gold Age”) for a sum specified to be the “fair value”. If the Manager was of the opinion that the price specified was not fair value then fair value was to be calculated by the Partnership’s accountants. The other partners had a right of first refusal over the units and shares offered for disposal and if that right was not exercised, then the units and shares were to be sold at public auction with no reserve and/or by private sale;
(h)at meetings of the Partnership, all questions would be decided by a majority of the votes of the partners holding not less than three-fifths of the units (rule 23(3)); and
(i)the Manager was to be indemnified out of the funds of the Partnership (rule 29).
The units in the Partnership were initially allocated as follows (see item 4 of the Schedule to the Partnership Deed):
(a)40 units to Lopet Pty Ltd as trustee for the AFP Trust (“Lopet”);
(b)40 units to Northpeak Pty Ltd as trustee for the ABJ Trust (“Northpeak”); and
(c)20 units to Gold Age Pty Ltd as trustee for the Gold Age Trust.
On 23 January 2004, by way of a Deed of Appointment and Removal of Trustee, Gold Age Pty Ltd retired as trustee of the Gold Age Trust and Danvest was appointed in its place.[3]
[3]Jenkings Affidavit, [7]; Exhibit RJ-2 to the Jenkings Affidavit.
Fair Course (which was subsequently renamed Gold Age Australia Pty Ltd (“Gold Age Australia”))[4] is the owner of three properties (“the Properties”) which are held on trust for the Partnership. The Properties were leased by Gold Age, which conducted an aged care business (“the Business”) from the Properties.[5] In this way, the Partnership earned rental income.
[4]Jenkings Affidavit, [3].
[5]Jenkings Affidavit, [4].
Immediately prior to 28 February 2014, the shareholders of Gold Age were Lopet, Northpeak and Danvest, with each holding 40%, 40% and 20% of the shares of Gold Age respectively.[6]
[6]Jenkings Affidavit, [11].
In December 2013, an agreement was reached between Lopet, Northpeak, Danvest and Bullhusq for the sale of the Business, including the shares in Gold Age and the units in the Partnership. As at this point in time, the position is helpfully summarised:[7]
[7]Appellants’ Outline of Submissions (17 February 2017) [12].
(a)Lopet, Northpeak and Danvest, in the proportions of 40/40/20, owned:
(i)all of the units in the Partnership; and
(ii)all of the shares in Gold Age;
(b)Gold Age operated an aged care business; and
(c)the Properties upon which that business was run were owned by the Manager of the Partnership.
The sale of the Business was effected by way of two interdependent agreements, a Partnership Sale Agreement[8] and a Business Sale Agreement,[9] both dated 11 December 2013. Completion under each occurred on 28 February 2014.[10]
[8]Exhibit RJ-4 to the Jenkings Affidavit; Exhibit GG-2 to the Gunn Affidavit.
[9]Exhibit RJ-5 to the Jenkings Affidavit; Exhibit GG-3 to the Gunn Affidavit.
[10]Jenkings Affidavit, [17], [24].
By the Partnership Sale Agreement, Northpeak and Lopet (defined as “the Vendors”) sold and Danvest and Bullhusq (defined as “the Purchasers”) purchased the “Sale Partnership Interest”, which was defined as the 80% interest in the Partnership that had been collectively owned by Northpeak and Lopet (cl 4.1). The purchase price for the sale was $6,000,000 together with 80% of the amount of indebtedness of the Partnership to its bank and the value of certain assumed liabilities (cl 1.1). Clause 4.5 of the Partnership Sale Agreement recorded that:
Upon Completion, Danvest will hold 50% of the interests in the Partnership Assets (having increased the Danvest Partnership Interest from 20% to 50% upon Completion) and Bullhusq will hold 50% of the interests in the Partnership Assets.
“Partnership Assets” was not a defined term in the Partnership Sale Agreement; although “Assets” was a defined term. The latter was defined, non-exclusively, to include the Properties; certain plant and equipment; the rights of the Vendors under existing contracts; and business records.
A total of $30,049,424 was paid by the Appellants to the vendors under the Partnership Sale Agreement.[11] This was apportioned as follows:[12]
(a)Plant and Equipment $1,455,502 (which was more than the unencumbered value of the plant and equipment);
(b)Properties $28,593,920;
(c)Business records $1; and
(d)Existing contract $1.
[11]Jenkings Affidavit, [19].
[12]Jenkings Affidavit, [20].
By the Business Sale Agreement, Gold Age sold and Danvest and Bullhusq purchased the “Business” (cl 4.1). The Business was defined to include certain Assets including plant and equipment (cl 1.1). The amount paid for the Assets was $43,508,527.[13] Of this, $1,793,341 was apportioned to plant and equipment (excluding stock-in-trade).[14]
[13]Jenkings Affidavit, [25].
[14]Jenkings Affidavit, [27].
Consequently, following settlement of the sale, the position was as follows:
(a)Danvest and Bullhusq owned in equal shares:
(i)all of the units in the Partnership; and
(ii)the Business; and
(b)the Properties upon which that business was run continued to be owned by the Manager for the Partnership. The Manager did not dispose of its ownership of these Properties.
Legislative provisions
The relevant provisions of the Act applicable or potentially applicable are as follows:
7Imposition of duty on certain transactions concerning dutiable property
(1)This Chapter charges duty on—
(a)a transfer of dutiable property; and
(b)the following transactions—
…
(vi)any other transaction that results in a change in beneficial ownership of dutiable property
…
(4)In this Chapter—
…
change in beneficial ownership includes, but is not limited to—
(a)the creation of dutiable property;
(b)the extinguishment of dutiable property;
(c)a change in equitable interests in dutiable property;
(d)dutiable property becoming the subject of a trust;
(e)dutiable property ceasing to be the subject of a trust.
10What is dutiable property?
(1)Dutiable property is any of the following—
(a)each of the following estates or interests in land in Victoria—
(i)an estate in fee simple;
…
(ac)an interest in any dutiable property referred to in paragraph (a) … other than—
(i)a security interest;
(ii)an option to purchase;
(iii)a lease other than a lease referred to in paragraph (ab);
…
(d)goods in Victoria, if the subject of an arrangement that includes a dutiable transaction over an estate or interest in land …
“Transfer” is defined in s 3 of the Act to include:
… an assignment, a conveyance, an exchange and a buy-back of shares in accordance with Division 2 of Part 2J.1 of the Corporations Act.
“Interest” is defined in s 3 of the Act to include “an estate or proprietary right”.
In summary, s 7 of the Act relevantly charges duty on a transfer of dutiable property (s 7(1)(a)) and on “any other transaction that results in a change in beneficial ownership of dutiable property” (s 7(1)(b)(vi)). Section 7(4) provides that beneficial ownership “includes, but is not limited to, ownership of dutiable property by a person as trustee of a trust” and a change in beneficial ownership “includes but is not limited to … (c) a change in equitable interests in dutiable property”.
A critical concept for the purposes of the provisions of s 7 of the Act is that of “dutiable property”. Dutiable property is defined by s 10 to include, inter alia; an estate in fee-simple in land in Victoria (s 10(1)(a)(i)); an interest in any dutiable property referred to in s 10(1)(a), subject to certain non-material exceptions; and certain goods the subject of an arrangement that includes a dutiable transaction over an estate or interest in land (s 10(1)(d)).
As observed by the Appellant, an interest in a partnership is not expressed in the provisions of the Act to be an item of dutiable property, unlike the position under the New South Wales Duties Act, which shares very similar statutory architecture to the Victorian Act.[15]
[15]Victoria is the only Australian jurisdiction that does not bring to duty the acquisition of an interest in partnerships. See, eg, part 7 of ch 2 of the Duties Act 2001 (Qld).
The dutiable value of “dutiable property” is calculated in accordance with s 20 of the Act to be the greater of the consideration for the transfer of the dutiable property and its unencumbered value.
In terms of the legislative environment, reference should also be made to ss 24 and 26 of the Victorian Partnership Act 1958,[16] which provide:
24 Partnership property
(1)All property and rights and interests in property originally brought into the partnership stock or acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business are called in this Act partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.
(2)The legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law thereto applicable but in trust so far as necessary for the persons beneficially interested in the land under this section.
(3)Where co-owners of an estate or interest in any land not being itself partnership property are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them in the absence of an agreement to the contrary not as partners but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase.
26Personal estate held as partnership property
Where land or any interest therein has become partnership property it shall unless the contrary intention appears be treated as between the partners (including the representatives of a deceased partner) as personal estate.
[16]Although the Partnership Deed contains no choice of law provision, the Partnership and the Partnership Deed have no connection with any other jurisdiction.
The Commissioner’s Ruling
By letter dated 27 March 2014,[17] the Appellants sought a private ruling from the Commissioner, to the effect that the transactions with respect to the Partnership which have been described were not dutiable under the Act.
[17]Exhibit RJ-6 to the Jenkings Affidavit.
In response, the Commissioner issued a private ruling on 23 December 2014 (“the Private Ruling”)[18] in which he expressed the view that Danvest and Bullhusq together acquired an 80% proportionate interest in the property of the Partnership. This in turn comprised a beneficial interest in the assets of the Partnership. Some of those assets were dutiable property: the Properties were estates in fee simple (s 10(1)(a)(i) of the Act) and certain other property comprised goods the subject of an arrangement that included a dutiable transaction over an estate or interest in land (s 10(1)(d)). The interest that Danvest and Bullhusq acquired was therefore dutiable property under s 10(1)(ac), which included within the meaning of dutiable property an interest in an estate in fee simple.
[18]Exhibit RJ-7 to the Jenkings Affidavit.
