Federal Commissioner of Taxation v Galland

[1986] HCA 83

HIGH COURT OF AUSTRALIA

Mason, Wilson, Brennan, Deane and Dawson JJ.

FEDERAL COMMISSIONER OF TAXATION v. GALLAND

(1986) 162 CLR 408

16 December 1986

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Partnership—Assignment of interest in partnership—Assignment before end of financial year—Express provision that assignment to take effect in relation to share of profits for whole year—Whether assignor's assessable income includes amount attributable to share of net partnership income before assignment—Income Tax Assessment Act 1936 (Cth), ss. 92, 95—Partnership Act, 1919 (N.S.W.), s. 31.

Decisions

MASON AND WILSON JJ.: The respondent taxpayer was at the relevant time a solicitor practising in partnership with his father under the firm name "Bernard L. Galland &Co." in Goulburn, New South Wales. Each partner was entitled to 50 per cent of the capital and to the same share of profits. Neither partner was entitled, without the consent of the other, to assign his share in capital or profits. Clause 5 of the partnership agreement provided:

"5. In July in each year an account shall be taken and a balance sheet prepared showing the assets and liabilities of the partnership and the amount owing to each partner in respect of profits and as soon as possible thereafter the net profits (if any) shall be divided in the proportions hereinbefore stated."

Clause 6 entitled each partner to draw during the year against anticipated profits of that year but with an obligation to refund drawings in excess of his share of net profits as subsequently ascertained.

2. In June 1980 the taxpayer obtained his father's consent to assign 49 per cent of his share of partnership capital and profits to a trust to be set up in favour of his family. Because s.40F(1) of the Legal Practitioners Act 1898 (N.S.W.) prohibits a solicitor, in certain circumstances, from sharing receipts from a business of a nature usually performed by a practising solicitor with an unqualified person, it was necessary to obtain the approval of the Council of the Law Society of New South Wales to the assignment pursuant to reg. 25(4) of the Solicitors (General) Regulations. The taxpayer applied for that approval on 25 June 1980. On 27 June he executed a Deed whereby he assigned to Galland Services Pty Limited, as trustee upon discretionary trusts for the benefit of the taxpayer and members of his family, 49 per cent of the share which he then held in the partnership. It was expressly provided that the assignment would, in respect of the year ended 30 June 1980, take effect in relation to the taxpayer's share of the partnership profits of the whole year, without any apportionment, and the taxpayer's share in the partnership assets upon dissolution. The Deed was delivered in escrow, conditional upon the Law Society granting approval to the assignment. On 30 June the Council of the Law Society approved the assignment.

3. In his return of income for the year ended 30 June 1980, the taxpayer disclosed the amount of his share in the net income of the partnership as $36,070. The disclosure was accompanied by the statement: "Note 49% of taxpayer's income shown in Partnership return assigned to Galland Services Pty. Limited as trustee pursuant to Deed 27/6/80." The disclosed amount represented 51 per cent of the taxpayer's half-share in the net partnership income for that year, and was calculated on the basis that the Deed was effective to assign 49 per cent of his share of the partnership profits for the whole of the year of income, notwithstanding that the Deed was only executed on 27 June 1980. In making his assessment on 30 March 1981, the Commissioner increased the taxpayer's taxable income by $34,371, which he described in the adjustment sheet as "Partnership Distribution" and "Adjusted as a result of variation in partnership distribution." The result was to increase the taxpayer's taxable income arising from the partnership to $70,441. This figure was arrived at on the footing that the assignment was effective only from 27 June, so that the amount of $34,371 represented 49 per cent of the taxpayer's share of net partnership income up to that date.

4. The taxpayer objected to the assessment on various grounds. One of the grounds was that the assigned share did not form part of his assessable income for the year. The Commissioner disallowed the objection. The taxpayer's appeal to the Supreme Court of New South Wales in relation to the disallowance of the ground of objection was successful. The Commissioner's subsequent appeal to the Full Court of the Federal Court (Bowen C.J., Fisher and Beaumont JJ.) was unsuccessful. The Commissioner appeals to this Court pursuant to the grant of special leave. By that grant this Court limited the grounds of appeal so as to exclude from the grounds points relating to s.102 of the Income Tax Assessment Act 1936 (Cth) ("the Act").