The Commissioner ruled in the alternative that Danvest and Bullhusq “in effect acquired a direct beneficial interest in the underlying assets of the Partnership”, and consequently there was a change in the beneficial ownership of dutiable property (s 7(1)(b)(vi) of the Act). Whether viewed from the perspective of the Commissioner’s primary ruling or this ruling in the alternative, the critical issue in this proceeding is the nature of a partner’s interest in the partnership property. A finding in favour of the Appellants’ characterisation of that interest means that neither the Commissioner’s primary ruling, nor this ruling in the alternative can stand. In the further alternative, the Commissioner ruled that if a dutiable transaction had not occurred under Ch 2 of the Act, then a “relevant acquisition” had been made under Ch 3. It is not necessary to say anything further about this issue, as the Commissioner no longer seeks to rely upon it.
The Commissioner did not calculate the dutiable value of the dutiable property in the Private Ruling, but indicated that the dutiable value would be the sum of amounts paid for the Properties, plant and equipment (other than stock in trade) sold by way of the Partnership Sale Agreement and further plant and equipment (other than stock in trade) sold by way of the Business Sale Agreement. Following further correspondence, the Commissioner accepted the Appellants’ submission that the dutiable value (on the basis that the Private Ruling was correct) was $31,842,763. On that basis, an assessment in the amount of $1,765,549 (which included interest of $14,197) was issued on 28 April 2015 (“the Assessment”).[19]
[19]Exhibit RJ-8 to the Jenkings Affidavit.
Both Appellants filed a Notice of Objection against the Assessment, each of which is dated 12 October 2016.
Nature of an interest in a partnership
Central to the resolution of the issue in dispute between the parties is the proper characterisation of the nature of the interest of a partner in the partnership property. More specifically, in this proceeding, the ultimate issue is whether such interests as each of the Appellants has in the partnership property is “an interest in [an estate in fee simple]” within the meaning of s 10(1)(ac) of the Act.
As the Commissioner contends, the word “interest” has many potential meanings.[20] Moreover, he submits that the definition of “interest” in the Duties Act in s 3(1) would suggest that it includes both proprietary and non-proprietary rights. An interest may be legal or equitable. It may be a present interest, a future interest or a potential interest. It may be vested, conditional or contingent. The language of s 10(1)(ac) and of the definition of “interest” is broad. The “interest” that is the subject of the paragraph is, the Commissioner contends in his written submission, not qualified or limited in any way.[21] Nevertheless, it was made clear in the Commissioner’s oral submissions that it is common ground that the interest of a partner in the partnership property must, if these provisions are to be enlivened, be proprietary. As is discussed in the reasons which follow, the Commissioner contends that this is the position whereas the Appellants contend otherwise.
[20]See, eg, Re Hemming (dec’d); Raymond Saul & Co (a firm) v Holden [2009] Ch 313 at 325–6 [55]–[56].
[21]Commissioner’s Outline of Submissions (3 March 2017) [21].
These very contentions of the Commissioner with the references to Re Hemming, a relatively recent judgment of the Chancery Division, do, however, emphasise the importance of context in considering the meaning of a word such as “interest”. Thus, the Court said:[22]
[22]Re Hemming (dec’d); Raymond Saul & Co (a firm) v Holden [2009] Ch 313 at 325–6 [55]–[56].
55.These observations can be reconciled and understood when one appreciates that the word “interest”, like the word “property” is a word of many potential meanings. The word must take its meaning from the specific context in which it is used. Viscount Radcliffe made this very point in Livingstone’s case, when commenting upon criticisms that had been made of the decision in Lord Sudeley’s case to the effect that Lord Herschell could not really have intended to deny a residuary legatee all beneficial interest in the assets of an unadministered estate. Viscount Radcliffe said [1965] AC 694, 712-713:
‘Criticisms of this kind arise from the fact that the terminology of our legal system has not produced a sufficient variety of words to represent the various meanings which can be conveyed by the words “interest” and “property”. Thus propositions are advanced or rebutted by the employment of terms that have not in themselves a common basis of definition. For instance, there are two passages quoted by the Chief Justice in his dissenting judgment in this case which illustrate the confusion. There is the remark of Jordan CJ in McCaughey’s case, “The idea that beneficiaries in an unadministered or partially administered estate have no beneficial interest in the items which go to make up the estate is repugnant to elementary and fundamental principles of equity.” If “by beneficial interest in the items” it is intended to suggest that such beneficiaries have any property right at all in any of those items, the proposition cannot be accepted as either elementary or fundamental. It is, as has been shown, contrary to the principles of equity. But, on the other hand, if the meaning is only that such beneficiaries are not without legal remedy during the course of administration to secure that the assets are properly dealt with and the rights that they hope will accrue to them in the future are safeguarded, the proposition is no doubt correct. They can be said therefore to have an interest in respect of the assets, or even a beneficial interest in the assets, so long as it is understood in what sense the word “interest” is used in such a context.’
56.Viscount Radcliffe returned to this theme later in the judgment [1965] AC 694, 716–717:
‘Where, as here, the question is whether a succession arose on a death in respect of a “devolution by law of any beneficial interest in property”, and the necessary limitations of the Queensland Succession Duty Act reduce that question to one whether there was a beneficial interest in Queensland property belonging to her at her death, it is necessary, to use Lord Greene’s words, to “discover the locality to be attributed to a right”, and this requirement involves a precise analysis of the nature of the right. It is not enough for this purpose to speak of an “interest” in a general or popular sense. It is apt to recall what Lord Halsbury LC said on this point in his speech in the Sudeley Case: “With reference to a great many things, it would be quite true to say that she had an interest in these New Zealand mortgages—that she had a claim on them: in a loose and general way of speaking, nobody would deny that was a fair statement. But the moment you come to give a definite effect to the particular thing to which she becomes entitled under his will, you must use strict language, and see what it is that the person is entitled to; because upon that in this case depends the solution of the question. It is idle to use such phrases as … that she had an ‘interest’ in this estate.”’
The gravamen or essence of the Commissioner’s case is helpfully explained at the commencement of his oral submissions:[23]
[23]Transcript, 32–3.
MR YOUNG: Your Honour, the Commissioner’s submissions can be somewhat briefer than my friends, partly because he has relieved us of the burden to go through many of the materials. The battleground in this case is my friend’s proposition 3, that the partner does not have a presently existing equitable interest in property. The commissioner makes two submissions, two propositions which, if accepted, the commissioner says lead to the assessment being upheld.
The first proposition is that whatever its full ambit, the statutory phrase “an interest in an estate in fee simple” certainly captures a presently existing equitable proprietary interest and we don’t think there’s any doubt about that as a proposition, or any dispute about it. There’s no doubt questions that might arise about contingent interests, future interests and choate interests and the like but that brings me to the second proposition which is that a partner does have a presently existing equitable sui generis proprietary interest in each and all of the assets of the partnership.
HIS HONOUR: So it’s common ground the interest must be proprietary?
MR YOUNG: That’s the way the Commissioner puts the case, yes—well, when your Honour says the interest must be proprietary, that might raise a broader question about construction for the section but we don’t need to put the case that way, we say there’s no doubt within the section proprietary interests do fall and the interest that we contend for here is a proprietary interest.
The gravamen or essence of the Appellants’ case is also helpfully explained at the commencement of their oral submissions.[24] The Appellants submit that the case put by the Commissioner is that there has either been a transfer of dutiable property being an equitable interest in three estates in fee simple or that there has been a change in beneficial ownership of dutiable property. In this respect, reference is made to s 10 of the Act, particularly sub-s (1)(a). In those provisions, as has already been discussed, dutiable property includes in (a) “an estate in fee simple”, and then under paragraph (ac) an estate in any dutiable property referred to in paragraph (a) other than a security interest, an option to purchase or certain leases. In this respect, the Appellants emphasise a number of points. The first is that the language of these provisions does not include words such as “contingent”, “future” or anything of that nature. Thus, under these provisions, it is submitted, there has to be a presently existing interest in dutiable property.
[24]Transcript, 3–5.
The second point made is that contingent interests are necessarily or inferentially excluded from something in the nature of a presently existing interest in dutiable property having regard to the provisions of sub-s 10(1)(ac)(ii), which makes reference to an option to purchase which may include something in the nature of a contingent interest. Thus, it is submitted that the relevant interest must be a presently vested interest in an estate in fee simple.
Moreover, reference is also made to the definition of “interest” in s 3 of the Act, which defines “interest” in an inclusive way as including “… an estate or proprietary right”. The Appellants emphasise that the word “proprietary” necessarily excludes in personam rights, such as a mere licence. This point is emphasised by the reference to the provisions of s 3(1), which makes reference to the “‘right’ to shares or units means any right (whether actual, prospective or contingent) of a person …” which both indicates that where the legislature has chosen to include contingent or prospective or future rights, this has been done expressly in these provisions and, further, that this is telling in the present circumstances as the words in parenthesis do not appear in provisions relevant to the present proceedings.
Thus, with reference to the particular provisions of the Act, the Appellants’ position is that the interest caught by s 10(1)(ac) of the Act must be one which, when acquired, gives the taxpayer specific title to it as to provide complete dominion or ownership of it and must be a definite proprietary title in land, whether that be to an estate, interest or other proprietary right. The Appellants submit that, as such, title was acquired here. At best, it is submitted the Commissioner’s case is that the Appellants acquired what has been variously called a sui generis peculiar hybrid interest in every asset of the partnership. Nevertheless, the Appellants contend, and for the reasons which follow, in my view correctly, that this is not an interest to which s 10(1)(ac) of the Act extends. In truth, what was acquired was no more than an equitable chose in action—the right to partnership property, as a mere expectancy, on the dissolution of the partnership and realisation of assets.
In his submissions to which reference has been made, the Commissioner correctly identifies that the Court must construe the phrase “an interest in an estate in fee simple”; however the construction he proffers gives no meaning to the first use of the word “in” in that phrase. He is, therefore, the Appellants submit, wrong to conclude that “[t]he interest that is the subject of [the definition in s 3(1) of the Act] is not qualified or limited in any way”.[25] It is, however, qualified, it is submitted, by the need for the interest to be “in” an estate in fee simple. Here, the Appellants submit, that interest must necessarily be of a proprietary nature in the land owned by the Manager. In my view, both as a matter of language and in light of the authorities considered in the reasons which follow, the Appellants’ submissions in this respect must be accepted.