5. At the commencement of the hearing of the appeal Mr Simos Q.C. for the Commissioner sought leave to amend the notice of appeal so as to permit the Commissioner to rely on s.260 of the Act and to challenge the correctness of this Court's decision in Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440. Mr Simos submitted that a decision on these grounds or one of them would resolve many pending objections in which the same issues arise. He also submitted that the argument based on s.260 gained some support from the Court's recent decisions in Commissioner of Taxation v. Gulland; Watson v. Commissioner of Taxation; and Pincus v. Commissioner of Taxation (1985) 60 ALJR 150; 62 ALR 545. At first instance the Commissioner placed no reliance on s.260. Indeed, before the hearing in the Supreme Court, in response to an inquiry from the taxpayer, he disclaimed reliance on the section. Subsequently in the Federal Court he sought to amend his notice of appeal to rely on the section, but the application was refused. In the light of the history of the litigation and to the limited grant of special leave, we rejected the application to amend the notice of appeal.

6. The Commissioner's principal submission in support of the appeal is that partners, like individual taxpayers, derive income when they can sue for it, so that they derive income for the purposes of the Act before the accounts of the partnership are prepared for the year of income and the amount of the distribution to each partner is ascertained.

7. This submission cannot be sustained. Section 92(1)(a) of the Act includes in the assessable income of a partner, not his share of the gross income derived, but his individual interest in the net income of the partnership for the year of income. The expression "net income" is defined by s.90, in relation to a partnership, to mean "the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions" except certain concessional and other deductions. These provisions are essentially for accounting purposes. They reflect the basic legal principle that the profits or net income of a partnership are the profits or net income of those who constitute it. It follows that, although a partner is not usually entitled to call for a distribution of profits or net income until accounts have been prepared, he has an individual interest in the net income of the partnership, notwithstanding that the precise amount of his interest cannot be determined until the accounts are prepared in respect of the relevant period. All this is made clear by the judgment of the Federal Court in Rowe v. Federal Commissioner of Taxation (1982) 60 FLR 475, at p 476; 82 ATC 4243, at p 4244, and the decision of this Court in Rose v. Federal Commissioner of Taxation (1951) 84 CLR 118, at p 124.

8. The judgment in Rowe then makes the fundamental point that net income must ordinarily be related to a period and that for tax purposes, in the case of a partnership, that means the relevant year of income. The judgment continues (at pp.476-477; p.4244 of A.T.C.):

"That does not, however, necessarily mean that that is the only, or the critical, relevant period for taxation purposes. Where, for example, a partnership business has been carried on by one partnership for part of a tax year and by a different partnership for the residue of the tax year, there will, for taxation purposes, be two periods in respect of which net income will be required to be ascertained so as to divide overall income between the two partnerships. The fact that the accounts in relation to the first period are not drawn up until after the period has expired, will not alter the prima facie position that the persons who, as partners, derive the income during that period will be the persons in whose assessable incomes the net income of that period falls to be included, according to their respective interests, pursuant to s.92(1) of the Act."

9. The flaw in the Commissioner's argument is that, by virtue of s.92, a partner's assessable income is ascertained by reference to the net income, not the gross income of the partnership for the year of income. Therefore it matters not that the partner derives gross income when the partnership earns recoverable fees during the year of income. The point is that, in general, the partner's assessable income for the year of income can only be ascertained at the end of that year when the net income of the partnership is ascertained. Accounts for that purpose cannot be taken until the expiration of the year of income, unless there is some independent reason for taking accounts at an earlier date, as, for example, a dissolution of the partnership.

10. Mr Simos sought to overcome this hurdle by submitting that partnership accounts could be taken at any time in order to ascertain the net income of the partnership and the assessable income of the partners during the year of income up to a particular date. In support of this submission he pointed to decisions in which it has been accepted that the accounts of a partnership were correctly taken at a date other than the expiration of the year of income as required by the partnership agreement. However, as Beaumont J. correctly pointed out in his judgment in the Federal Court, these cases - Rowe; Commissioner of Taxation v. Melrose (1923) 26 WALR 22; and Commissioner of Taxation v. Happ (1952) ALR 382, at p 386 - are all instances of dissolution or notional dissolution of partnership in the course of what would otherwise have been the partnership's year of income. Accordingly, there was an independent obligation or reason to take partnership accounts on the dates when they were taken. The decisions provide no support at all for the proposition that in cases such as the present, where these factors do not operate, the net income of the partnership and the assessable income of the partners must be ascertained at a date which differs from that provided for in the partnership agreement, or, perhaps, a date otherwise agreed by the partners.

11. Although the assignment in Everett differed from this assignment, in that in Everett the assignor assigned a share of his interest in the partnership, including the right to receive a share of the profits of the partnership as from the date of the assignment (i.e. future profits), the reasoning on which the decision is based is fatal to the Commissioner's argument. Barwick C.J., Stephen, Mason and Wilson JJ. pointed out (at p.452) that because the assignment was of present property, a share of an interest in the partnership carrying with it a right to future income, it operated immediately as a present equitable assignment. Their Honours distinguished the case from other decisions in which there were assignments of future income dissociated from the property or proprietary right to which that income was attributable. The references to future income are explained by the fact that the Everett assignment purported to assign only an entitlement to future income. The important point for present purposes is that an assignment of a share of an interest in a partnership carries with it the income attributable to that share unless the assignment limits the entitlement to income as it did in Everett. The decision therefore establishes that a partner may during the year of income of a partnership assign a share of his interest in the partnership so that the assessable income attributable to that share during the year of income is that of the assignee, not of the assignor, for tax purposes.

12. For these reasons the appeal must be dismissed.

BRENNAN J.: The respondent taxpayer and his father carried on the practice of solicitors in Goulburn during the year ended 30 June 1980. The partnership agreement provided, inter alia:

" The capital of the partnership shall be divided into two equal parts or shares which shall belong to the partners equally and they shall in like proportion share all profits and bear all losses."

On 27 June 1980, the taxpayer executed a deed of assignment of certain "property" as defined therein in favour of a company that was the trustee of a family trust. The "property" was defined to be 49 per cent of "the share now held by the Partner in the Partnership" including:

" that part of the right to receive the share of the profits of the Partnership to which the Partner would but for this deed have been entitled ... and, in the event of dissolution of the Partnership, that part of the share of the Partnership assets to which the Partner would, as between himself and his other partners, but for this deed have been entitled".

The appellant Commissioner assessed the taxpayer to tax in respect of the year ended 30 June 1980 on the footing that the assessable income of the taxpayer included his half- interest in the "net income" of the partnership (calculated in accordance with s.90 of the Income Tax Assessment Act 1936 (Cth)) undiminished by the 49 per cent of the profits the right to receive which he had assigned except in respect of income referable to the period 27 to 30 June 1980. The assessment was set aside on appeal to the Supreme Court of New South Wales (Hunt J.) and the judgment of that Court was affirmed by the Full Court of the Federal Court (Bowen C.J., Fisher and Beaumont JJ.). On further appeal to this Court, the Commissioner sought leave for the first time to rely on s.260 of the Act and to challenge the decision of this Court in Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 which had affirmed the majority decision of a Full Court of the Federal Court (1978) 21 ALR 625; 78 ATC 4595; 38 F.L.R.26. The application to raise these new grounds in support of the assessment came too late and it was refused. It is therefore necessary to resolve this appeal on the basis that Everett was rightly decided and without reference to the provisions of s.260.

2. Like this case, Everett was a case of assignment by a solicitor partner of a proportion of his share in the partnership. The majority judgment in this Court held (at p.446) that the taxpayer's "share in the partnership consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership", and (at p.447) that a partner's "interest" in a partnership "is a chose in action assignable in whole or in part". Their Honours went on to hold (at p.449) that:

" a share in a partnership carries with it the right to receive the proportion of the partnership profits to which the partner is entitled by virtue of the partnership agreement. Consequently, when the share is assigned, it carries with it the right to receive the assigning partner's proportion of those profits. In the same fashion, when a portion of a share is assigned, the portion carries with it the right to receive the proportion of profits attributable to that portion. As the right to receive profits is inherent in the partner's interest in the partnership, unless it be excluded by the partnership agreement, it is carried on assignment of the share, even though no mention of it be made in the assignment." (Emphasis added.)

Their Honours thus appear to have seen a partner's individual interest in the net income of the partnership as the fruit of the partner's "share" in the partnership, so that an assignment of a proportion of the "share" carried to the assignee a right to a corresponding proportion of the partner's individual interest in the net income of the partnership. That view must be accepted for the purposes of this case. Deane J., in a powerful dissenting judgment in the Federal Court said (at pp.636-637; p.4604; p.42):

" Where such questions (that is, questions involving the derivation of income) are involved, the determination of whether the income of a partnership should be seen as flowing primarily from the assets of the partnership or from the personal exertions of the partners or of whether a particular partner's share of profits should be regarded as flowing primarily from his 'share in the partnership' or from his personal exertions as a partner will properly involve consideration of the circumstances of the particular case."

If that view had prevailed, it would have been appropriate in the present case to hold, as his Honour held in Everett (at p.648; p.4612; p.56):

" The reality and the substance of the matter was that, notwithstanding the effect of the deed of assignment, the relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion, being part of his earnings derived from his professional activities and did not constitute the income of income- producing property or income of a trust estate".