[25]Commissioner’s Outline of Submissions (3 March 2017) [21]; and see above, [33].
In R v Toohey; ex parte Meneling Station Pty Ltd,[26] the High Court had to consider whether certain grazing licences conferred an “estate or interest” in land. Mason J (as his Honour then was) said:[27]
There is no question that the phrase “estate or interest” in s 3(1) of the Act has, in its ordinary and natural usage, a proprietary connotation.[28] No one who has a merely personal right in relation to land can be said to have an “estate or interest” in that land.
[26](1982) 158 CLR 327.
[27](1982) 158 CLR 327 at 342.
[28]See Stow v Mineral Holdings (Aust) Pty Ltd (1977) 51 ALJR 672 at 679; Harada v Registrar of Titles [1981] VR 743 at 748.
Earlier, in Stow v Mineral Holdings (Aust) Pty Ltd,[29] Aickin J had observed:
In my opinion the ordinary meaning of the compound expression “estate or interest in land” is an estate or interest of a proprietary nature in the land. This would include legal and equitable estates and interests, eg, a freehold or a leasehold estate, or incorporeal interests such as easements, profits à prendre, all such interests being held by persons in their individual capacity.
[29](1979) 180 CLR 295 at 311.
If the Commissioner’s construction were correct then I accept that it would follow that contractual rights such as a right to mine, or a right to share in the income generated by land would be dutiable property for the purposes of Chapter 2 of the Act. However, the Commissioner does not, and could not, suggest that is the case. The interest must be in land, and not merely related to land. It must be a proprietary interest in that land.
The Act does make provision for the bringing to duty of the acquisition of certain economic interests in land. It does so in Chapter 3 which, among other things, imposes duty on the acquisition of a contractual right to share in the future income, rent and profits of landholdings.[30] These provisions are addressed to interests broadly analogous to those the subject of this appeal, namely rights as against the owner of property to the future economic value of that property. Consequently, it might be thought that if the acquisition of partnership interests was to be brought to duty, it would be done in Chapter 3 of the Act. Indeed, the Commissioner initially assessed the Appellants to duty on the alternative basis that the Appellants made a relevant acquisition of an 80% interest in the Partnership for the purposes of s 78.[31] However, the Commissioner no longer relies on this ground.
[30]See BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172.
[31]See Private Ruling, 3.
In the Commissioner’s submissions to which reference has been made, the Commissioner also says that an interest for the purposes of s 10(1)(ac) may be a present interest, a future interest or a potential interest.[32] The definition of “interest” in s 3 of the Act does not, however, use this language. It merely provides that the term includes an estate or proprietary right. If Parliament had wanted the defined term “interest” to extend to a future, contingent or inchoate interest, it would have said so. Thus, the definition of “‘right’ to shares or units” in s 3 expressly refers to “any right (whether actual, prospective or contingent) of a person …”.[33] Accordingly, and inferentially, the legislature has turned its mind to prospective and contingent rights and chosen not to include them in the definition of “interest”. In any event, the Commissioner has not assessed the Appellants by reference to the value of any future or contingent interest—he assessed them on the basis that each had acquired a full and present interest in property.
[32]Commissioner’s Outline of Submissions (3 March 2017) [21]; and see above, [33].
[33]Similarly, the Stamp Duties Act 1923 (SA), which was at issue in Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508, included a potential, contingent expectant or inchoate interest: see at 508, where the words of the provision are quoted in the headnote.
It is against this legislative background that the Appellants contend that it is not sufficient for the purposes of the provisions of the Act upon which the Commissioner seeks to rely to adopt a broad brush approach to the expression “beneficial interest” with respect to the characterisation of the nature of the interest of a partner in partnership property. Rather, as emphasised by Viscount Radcliffe in Livingston’s case in the passage set out in the judgment in Re Hemming which is set out above,[34] it is necessary to consider the context in which, what is said to be, a broad and general expression is used.
[34]See above, [34].
In support of this case as thus explained, the Commissioner, as do the Appellants, makes detailed references and submissions with respect to a line of authorities in the Privy Council, the High Court and State Supreme Courts. It is to these authorities I now turn to consider, in the context of the submissions of both the Commissioner and the Appellants. At the outset I commence this consideration of the authorities with three propositions contended for by the Appellants.
First, and perhaps unlike other partnerships, here legal title to the Partnership property, including the land, vested in the Manager and not the partners.[35] As is discussed below in more detail, this is a case like Commissioner of Stamp Duties (Queensland) v Livingston[36] and CPT Custodian Pty Ltd v Commissioner of State Revenue,[37] where it would be a mistake to contend that because property is vested in a trustee, equitable ownership must be vested in someone else.[38]
[35]In relation to the relevance of the vesting of property in the Manager, see below, [86]–[93].
[36](1964) 112 CLR 12 (“Livingston”).
[37](2005) 224 CLR 98 (“CPT Custodian”).
[38]See CPT Custodian (2005) 224 CLR 98 at 112 [25]; cf Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592.
Secondly, a partner’s interest depends on whether it is viewed in terms of the partners’ rights vis-à-vis one another (an internal perspective) or their rights against third parties (an external perspective).[39] In Inland Revenue Commissioner v Gray,[40] Hoffmann LJ (Neill and Waite LJJ concurring) said:
[39]R I Banks, Lindley and Banks on Partnership (Thomson Reuters, 19th ed, 2010) at [19-03].
[40][1994] STC 360 at 377.
As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business, and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share.
The following passage from the judgment of Romer LJ in In Re Bourne; Bourne v Bourne is to similar effect: [41]
It is to be borne in mind that the real interest of the partnership in real estate is of a personal character, because wherever the legal estate may be, whether it is in the partners jointly or in one partner or in a stranger it does not matter, the beneficial interest in the real estate belongs to the partnership, with an implied trust for sale for the purpose of realizing the assets and for the purpose of giving to the two partners their interests when the partnership is wound up and an account taken. So that no real distinction can be drawn, it appears to me, between real estate held for partnership purposes and personal estate.
Section 26 of the Victorian Partnership Act 1958 confirms that land that is partnership property shall, unless the contrary intention appears “be treated as between the partners … as personal estate”.
[41][1906] 2 Ch 427 at 432–3.
Thirdly, describing what a partner holds, as an “interest” in the Partnership and its assets, is apt to mislead if the word “interest” is thereby intended to refer to a proprietary stake in those assets, as distinct from a convenient label for what is in fact held. As is demonstrated from the review of the authorities in the reasons which follow, confusion has perhaps arisen from the use, or misuse, of the word “interest”. Thus it has been held that a partnership interest is an equitable chose in action.[42] However, the nature of that interest is such that it can only be exercised by the partners acting as a partnership, and an individual partner does not have a right to deal with any particular partnership asset.[43] In Australia, this principle was, the Appellants contend, recently upheld in Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd,[44] which further clarified the nature of what previous authorities have called the sui generis equitable “interest” held by a partner in all the assets of a partnership.[45]
[42]Re Bainbridge; ex parte Fletcher (1878) 8 Ch D 218.
[43]Watson v Ralph (1982) 148 CLR 646.
[44](2010) 242 CLR 508 (“Cyril Henschke”).
[45]See, for instance, Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321.
I turn now to the authorities which do, in my view, for the reasons which follow, both support these three propositions as advanced by the Appellants, and the Appellants’ case in this proceeding.
Cyril Henschke concerned a partnership which had four partners, each of whom had entered into what was called a retirement deed. One of them, who held a one-sixth interest, retired from the partnership and was paid a sum equal to her share of the partners’ funds of the partnership. The remaining partners, who had held interests of two sixths, two sixths and one sixth, then acknowledged that their interests were now two fifth, two fifths and one fifth.
The issue for the High Court was whether the continuing partners were liable to stamp duty on the basis that the retirement deed was a conveyance on sale, defined as an instrument by which an interest in property, including personal property, was conveyed. “Interest”, for these purposes was defined to include an equitable interest. “Conveyance” was defined to include a vesting of property in another. That question was answered in the affirmative on the basis that the retirement deed effected the dissolution of the partnership and the creation of a new one, and the vesting of “personal property”, being the equitable chose in action held by the retiring partner, in the remaining partners.[46] In reaching this conclusion, the High Court considered the nature of a partnership interest and, as submitted by the Appellants, there are four principal elements in the reasoning.
[46](2010) 242 CLR 508 at 516 [20].
First, the High Court considered the interplay between the law of contract and the doctrines and remedies of equity as explained by Lord Millett in Hurst v Bryk;[47] including the observation that disputes between partners and the dissolution and winding up of partnerships have always fallen within the jurisdiction of the Court of Chancery. His Lordship then elaborated on the consequences of this jurisdictional context and the manner in which the technique and remedies in equity were applied in these circumstances—in the following passage which is set out in Cyril Henschke:[48]
This is because, while partnership is a consensual arrangement based on agreement, it is more than a simple contract (to use the expression of Dixon J in McDonald v Dennys Lascelles Ltd[49]); it is a continuing personal as well as commercial relationship. Neither during the continuance of the relationship nor after its determination has any partner any cause of action at law to recover moneys due to him from his fellow partners. The amount owing to a partner by his fellow partners is recoverable only by the taking of an account in equity after the partnership has been dissolved.[50] Only the Court of Chancery was equipped with the machinery necessary to enable such an account to be taken, and the basis upon which the account was taken reflected equitable principles. These could be modified by agreement, but they did not find their source in contract.
[Emphasis added]
[47][2002] 1 AC 185.
[48](2010) 242 CLR 508 at 516 [22]; the passage set out being from Hurst v Bryk [2002] 1 AC 185 at 194.
[49](1933) 48 CLR 457 at 476.
[50]See Richardson v Bank of England (1838) 4 My & Cr 165 [41 ER 65]; Green v Hertzog [1954] 1 WLR 1309.
The High Court then considered the consequences of the basis of this remedial approach in the equitable jurisdiction:[51]
This foundation for the engagement of equitable doctrines and concomitant remedies has given rise to judicial consideration of the nature of the interest conferred by equity upon each partner with respect to partnership assets as they exist from time to time and in advance of a “general” dissolution under the control of a court of equity. Neuberger LJ[52] recently described as “conceptually somewhat opaque” the concept of a partner’s share in the partnership assets as understood in the earlier English authorities. However, the matter has received attention in a series of decisions in this court.
[51](2010) 242 CLR 508 at 516–7 [23].
[52]Sandhu v Gill [2006] Ch 456 at 462 [18].
Secondly, the High Court surveyed a number of its earlier decisions on this issue which described a partner’s interest as a right against assets on a future dissolution of the partnership. The Court said:[53]
Any such interest with respect to partnership assets was described by Dixon CJ as[54] “a right in respect of assets but ... a right, or a congeries of rights, growing out of the partnership articles”. As Windeyer J indicated in Bolton v Federal Commissioner of Taxation,[55] the right is generally regarded as equitable and is “a fractional interest in a surplus of assets over liabilities on a winding up and in the future profits of the partnership business”. In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd,[56] McTiernan, Menzies and Mason JJ said that the interest of the partner is sui generis.
[53](2010) 242 CLR 508 at 517 [24].
[54]Perpetual Executors & Trustees Association of Australia Ltd v Federal Commissioner of Taxation (Thomas’ Case) [No 2] (1955) 94 CLR 1 at 15.
[55][1965] ALR 481 at 485, 491.
[56](1974) 131 CLR 321 at 328. Cf Hendry v Perpetual Executors and Trustees Association of Australia Ltd (1961) 106 CLR 256 at 265–6; Watson v Ralph (1982) 148 CLR 646 at 650.
Thirdly, and critically, the Court then observed that earlier descriptions of this right as conferring a “beneficial interest” in partnership property, were inaccurate. The Court said:[57]
[57](2010) 242 CLR 508 at 517 [25].
The position here is not sufficiently or accurately expressed merely by use of the term “beneficial interest” any more than when considering the operation of discretionary trusts and unit trusts. The critical point, putting to one side the prospect of future profits, was explained by Kitto J in Livingston v Commissioner of Stamp Duties (Qld).[58] It is that the interest of each partner can be ascertained finally only upon completion of the liquidation and the identification of any surplus share. …
[58](1960) 107 CLR 411 at 453. See also Thomas’ Case [No 2] (1955) 94 CLR 1 at 27–8; Chan v Zacharia (1984) 154 CLR 178 at 192–3.
This critical observation by the High Court emphasises, in my view, the need to both look behind and look to the context and content of terms such as “beneficial interest” or, indeed, “trust” as they are used within the context of the equitable jurisdiction as explained by Lord Millett in Hurst v Bryk[59] in the passage set out previously. Having regard to the nature of the equitable jurisdiction and the technique of equity, they are convenient “labels” as indicative of the nature of remedies which may be called upon in the equitable jurisdiction, as the following passages in the Privy Council advice and the judgment of Kitto J in the High Court in Livingston indicate. Thus, Viscount Radcliffe, in delivering the advice of the Privy Council, said:[60]
[59][2002] 1 AC 185 at 194.
[60](1964) 112 CLR 12 at 17–8.
When Mrs Coulson died she had the interest of a residuary legatee in his testator’s unadministered estate. The nature of that interest has been conclusively defined by decisions of long established authority, and its definition no doubt depends upon the peculiar status which the law accorded to an executor for the purposes of carrying out his duties of administration. There were special rules which long prevailed about the devolution of freehold land and its liability for the debts of a deceased, but subject to the working of these rules whatever property came to the executor virtute officii came to him in full ownership, without distinction between legal and equitable interests. The whole property was his. He held it for the purpose of carrying out the functions and duties of administration, not for his own benefit; and these duties would be enforced upon him by the Court of Chancery, if application had to be made for that purpose by a creditor or beneficiary interested in the estate. Certainly, therefore, he was in a fiduciary position with regard to the assets that came to him in the right of his office, and for certain purposes and in some aspects he was treated by the Court as a trustee. “An executor”, said Kay J in In Re Marsden,[61] “is personally liable in equity for all breaches of the ordinary trusts which in Courts of Equity are considered to arise from his office.” He is a trustee “in this sense”.
It may not be possible to state exhaustively what those trusts are at any one moment. Essentially, they are trusts to preserve the assets, to deal properly with them, and to apply them in a due course of administration for the benefit of those interested according to that course, creditors, the death duty authorities, legatees of various sorts, and the residuary beneficiaries. They might just as well have been termed “duties in respect of the assets” as trusts. What equity did not do was to recognize or create for residuary legatees a beneficial interest in the assets in the executor’s hands during the course of administration. Conceivably, this could have been done, in the sense that the assets, whatever they might be from time to time, could have been treated as a present, though fluctuating, trust fund held for the benefit of all those interested in the estate according to the measure of their respective interests. But it never was done. It would have been a clumsy and unsatisfactory device, from a practical point of view; and indeed it would have been in plain conflict with the basic conception of equity that to impose the fetters of a trust upon property, with the resulting creation of equitable interests in that property, there had to be specific subjects identifiable as the trust fund. An unadministered estate was incapable of satisfying this requirement. The assets as a whole were in the hands of the executor, his property; and until administration was complete no one was in a position to say what items of property would need to be realized for the purposes of that administration or of what the residue, when ascertained, would consist or what its value would be. Even in modern economies, when the ready marketability of many forms of property can almost be assumed, valuation and realization are very far from being interchangeable terms.
And in the High Court, Kitto J said:[62]
An analogy may be seen also in the case of a partner’s interest in the 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: In re Holland; Brettell v Holland;[63] Manley v Sartori;[64] In re Fuller’s Contract;[65] 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: In re Ritson, Ritson v Ritson;[66] Bakewell v Deputy Federal Commissioner of Taxation;[67] 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”: Rodriguez v Speyer Brothers.[68]
The Commissioner places reliance on this passage from the judgment of Kitto J in support of his position together with its citations more recently.[69] However, for the reasons which follow, I am of the opinion that in light of further consideration of the issue by the High Court, this statement by Kitto J cannot be taken as going further than that the meaning of “beneficial interest” in this context is the entitlement to any surplus share in the partnership property after its liquidation. Though, in general terms of course, all of the partnership property is the subject of any such liquidation and in the more general sense in which the equitable jurisdiction bases remedies—particularly as indicated in the Privy Council advice in Livingston, which is set out above—each and every partner has an interest in the whole of the partnership property for the purpose of its realisation on liquidation. In any event, Kitto J had already introduced the discussion with the observation: “[b]ut the existence of a beneficial interest is one thing, and the nature of it is another”.[70]
[61](1884) 26 Ch D 783 at 789.
[62](1960) 107 CLR 411 at 453.
[63][1907] 2 Ch 88 at 91.
[64][1927] 1 Ch 157 at 163, 164.
[65][1933] Ch 652 at 656.
[66][1898] 1 Ch 667.
[67](1937) 58 CLR 743 at 770.
[68][1919] AC 59 at 68.
[69]Commissioner’s Outline of Submissions (3 March 2017) [27].
[70](1960) 107 CLR 411 at 450.
Fourthly, the Court in Cyril Henschke endorsed as “the established doctrine of the Court”[71] the analysis of Mason J (with whom Barwick CJ, Gibbs and Wilson JJ agreed) of a partner’s interest in United Builders Pty Ltd v Mutual Acceptance Ltd[72] as follows:[73]
[A]ccording to long established principle, a mortgage or charge over a partner’s share or interest in the partnership does not vest any interest in the assets of the partnership against the other partners. What the mortgage or charge does is to confer an entitlement on the holder on dissolution of the partnership in relation to the partner's share of the partnership assets. ...
The vital consideration is that the partner’s interest is in truth a chose in action, which, as [Federal Commissioner of Taxation v 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.
... 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.
[71](2010) 242 CLR 508 at 518 [28].
[72](1980) 144 CLR 673 (“United Builders”).
[73](2010) 242 CLR 508 at 518 [27]; being a passage from the judgment of Mason J in United Builders (1980) 144 CLR 673 at 687–8.
Significantly, this passage from the judgment of Mason J in United Builders—expressed to be “established doctrine”—excludes the following sentences from Mason J’s reasoning, which appear in the reported judgment of United Builders in the paragraph immediately following the first part of the quote repeated in Cyril Henschke as set out above:[74]
This principle does not in my opinion deny the existence of a partner’s beneficial interest in each of the partnership assets, but this interest is of a special and non-specific kind (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd;[75] Federal Commissioner of Taxation v Everett).[76] In Helmore v Smith,[77] it was recognized that a sheriff under a writ of fi. fa. could sell a partner’s chattel interest in the partnership. But, as Lindley LJ pointed out, the purchaser “has to find out what he has really had assigned to him, and that he can only do by a partnership account”.[78] This in itself will virtually ensure a dissolution of the partnership. It is significant that The Partnership Act now provides that a writ of execution shall not issue against any partnership property except on a judgment against the firm (s 26(1)) and that the court may by order charge a partner’s interest and his share of profits with payment of a judgment debt and by subsequent order appoint a receiver of that partner’s share of profits and of any other money which may be coming to him from the partnership (s 26(2)). What is more, a partnership may at the option of the other partners be dissolved if any partner suffers his share of the partnership property to be charged under the Act for his separate debt (s 36(2)).
[74]See United Builders (1980) 144 CLR 673 at 687.
[75](1974) 131 CLR 321 at 327–8.
[76](1980) 143 CLR 440 at 446–7.
[77](1887) 35 Ch D 436.
[78](1887) 35 Ch D 436 at 447–8.