3. This comparison between the view which prevailed and the view which was rejected reveals the hypothesis on which it is necessary to decide this case. The hypothesis is that "the individual interest of the partner in the net income of the partnership of the year of income" - the subject matter of s.92(1) - is the product of the partner's share of the partnership so that an assignment of part of the share entitles the assignee to a corresponding part of the net income of the partnership. On that hypothesis, it is immaterial whether the partners earned most of the net income of the partnership before the date of the assignment; what is material is the part of the net income of the partnership of the year of income to which the assignee becomes entitled beneficially in virtue of the assignment of the part of the partner's share. The part of the net income to which the assignee becomes entitled beneficially is the net income of a trust estate within the meaning of s.95 of the Act and does not attract a liability to tax in the hands of the assigning partner: s.96.

4. The net income of the partnership of the year of income is calculated, in accordance with s.90, by deducting allowable deductions (except for concessional deductions and deductions allowable under ss.80, 80AA or 82AAT) from "the assessable income of the partnership". The net income of a year of income is not the aggregate of net incomes derived during the intermediate periods of a year: the net income of a year of income is a single amount ascertained for the whole year on a basis appropriate for the particular partnership business. As Windeyer J. said in Peterson v. Federal Commissioner of Taxation (1960) 106 CLR 395, at p 404:

" In any continuing business, income is ascertained periodically over accounting periods, and the various items of expenditure in any accounting period that are directly connected with gaining the amounts received, or expected to be received, from the ordinary conduct of the business must be taken into account. It is only the 'net balance ascertained according to the usual and recognized principles of accounting' that is income".

Adopting that approach to the ascertainment of the net income of a partnership of a year of income, the whole of the assessable income of the year must be aggregated and from that sum the aggregate of the deductions allowable conformably with s.90 must be deducted. The net income of a partnership of a year of income can be ascertained whether or not the partnership agreement requires accounts to be taken at the end of the year of income and whether or not the taxpayer partner is then entitled under the terms of that agreement to be paid his share of the net income. In Rose v. Federal Commissioner of Taxation (1951) 84 CLR 118, at p 124, the Court said:

" Division 5 of Part III, which deals with partnerships, is based upon the view that the collective income earned by the partnership belongs according to their shares to the partners regardless of its liberation from the funds of the partnership, that is, its actual distribution."

The individual interest of a partner in the net income so calculated is included in the assessable income of a resident partner by s.92(1) irrespective of the period of the year in which the assessable income is earned and of the period of the year in which the partnership made the expenditures or incurred the liabilities which constitute the relevant deductions. It is unnecessary to consider whether the "year of income" mentioned in s.92 when used in reference to a continuing partnership must be identified for the purposes of that section as a year ended on 30 June or whether a taxpayer partner's year of income or a year of income specified by the partnership agreement may be adopted if either of those periods does not expire on 30 June. That question does not arise in this case for the taxpayer's year of income and the partnership year of income ended on 30 June 1980.

5. On the hypothesis by which this case is governed, the taxpayer partner's "individual interest ... in the net income of the partnership of the year of income" was not derived by reason of the partners' exertions in carrying on the solicitors' practice but by reason of his ownership of a share in the partnership. If it were open to regard the net income of the partnership as the fruit of the partners' exertions rather than as the fruit of their shares, it would be open to argue that at least so much of the taxpayer partner's interest in the net income of the partnership of the year of income as reflected the assessable income of the partnership earned prior to the assignment was unaffected by the assignment. But that argument is inconsistent with the governing hypothesis. If the taxpayer partner's interest in the net income of the partnership must be regarded as the fruit of his share in the partnership, and the net income of the partnership becomes ascertainable only at the close of the income year, the interest in the net income must be determined by reference to the share which the partner then holds. It follows that the proportion of the interest which is to be treated as the net income of a trust estate within the meaning of s.95 must be determined by reference to the proportion of the share which the partner has then assigned. As the taxpayer had assigned 49 per cent of his share at 30 June 1980, a corresponding proportion of the partner's interest in the net income of the partnership of the year ended 30 June 1980 must be regarded as the fruit of the assigned part of the share and as income of a trust estate. The governing hypothesis requires that 49 per cent of the net income of the partnership of the year ended 30 June 1980 be treated as not attracting tax in the hands of the taxpayer.