The Appellants contend that, inferentially, the exclusion of this passage from the quoted passage from the judgment of Mason J in United Builders in Cyril Henschke is plain as indicating that this excluded passage is not considered by the Court as part of the “established doctrine”. This, it is suggested, is because of the Court’s earlier observations concerning the use of the term “beneficial interest” in this context.[79] In my view, the “excluded passage” is entirely consistent with the previously stated warning in Cyril Henschke with respect to uncritical or unconsidered use of the general expression, “beneficial interest” to which the Appellants refer. Indeed, I am of the view that Mason J also makes this position clear in the “excluded passage” and that his Honour’s statement supports the view I have expressed with respect to the effect of the statement by Kitto J in Livingston in light of further and later consideration of the issue by the High Court.[80]
[79]See (2010) 242 CLR 508 at 517 [25]; set out above, [56].
[80]See above, [56].
Thus, it follows on the basis of the authorities considered thus far that the interest held by a partner is a chose in action entitling the partner to a proportion of the surplus after the realisation of assets and the payment of debts and liabilities. It is a species of personal property and confers no equitable proprietary interest in partnership assets.
The Appellants then ask, almost rhetorically, how this conclusion is to be reconciled with the High Court’s earlier statement in Canny GabrielCastle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd[81] that a partner has a beneficial interest in every asset of the partnership, usually also described as sui generis[82] and of “peculiar character”.[83] Before turning to the Appellants’ submissions in this respect, it is important to view these statements of the High Court in full and in context. The critical part of the judgment in this respect is as follows:[84]
[81](1974) 131 CLR 321 (“Canny Gabriel”).
[82](1974) 131 CLR 321 at 328.
[83](1974) 131 CLR 321 at 327.
[84](1974) 131 CLR 321 at 327–8.
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 (NSW), s 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership.
In Re Fuller’s Contract,[85] Luxmore J (as he then was) said:
“… as between the partners, the partnership property must be dealt with in a particular way, but so far as all the rest of the world is concerned, there is no limitation on the interests of the partners; the partners have the beneficial interest in the partnership assets, which are held together as an undivided whole, but they respectively have undivided interests in them.”
It is significant that s 20(ii) of the Partnership Act, 1892, as amended (NSW) treats a partner as having a beneficial interest in real estate belonging to the partnership, for in this respect no distinction can be drawn between the nature of a partner's interest in real estate and his interest in personal estate.
The appellant submitted that the nature of a partner’s interest was analogous to that of a residuary legatee in an unadministered estate. There is some similarity between the two cases in that the residuary legatee and the partner each have the right to insist upon due administration, the former of the estate and the latter of the partnership assets and liabilities, and the precise entitlement of each must await the due course of administration. Nevertheless we think that the interest of the partner in an asset of the partnership is sui generis (cf Livingston v Commissioner of Stamp Duties (Qld)).[86] It is, as we have said, recognized as a beneficial interest.
As such it constitutes an equitable interest and is not a mere equity to set aside or rectify a transaction by means of a court order (see Latec Investments Ltd v Hotel Terrigal Pty Ltd).[87] Consequently it prevails over the subsequent equitable charge held by Canny Gabriel, despite that company’s ignorance of the prior equitable interest at the time when the equitable charge was granted.
[85][1933] Ch 652 at 656.
[86](1960) 107 CLR 411 at 453–4.
[87](1965) 113 CLR 265.
In relation to the question they pose with respect to Canny Gabriel, the Appellants submit:[88]
[88]Appellants’ Outline of Submissions (17 February 2017) [44].
·First, the exact nature of this so-called “interest” has always remained unclear. And being peculiar and sui generis, it may never have been intended to have constituted a proprietary interest in partnership assets.
·Secondly, if use of the word “interest” was intended to connote a proprietary interest in partnership assets, following Cyril Henschke it is no longer “the established doctrine of the Court”.
·Thirdly, it may be that use of the word “interest” is explicable because of the internal and external perspectives referred to previously.[89] As against the world, partners acting together in partnership have an interest in the property of a partnership that can be asserted against third parties. However, as against each other, partners have only an interest in a proportion of the partnership assets after they have been realised and converted into money.
·Fourthly, the reference to “beneficial interest” may also arise from an ambiguity of language. In Official Receiver in Bankruptcy v Schultz,[90] the High Court described a legatee’s interest in an unadministered estate as including “an interest in the entire estate” but left for later decision whether this conferred “a specific proprietary interest”. The learned authors of Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies commentated on this use of the word “interest” as follows:[91]
In light of the analysis in Livingston’s case, it can be seen that the term ‘interest’ is used in several senses. Where first used it appears to mean that a beneficiary has an interest in the sense of a concern to see the proper administration of the estate occur. That ‘interest’ is something less than a proprietary right or set of proprietary rights. In the rest of the passage, ‘interest’ evidently means a proprietary right. But in the rest of the passage, as in the decisions analysed by Viscount Radcliffe in Livingston’s case, more than one variety of equitable property goes by the name ‘interest’. The word ‘interest’, like the word ‘property’, is a word of many potential meanings.
·This is the basis for how the learned authors were able to explain in the 4th edition the use of the word “interest” in Canny Gabriel. It will be recalled that in that case the High Court refused to equate the interest in a partnership with a legatee’s interest in an unadministered estate, as the former involved a beneficial interest in all partnership assets. The learned authors then wrote the following:[92]
While the result may be correct, this decision is sadly illustrative of the word play which in this area passes for analysis. For it assumes as necessary to reach the court’s conclusion that (a) the legatee does not have “a beneficial interest”; (b) the partner does so; (c) “beneficial interest” is a term of fixed import rather than infinite variety; and (d) in particular, because he lacked such an interest a legatee would not retain in a competition with an equitable chargee the priority given the partner. This last step has not, in fact, been yet taken in any case after Livingston’s case dealing specifically with a legatee.
A similar passage appears in the 5th edition at [4-065].
[89]See above, [49].
[90](1990) 170 CLR 306 at 313–4.
[91]J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis, 5th ed, 2015) [4-060].
[92]R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis, 4th ed, 2002) [4-040].
Thus, the Appellants contend that, consistently with this analysis, the High Court in Cyril Henschke endorsed the result in Canny Gabriel, but not the reasoning which led to it. [93] The same observation has been made by the learned authors of Meagher Gummow and Lehane’s Equity: Doctrines and Remedies who now note of the ambiguities associated with the words “beneficial interest” that “[t]he High Court in… [Cyril Henschke] was careful to explain the Canny Gabriel decision in narrow terms which avoid these difficulties”.[94]
[93]Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508 at 517–8 [26].
[94]J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis, 5th ed, 2015) [4-065].
It is also true that a number of State courts since Cyril Henschke have continued to maintain that a partner enjoys a beneficial interest in all partnership assets. Examples include Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd[95] and Sze Tu v Lowe.[96] But it does not appear that the foregoing analysis of Cyril Henschke was before either court; nor was either Court required to confront squarely the issue raised in this proceeding.
[95](2012) 45 WAR 29 (“Hancock Prospecting”).
[96](2014) 89 NSWLR 317.
Confining a partner’s interest to an equitable chose in action is also consistent with the High Court’s decision in CPT Custodian. In that case, the question was whether a taxpayer was “the owner of any equitable estate or interest in land” for the purposes of the Victorian Land Tax Act 1958. “Owner” was defined as meaning, among other things, “every person entitled to any land for any estate of freehold in possession”. The taxpayer held units in a trust. The relevant trust deed provided for the beneficial interest in the fund of the trust to be divided into units, with each unit conferring an equal interest in all property held by the trust from time to time. However, as the Court recorded, “no unit conferred ‘any interest in any particular part of the Trust Fund or any investment’ and each unit had ‘only such interest in the Trust Fund as a whole as [was] conferred on a Unit under the provisions contained in [the Deed]’”.[97] Unit holders were entitled to periodic distribution of income.[98]
[97](2005) 224 CLR 98 at 111 [20].
[98](2005) 224 CLR 98 at 111 [21].
The Court held that the taxpayer was not the owner of an equitable estate or interest in land. It began by rejecting the proposition that, where property is held on trust, someone other than the trustee must necessarily be the owner of an equitable estate.[99] In circumstances where the trust deed provided only that unit holders would have an entitlement to whatever income may be derived from the property of the trust, the rights of unit holders to the property of the trust were something less than ownership.[100] Further, given the trustee’s rights of reimbursement and exoneration, it was not possible to say what was the trust fund in question.[101]
[99](2005) 224 CLR 98 at 112 [25].
[100](2005) 224 CLR 98 at 112 [37].
[101](2005) 224 CLR 98 at 121 [51].
Thus, the Appellants contend that two relevant propositions emerge from CPT Custodian. First, a person who has rights generally in respect of property that is held for their benefit by another person, does not necessarily have an interest in that property itself; and secondly, where the right is in respect of a proportional share of the property of another, in circumstances where the amount and value of that property will not be determined until some later time, the right is less than an interest in that property. It does not follow from the second proposition, as the Commissioner contended on a more general basis, that the process of determining the amount or value of some later terms is indicative of the position that an interest—a beneficial interest—is as an existing interest which is merely being quantified and valued at a later time.[102]
[102]See Transcript, 37.
The Commissioner responds to the Appellants’ submissions emphasising a long line of authority prior to the High Court decision in Canny Gabriel. It is to the authorities relied upon by the Commissioner in this line and his submissions as to their significance to which I now turn. It is, however, my view, for the reasons indicated, that neither the authorities relied upon nor the Commissioner’s submissions in relation to their significance detract from the Appellants’ analysis and submissions and the views that I have already expressed.
The Commissioner begins with Sharp v Union Trustee Company of Australia Ltd,[103] where Rich J (in dissent on the result concerning the character of an option granted in a will) said:[104]
Business partners own between them the whole of the partnership assets, and each partner has a proprietary interest in each and every item. But his interest is not a fixed proportion of each item, nor is it an immediately ascertainable quantity of the item. It is an indefinite and fluctuating interest, which at any given moment is in proportion to his share in the ultimate surplus coming to him if at that moment the partnership were wound up and its accounts taken.
[citations omitted]
Rich J was not in dissent on this proposition; and the Commissioner submits that no other member of the Court reached a contrary or inconsistent conclusion as to the character of a partner’s interest. Some eleven years or so later, in Perpetual Executors & Trustees Association of Australia Ltd v Federal Commissioner of Taxation [No 2] (Thomas’ Case), Kitto J said of Rich J’s statement that it “accurately states all that need be said on this point”.[105]This passage from Rich J’s reasons was later cited in argument in Cyril Henschke,[106] in Hancock Prospecting[107] and in Sze Tu v Lowe.[108]
[103](1944) 69 CLR 539.
[104](1944) 69 CLR 539 at 551.
[105](1955) 94 CLR 1 at 28.
[106]Cyril Henschke Pty Ltd (2010) 242 CLR 508 at 510.
[107]Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29 at 45–6 [42].
[108]Sze Tu v Lowe (2014) 89 NSWLR 317 at 341 [121]–[122].
The next case referred to by the Commissioner is Livingston v Commissioner of Stamp Duties (Qld),[109] and the statement of Kitto J which has already been set out.[110] This passage from Kitto J’s reasons was later cited in Watson v Ralph,[111] Hancock Prospecting[112] and Sze Tu v Lowe.[113]
[109](1960) 107 CLR 411.
[110](1960) 107 CLR 411 at 453; and see above, [57].
[111]Watson v Ralph (1982) 148 CLR 646 at 650.
[112]Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29 at 45–6 [42].
[113]Sze Tu v Lowe (2014) 89 NSWLR 317 at 341 [121]–[122].
Next, the Commissioner refers to Canny Gabriel, where the High Court (McTiernan, Mason and Menzies JJ) said:[114]
[114](1974) 131 CLR 321 at 327.
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 realisation 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.
[Emphasis added]
The Court also stated that, as a beneficial interest, it constitutes an equitable interest. It must not be forgotten, however, that this characterisation was in the circumstances of this case directed to resolving an equitable priorities issue where characterisation as an “equitable interest”, rather than a “mere equity”, was critically significant. This is made clear in the following passage in the joint judgment (a passage which is repeated here for context and emphasis):[115]
As such it constitutes an equitable interest and is not a mere equity to set aside or rectify a transaction by means of a court order (see Latec Investments Ltd v Hotel Terrigal Pty Ltd).[116] Consequently it prevails over the subsequent equitable charge held by Canny Gabriel, despite that company's ignorance of the prior equitable interest at the time when the equitable charge was granted.
Consequently, having characterised the interest as an “equitable interest” rather than a ”mere equity”, the priorities issue was resolved and it was not necessary to explore further the nature and content of that “equitable interest”.
[115](1974) 131 CLR 321 at 328; and see above, [62].
[116](1965) 113 CLR 265.
The Commissioner also makes reference to three other High Court decisions.
First, in Federal Commissioner of Taxation v Everett,[117] Barwick CJ, Stephen, Mason and Wilson JJ said:[118]
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.
Barwick CJ, Stephen, Mason and Wilson JJ cited the earlier decisions in Canny Gabriel and Livingston for this proposition. Secondly, in the same year as Everett, the High Court decided United Builders. The Commissioner makes specific reference to the judgment of Mason J, setting out the first paragraph of the extract of his Honour’s judgment set out above.[119] Mason J cited Canny Gabriel and Everett as authority for the “beneficial interest” proposition. Moreover, as discussed previously, this statement by Mason J must now be viewed in light of its treatment by the High Court in Cyril Henschke.[120]
[117](1980) 143 CLR 440 (“Everett”).
[118](1980) 143 CLR 440 at 446.
[119](1980) 144 CLR 673 at 687; set out above, [58].
[120]See above, [58]–[61].
Third, in Watson v Ralph,[121] at the time of death of a testatrix, she and her husband were registered as joint proprietors of land; and the land was an asset of a business which they had conducted in partnership. Gibbs CJ found that, notwithstanding that the property was partnership property at the time of her death, the testatrix “had an equitable interest in every asset of the partnership, including the land.”[122] Livingston, Canny Gabriel and Everett were cited by Gibbs CJ as authority. Again, for the preceding reasons, this reference to an “equitable interest” was in the broad, non-specific, sense.
[121](1982) 148 CLR 646.
[122](1982) 148 CLR 646 at 650.
The Commissioner then makes reference to a number of decisions in the State courts. First, reference is made to Connell v Bond Corporation Pty Ltd,[123] when Malcolm CJ, after a detailed review of the authorities, concluded that a partner’s interest was capable of supporting a caveat and said that “[t]he beneficial interest or equitable interest of a partner in each and every asset of a partnership is in the nature of a proprietary interest.”[124] This position was, however, reached on the basis of the High Court decision in Canny Gabriel[125] rather than later authority, particularly Cyril Henschke. In any event, Malcom CJ did refer to and set out at some length Lindley’s assessment of the nature of a partner’s interest in a continuing partnership; a statement of the law which is, in my opinion, entirely consistent with the decision in Cyril Henschke. Thus, Malcolm CJ said:[126]
[123]Connell v Bond Corporation Pty Ltd (1992) 8 WAR 352.
[124](1992) 8 WAR 352 at 373.
[125]Particularly with reference to Canny Gabriel (1974) 131 CLR at 327–8; referred to at (1992) 8 WAR 363–4.
[126](1992) 8 WAR 352 at 364.
In the case of a continuing partner in an ongoing partnership, Lindley on Partnership (15th ed, 1984), p 517 answers the question, “What is meant by the share of a partner?” as follows:
In this case, where the question does not arise in connection with the departure of a partner or a dissolution, the share may comprise a legal title (in common with one or more other partners) to all or some items of the partnership property and will comprise a beneficial interest in respect of the partnership property.
The expression “beneficial interest in respect of partnership property” has been used advisedly since the precise nature of the beneficial interest depends to some extent on the partnership agreement; but two characteristics are constant. First, in the situation being supposed (ie during the continuance of the partnership) the beneficial interest, considered as a several interest, is in the nature of a future interest taking effect in possession on (and not before) the determination of the partnership (whether by a change in the membership thereof or by general dissolution). The reason is that during the continuance of the partnership, each partner is entitled to require the partnership property to be applied for the purposes of the partnership and no partner is entitled to the several enjoyment of his share. Secondly, when, on the determination of the partnership the several beneficial interest falls into possession, it takes effect subject to the right of the other partners to have the property of the partnership applied in payment of the debts and liabilities of the firm and otherwise in accordance with the provisions of sections 39 and 44 of the Partnership Act 1890. In the absence of agreement to the contrary, this will mean that the share of a partner will take the form of his proportionate share in the net proceeds of the sale of the partnership property after all such payments have been met, although it is possible for the partnership agreement to provide in advance for the ultimate distribution of the partnership assets (after all debts and liabilities have been provided for) to be made in specie among the partners.
[emphasis in original]
Malcolm CJ then made reference to the effect of the decision of the High Court in Canny Gabriel. However, the position articulated by the Chief Justice has, as discussed, been overtaken by the High Court decision in Cyril Henschke.
Secondly, reference is made to Hancock Prospecting,[127] where the Western Australian Supreme Court considered the nature of a partner’s interest in partnership property at some length and said:[128]
[127]Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd (2012) 45 WAR 29 at 45 [42].
[128](2012) 45 WAR 29 at 45 [42].
Partners are not entitled in their individual capacity to exercise proprietary rights over any partnership asset. As a consequence, the interest of a partner in an asset of the partnership is characterised as equitable, sui generis and of a non-specific kind. Each partner has an undivided interest in the whole of the assets of the partnership.
[citations omitted]
The High Court refused an application for special leave to appeal this decision.[129] Thirdly, reference is made to Sze Tu v Lowe,[130] where the New South Wales Court of Appeal addressed the characterisation of partnership property at length and commenced the analysis with the decision in Cyril Henschke.[131] The Court of Appeal referred to the analysis in Hancock Prospecting (with evident agreement) and continued:[132]
In the eyes of equity, therefore, a partner has an undivided interest in the whole of the partnership property.
The High Court also refused an application for special leave to appeal this decision.[133]
[129]Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2013] HCA Trans 222 (12 September 2013).
[130](2014) 89 NSWLR 317.
[131](2014) 89 NSWLR 317 at 340–2 [119]–[127].
[132](2014) 89 NSWLR 317 at 341 [122].
[133]Lowe v Sze Tu [2015] HCA Trans 179 (7 August 2015).
Concluding his submissions with respect to these authorities, the Commissioner submits that there is, therefore, clear, repeated and long-standing authority that a partner has a sui generis equitable interest in each of the assets of the partnership. Many such authorities have been referred to, he says: seven in the High Court, and two further appellate Courts where special leave was refused. I am, however, unable to accept this submission. In my view, the authorities to which the Commissioner refers and the manner in which he relies upon them only serve to emphasise and confirm the views I have already expressed in the preceding reasons in relation to both the non-specific and unique kind of “beneficial interest” a partner enjoys in the partnership property and one which cannot be properly characterised in the context of the present proceedings as anything like a relevant vested proprietary interest. The cases confirm, in my view, that the interest is, when analysed beyond its general description as a “beneficial interest”, an equitable chose in action, an expectancy only. Moreover, this position is emphasised in the very passages of the judgment of Gleeson JA in Sze Tu v Lowe, which include those upon which the Commissioner relies in his submissions:[134]
[134](2014) 89 NSWLR 317 at 340–1 [117]–[122].
117.This contention is not based on any submission as to constructive trust or resulting trust. Rather, it is said that, once particular property is characterised as “partnership property“ for the purposes of the partnership legislation, it is, for that reason alone, held upon trust and is trust property accordingly. The contention is derived from statements in decided cases to the effect that partnership property, the legal title to which is held by one partner, is impressed with a trust for the partnership. One such statement is found in the joint judgment of Kitto, Taylor, Menzies, Windeyer and Owen JJ in Carter Bros v Renouf (1962) 111 CLR 140. The court referred at 163 to the question of whether property acquired in the name of one only of the partners “was acquired as partnership property, and therefore upon trust for the partnership“, so that “the purchasing partner is a trustee of the property for the firm“.
118.Statements such as this imply that characterisation of particular property as partnership property has the consequence that it is trust property and that all partnership property must therefore be regarded as held upon trust.
119.The first step in assessing that proposition is to consider the nature of a partner’s interest in partnership property. That matter was examined by the High Court in Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd [2010] HCA 43; 242 CLR 508. French CJ, Gummow, Hayne, Heydon and Kiefel JJ referred at [23] to an observation of Neuberger LJ (in Sandhu v Gill [2006] Ch 456 at 462) that the concept of a partner’s share in the partnership assets, as understood in earlier English authorities, was “conceptually somewhat opaque“. The members of the High Court pointed out, however, that the matter had received attention in a series of decisions of the High Court itself. Reference was made to Dixon CJ’s description (in Perpetual Executors & Trustees Association of Australia Ltd v Federal Commissioner of Taxation [No 2](Thomas’ Case) (1955) 94 CLR 1 at 15) of a partner’s interest in partnership property as “a right in respect of assets but … a right, or a congeries of rights, growing out of the partnership articles“.
120.Their Honours also referred to Windeyer J’s statement in Bolton v Federal Commissioner of Taxation [1965] ALR 481 at 491 that an individual partner’s right is generally regarded as equitable and is “a fractional interest in a surplus of assets over liabilities on a winding up and in the future profits of the partnership business“; and to the observation of McTiernan, Menzies and Mason JJ in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 328 that the interest of the partner is sui generis. The joint judgment continued:
[25] The position here is not sufficiently or accurately expressed merely by use of the term ‘beneficial interest’ any more than when considering the operation of discretionary trusts and unit trusts. The critical point, putting to one side the prospect of future profits, was explained by Kitto J in Livingston v Commissioner of Stamp Duties (Qld) [(1960) 107 CLR 411 at 453]. It is that the interest of each partner can be ascertained finally only upon completion of the liquidation and the identification of any surplus share. That reasoning is reflected in the terms of s 39 of the Partnership Act, and exemplifies a proposition expressed by Viscount Radcliffe upon the further appeal in [Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12 at 22; [1965] AC 694 at 712]. His Lordship said:
Equity in fact calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines.
[citations omitted]
121.The position was summarised by McLure P (with the concurrence of Newnes JA and Le Miere J) in Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216; 45 WAR 29 at [42]:
“[42] Partners are not entitled in their individual capacity to exercise proprietary rights over any partnership asset: Re Fuller’s Contract [1933] Ch 652 at 656; Gray v Inland Revenue Commissioners [1994] STC 360 at 377. As a consequence, the interest of a partner in an asset of the partnership is characterised as equitable, sui generis and of a non-specific kind: Canny Gabriel [Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321] (at 328). Each partner has an undivided interest in the whole of the assets of the partnership. The interest of a partner in partnership assets is not a fixed proportion of each item nor is it an immediately ascertainable quantity of the item; it is an indefinite and fluctuating interest: Sharp v Union Trustee Co of Australia Ltd (1944) 69 CLR 539 at 551; Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 at 453; Canny Gabriel (at 328).
122.In the eyes of equity, therefore, a partner has an undivided interest in the whole of the partnership property. This interest is non-specific and of a unique kind. It is the concomitant of the right of the partner to see the property applied only as partnership property may lawfully be applied and, on dissolution, to see any surplus remaining after payment of the firm’s debts distributed to the partners according to their respective shares in the partnership.
The Commissioner then turns to the Appellants’ contentions with respect to Cyril Henschke and their submission that:[135]
… the interest held by a partner is a chose in action entitling the partner to a proportion of the surplus after the realisation of assets and the payment of debts and liabilities. It is a species of personal property and confers no equitable proprietary interest in partnership assets.
[135]Appellants’ Outline of Submissions (17 February 2017) [43].
The Commissioner disagrees and submits, initially and generally, that the High Court’s statements in Cyril Henschke about the interest being a chose in action and a species of personal property were made for the purpose of resolving the case before it, which concerned particular wording in a South Australian taxing statute; and for that reason, it cannot be said that the Court either intended to, or did, exhaustively state the nature and extent of a partner’s interest in partnership property. No issue was raised in the case about whether the interest was a sui generis equitable interest in each asset of the partnership.
In support of his contentions with respect to Cyril Henschke, the Commissioner draws attention to the factual and legislative context of that case—one involving four partners who carried on a business of wine making. In December 2004, the partners executed a Deed of Retirement pursuant to which one partner retired from the partnership. The Deed provided that the other three partners were to continue the partnership under the Partnership Agreement. The taxation question was whether that instrument comprised a “conveyance on sale” within South Australian stamp duties legislation. A “conveyance” included an instrument by which any personal property or any estate or interest in such property is vested in any person. “Interest” was defined to include an inchoate equitable interest. The High Court concluded that the retirement deed was a conveyance within the meaning of s 60 of the South Australian Act. The Commissioner submits that in order to reach that conclusion, it was sufficient for the High Court to hold that the deed vested in the members of the new partnership the equitable choses in action representing their interests in the partnership and that it was not there in issue that an equitable chose in action was an inchoate equitable interest. The Court did not, the Commissioner says, need to consider any other question, including as to the nature of a partner’s interest in the trust property and there is nothing in the Court’s reasons that suggests it was intending to be exhaustive in its description of the nature of a partner’s interest.[136]
[136]Cf Appellants’ Outline of Submissions (17 February 2017) [37].
Moreover, the Commissioner contends that there is nothing in the High Court’s treatment of the authorities that suggests that it overruled, contradicted or qualified the seven earlier High Court authorities.[137]
(a)The proposition that a partner has a sui generis equitable interest in each asset of the partnership was not at issue in the case; and was not addressed in the Court’s reasons.
(b)Each of Livingston, Canny Gabriel, Everett, United Builders and Watson v Ralph is referred to in the Court’s reasons and nowhere does the Court doubt, contradict, overrule or qualify anything said in, or decided by, those cases.
(c)When the Court dealt with the United Builders Case, it was sufficient for the Court, in the context of the issue in Cyril Henschke, to affirm that the partner’s interest is a chose in action, without addressing any other point about the nature of a partner’s interest.
(d)When the Court said that “[t]he position here is not sufficiently or accurately expressed merely by use of the term ‘beneficial interest’…”[138] the Court was drawing attention to the fact that it was necessary to identify the particular interest that brought the matter within the taxing provision. The Court was not saying, as the appellants contend, that “earlier descriptions of this right as conferring a ‘beneficial interest’ in partnership property, were inaccurate”.[139]
[137]Cf Appellants’ Outline of Submissions (17 February 2017) [41]–[42].
[138]Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508 at 517 [25].
[139]Cf Appellants’ Outline of Submissions (17 February 2017) [40(c)].
Thus, concluding, the Commissioner submits that there is no decision that holds that the proposition that a partner has a sui generis equitable interest in each asset of the partnership is wrong. Conversely, he says, that proposition finds clear expression in ten cases of high authority, referred to above.
I do not, however, accept the Commissioner’s submissions with respect to Cyril Henschke. As the Appellants contend, the Commissioner seeks to understate the effect of Cyril Henschke. He does, in my view, seek to avoid the High Court’s statement that the nature of a partner’s interest in the property of a partnership “is not sufficiently or accurately expressed merely by use of the term ‘beneficial interest’”.[140] The Commissioner says of Cyril Henschke that the High Court did not need to consider the nature of a partner’s interest in trust property. This is not correct, in my view, particularly having regard to the argument by the South Australian Solicitor-General that a partner has a beneficial interest in each asset of the partnership and that this interest is proprietary in nature.[141] This was the Solicitor-General’s first argument. Had it succeeded, it would not have been necessary to turn to the second argument, that a personal interest was vested. It was therefore a necessary part of the Court’s reasoning to hold that the interests of the partners were not accurately described as beneficial interests. In any event, this position is made clear in those parts of the judgment of the Court in Cyril Henschke to which I have referred in the preceding reasons.
[140](2010) 242 CLR 508 at 517 [25].
[141](2010) 242 CLR 508 at 510.
Additionally, the High Court concluded that what vested in the members of the second partnership was “personal property”.[142] In order to reach this conclusion, it was necessary to hold that it was not an equitable interest. Thus the Court’s statement as to the nature of the interest or interests contemplated in the term “beneficial interest” is a necessary part of its reasoning and is not merely obiter dictum.[143] That statement was also necessary because the trial judge had found that the retirement deed effected a transaction that resulted in a change in the ownership of an equitable interest in a partnership, for the purposes of s 71E of the Stamp Duties Act 1923 (SA).[144] On the view taken by the High Court, that conclusion was wrong and it was necessary for it to say so. Moreover, even if what was said in Cyril Henschke was merely dicta, it was recent considered dicta of a unanimous High Court, the ultimate Australian appellate court, and cannot be put aside.[145]
[142](2010) 242 CLR 508 at 516 [20].
[143](2010) 242 CLR 508 at 517 [25]; and see above, [57] where that paragraph of the judgment is set out.
[144]See Cyril Henschke Pty Ltd v Commissioner of State Taxation (2008) 104 SASR 1, 20–1 [71]–[74].
[145]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89.
By way of more general conclusions with respect to the Commissioner’s submissions, I would simply observe that they do not have regard to the thread, quite discernible in my view, running through the authorities that the description of a partner’s interest in the partnership property as a “beneficial interest” is merely a general descriptor flowing from the relatively limited vocabulary of the equitable jurisdiction and not a descriptor that informs, in itself, as to the actual nature of such an interest. As the cases show, in my opinion, it is necessary to go behind this generality, this general descriptor, in order to be able to characterise the interest. For the preceding reasons, I am of the view that the result of this going behind is the characterisation of a partner’s interest as an equitable chose in action of a kind contended for by the Appellants.[146] More specifically, for the preceding reasons, I accept the following submissions by the Appellants as a summary of the position in the nature of a partner’s interest in the partnership property on the present state of the authorities:[147]
[146]And see above, [78].
[147]Transcript, 28–9.
The first proposition, and I think this is uncontroversial between us, is that a partner enjoys a right to surplus, if any, upon dissolution of the partnership and a right to participate in annual profits depending on the terms of that partnership.
Secondly, it’s now well established that that right is an equitable chose in action and until the dissolution there is no need in the meantime for equity to carve out a present proprietary interest.
Thirdly, the interest of the partner comprising this chose in action does not have a presently existing interest because, as mentioned before, the assets and liabilities are in flux, they cannot be identified with sufficient particularity. A partner may only thus individually charge or pledge that chose in action and no more.
Fourthly, the interest is analogous to that of a legatee is an unadministered estate and is also analogous to a unitholder of a unit trust of the kind considered in CPT.
Fifthly, by reason of these principles, the manager here enjoyed full legal ownership of the land and equitable or beneficial ownership was not located elsewhere. The manager is like the trustee in CPT.
Sixthly, because the Duties Act does not include an interest in partnership as dutiable property, and because the partners here did not enjoy a beneficial interest in the land, the assessments issued to Danvest and Bullhusq are necessarily excessive.
Seventhly, upon the sale of what were called partnership interests to appellants, as mentioned before, the old partnership came to an end and the new one sprung up and there was by reason of that no transfer of any asset at all.
Eighthly, even if I am wrong and there is some form of peculiar hybrid sui generis interest, it is not sufficiently proprietary, if I can put it like that, for it to be an interest for the purpose of subparagraph [10(1)](ac).
Present position
In CPT Custodian, the High Court said that there were two tasks to be undertaken with respect to the process of statutory construction:[148]
The first step was to ascertain the terms of the trusts upon which the relevant lands were held. The second was to construe the statutory definition to ascertain whether the rights of the taxpayers under those trusts fell within that definition.
The same steps should be undertaken in the present case, save that the references to trusts become references to partnership interests.
[148](2005) 224 CLR 98 at 109 [14].
What, then, are the rights of the partners to the Partnership? Each holder of a unit in the Partnership thereby held “an equal and undivided interest in the capital of the partnership”.[149] However, that interest was held on trust for the unit holder by the Manager and each unit holder undertook “not to attempt to obtain a partition and/or a separate legal title to his interest in the partnership property”.[150] No partner had an immediate or indefeasible right to the income or capital of the Partnership. As to the former, while a profit and loss account was to be put to the partners at least annually,[151] they were not obliged to distribute any profit in any given year.[152] If they did choose to distribute profit, they did not have to do so equally.[153] As long as they breached no fiduciary obligation in doing so, it was within the powers of a three-fifths majority of unit holders[154] to distribute profits otherwise than pari passu.
[149]Partnership Deed cl 5(1).
[150]Partnership Rules r 4.
[151]Partnership Rules r 8.
[152]See Partnership Rules r 9.
[153]See Partnership Rules r 9.
[154]Partnership Rules r 23(3).
Under the terms of this partnership, the Manager had significant powers and rights under the Partnership Rules, including as to the management of the business of the Partnership; the securing of borrowings on the property of the Partnership in the event it was authorised to make such borrowings; and indemnification out of the funds of the Partnership. These powers and rights meant that the Manager could, on behalf of the Partnership, incur expenses that would have the effect of depleting the assets or reducing the income of the Partnership. The Commissioner describes the Manager in its submissions,[155] Gold Age Australia, as holding the Properties as “bare trustee” for the Partnership. This is not, however, the position, as the Manager holds the property “for” the partners, but otherwise has full legal ownership.[156]
[155]Commissioner’s Outline of Submissions (3 March 2017) [7].
[156]Commissioner of Stamps v Livingston [1965] AC 694.
A partner who wished to dispose of units could nominate the price at which it proposed doing so. There was no obligation that the price so nominated be calculated by reference to a proportionate value of the property of the partnership. So long as the Manager did not take the view that the nominated price was not “a fair value”, the units would then be offered to the other partners at this nominated price and then, if necessary, on the open market.[157]
[157]See Partnership Rules r 11.
The rights of the partners on dissolution are governed by ss 43 to 48 of the Partnership Act 1958. While generally partners are entitled to a proportionate share of the ultimate residue,[158] the amount of that residue depends on, among other things, what debts the partnership has, whether any premium has been paid, whether the partnership is dissolved for fraud or misrepresentation and whether advances have been made by partners to the partnership. As if to note the contingent nature of a partner’s right to the property of a partnership on dissolution, s 47 of the Partnership Act provides that the amount due from surviving or continuing partners to an outgoing partner or the representative of a deceased partners is a debt accruing only at the date of the dissolution or death. It follows that by the terms of the Partnership Deed, no partner has any present entitlement to any of the property of the Partnership until such time as a distribution is declared, their units are sold or the Partnership is dissolved. Indeed, until a great many unknowable events have transpired (or not), it is impossible to say what the available property of the Partnership will be.[159]
[158]See s 48(b)(iv). Section 48 of the Partnership Act 1958 is the equivalent of s 39 of the Partnership Act 1891 (SA) referred to in Cyril Henschke (2010) 242 CLR 508 at 517 [25].
[159]Cf CPT Custodian (2005) 224 CLR 98 at 121 [51].
In Glenn v Federal Commissioner of Land Tax,[160] Griffith CJ said of a will by which beneficiaries’ rights could not be enjoyed until expiration of a period:
there is no present estate in possession in that property in any person other than the trustees of the will. In one sense, perhaps, the persons who are for the time being entitled to share in the fruits of the land may collectively be called the equitable owners, but that point is not material to the present case.
[160](1915) 20 CLR 490 at 498.
Similarly in this case, no partner has a present estate in possession in the property of the Partnership, and will not have one until the Partnership is dissolved. The only party with such an estate is the Manager. Nettle J at first instance in CPT Custodian[161] (in a passage adopted without reservation and described as “conclusive” by the High Court)[162] said of the trust in question there that a unit holder was entitled “not [to] a total of all of the receipts derived from each asset the subject of the fund but rather such if any income as may be derived from the product of the application of gross receipts in various ways”. The same may be said of the entitlements of partners to the Partnership, and indeed the interest is even less here because, unlike in CPT Custodian, the partners here do not have a right to a proportionate share of the income of the Partnership for a year. All they presently hold is their equitable chose in action.
[161](2002) 51 ATR 190 at 205 [63].
[162](2005) 224 CLR 98 at 116 [37].
Having determined the nature of the rights enjoyed by partners under the Partnership Deed, it remains to determine, as a matter of statutory construction, whether those rights answer the statutory definition of an “interest in” the dutiable property of the Partnership or “beneficial ownership” of the property of the Partnership.[163]
[163]Cf CPT Custodian (2005) 224 CLR 98 at 109 [14].
There can be no dispute that the Manager holds dutiable property, since it holds on trust for the partners certain estates in fee simple. The Commissioner relies on s 10(1)(ac) of the Act, which includes as “dutiable property” interests in estates in fee simple. “Interest” is not defined, except so as to exclude security interests, options to purchase and leases for which consideration other than rent reserved is paid. For the Commissioner to succeed, an interest for the purposes of s 10(1)(ac) must include an interest that has not vested, is not presently enforceable, is not presently calculable, and may have a zero or negative value. For, as Windeyer J said in Bolton v Federal Commissioner of Taxation,[164] it is a right to “a fractional interest in a surplus of assets over liabilities on a winding up and in the future profits of the partnership business”. It need hardly be said that there may never be either a surplus of assets or future profits.
[164][1965] ALR 481 at 491.
In my view, it follows that the equitable chose in action acquired by each of Danvest and Bullhusq conferred no interest in the Partnership property, in particular the land, and did not cause any change in the beneficial ownership of such property. The chose in action remained an item of personal property incapable of conferring any such interest, or changing any beneficial ownership. This is a case like Livingston and CPT Custodian, where a trustee owns both legal and beneficial ownership for others. All that is conferred on those others are equitable rights against each other and against the trustee. The rights may permit partnership assets to be exploited, including land, but no estate or interest in those assets is thereby carved out.[165]
[165]Cf Sojitz Coal Resources Pty Ltd v Commissioner of State Revenue [2016] 1 Qd R 75.
Conclusion and Orders
For the preceding reasons, it follows that:
(a)the Properties are dutiable property within the meaning of s 10(1)(a)(i) of the Act because they are estates in fee simple over land in Victoria;
(b)the interests acquired by the Appellants are not interests in dutiable property for the purposes of s 10(1)(ac). Rather, the interests the Appellants acquired in the Partnership are rights to any surplus assets of the Partnership upon its dissolution. They are therefore not themselves dutiable property;
(c)the goods the subject of the Assessment would be dutiable property within the meaning of s 10(1)(d) of the Act (because they would be goods the subject of an agreement that includes a dutiable transaction over an estate or interest in land) if they were the subject of an agreement that included the transfer of the Properties. However, since there was no transfer of the Properties, there is no arrangement of the type referred to in s 10(1)(d) and thus the goods are not dutiable property;
(d)there was no transfer of dutiable property for the purposes of s 7(1)(a). The only dutiable property was the Properties, and they were not transferred; and
(e)there was no change in beneficial ownership of any dutiable property for the purposes of s 7(1)(b)(vi).
It follows that the Assessment was wrongly issued as no duty was payable upon the acquisition by the Appellants of their units (or additional units) in the Partnership. The Commissioner does not appear to dispute that if duty was wrongly assessed then no interest is chargeable either.
The parties are to bring in orders to give effect to these reasons. The question of costs is reserved.
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