6. The appeal must be dismissed.

DEANE J.: When Federal Commissioner of Taxation v. Everett was before the Full Court of the Federal Court ((1978) 38 FLR 26), I expressed the view (at pp 43-44) that the annual amount, in the form of a share of net income, which the taxpayer in that case became entitled to receive as a working member of a firm of solicitors should, prima facie, be attributed to his personal exertion and was not realistically to be seen as the fruits of his interest in the capital of the partnership. That being so, the amount which was prima facie included in his assessable income pursuant to s.92 of the Income Tax Assessment Act 1936 (Cth) ("the Act") seemed to me to be, for the purposes of the Act, income derived by personal exertion to which any trust attached only upon or after its derivation (see, e.g., Stewart Dawson Holdings Pty. Ltd. v. Commissioner of Taxation (Cth) (1965) 39 ALJR 300, at p 301). The consequence was that the provisions of s.96 of the Act (exempting a trustee from liability to pay income tax upon the income of a trust estate) did not, in my view, exempt the taxpayer in that case from liability to pay income tax in respect of that part of his share of the net income of the partnership which was assigned to his wife under the deed of assignment which he had executed in her favour. The reasoning which I thought supported that conclusion was summarized in the following extract from my judgment (at p.56):

"Any profits of the partnership in which the

taxpayer was, under the partnership agreement, entitled to share were the joint professional earnings of the four partners. Those earnings were not derived by an interposed legal entity. They were derived by the taxpayer and his three partners themselves. The taxpayer's share in those joint earnings, determined by mutual agreement between the four partners, represented his earnings from his own professional activities....The reality and the substance of the matter was that, notwithstanding the effect of the deed of assignment, the relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion, being part of his earnings derived from his professional activities and did not constitute the income of income-producing property or income of a trust estate ..."

2. The reasoning which I accepted in Everett's Case was, however, firmly rejected both by the majority (Bowen C.J. and Fisher J.) of the Full Court of the Federal Court (at (pp.34-36 and 61-69) and by the majority of this Court (Barwick C.J., Stephen, Mason and Wilson JJ.; Murphy J. dissenting) when the matter came on appeal here ((1980) 143 C.L.R. 440). I mention that reasoning here not for the purpose of attempting to resuscitate it but because the importance of Everett's Case for present purposes seems to me to lie as much in what it rejected as in what it accepted. The conclusion reached by the majority of this Court was that it was "a misnomer to speak of the (taxpayer's) share of the income as having been gained by his personal exertion" (at p.454): the taxpayer's proportionate share of the net profits of the partnership was properly to be seen as payable to him as the owner of an interest in the capital of the partnership. That being so, that part of the proportionate share of profits to which the taxpayer's wife was entitled under the provisions of the deed of assignment was income of a trust estate and not income derived by his personal exertion as a working partner (see Everett, at pp.446-454).

3. When the reasoning of the majority in this Court in Everett's Case is, as it must be, applied to the present case, it is inevitable that the appeal by the Commissioner must fail. The result of the application of that reasoning is that the present taxpayer's share of the net income of the partnership between his father and himself cannot properly be seen, for the purposes of the Act, as income derived by his personal exertion. It was derived by, and payable to, the taxpayer "because he was a partner and the owner of a share in the partnership" (see Everett, at p.454). In its entirety, it represented the fruits of that share. It was not derived as - indeed, it did not exist as - assessable income until it was ascertainable as net income (see s.92 of the Act) at the end of the relevant accounting period which was, for the reasons given by Mason and Wilson JJ., the tax year ended 30 June 1980. Accordingly, as Everett's Case establishes, so much of it as was attributable to that part (49%) of the taxpayer's beneficial interest in the capital of the partnership which he had assigned (before the end of that accounting period) to Galland Services Pty. Ltd. was derived by him as trustee of a trust estate for the purposes of s.96 of the Act. That being so, the taxpayer was not liable to pay tax upon it.

4. The appeal must be dismissed.

DAWSON J.: I agree that this appeal must be dismissed. The grounds of appeal available to the appellant, the Commissioner of Taxation, precluded him from challenging the decision in Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 and from relying upon s.260 of the Income Tax Assessment Act 1936 (Cth). The question raised is, therefore, within a narrow compass.

2. The respondent, the taxpayer, is a solicitor who was carrying on practice in partnership with his father at the relevant time. By a deed executed on 27 June 1980, he effectively assigned 49 per cent of his interest in the partnership to the trustee of a trust fund to be set up for the benefit of his family and himself. It was expressly provided that the taxpayer's interest, for the purposes of the assignment, included his share of the partnership profits for the whole of the year in which the assignment took place "without any apportionment". Under the partnership agreement, accounts were to be prepared in July of each year and there is no dispute that the relevant year for the purpose of those accounts was the financial year ending on 30 June. Nor is there any dispute that the financial year was the year of income of the taxpayer for tax purposes. See s.6 of the Income Tax Assessment Act. The partnership agreement made provision for a partner to draw sums in anticipation of his share of the profits, but profits were to be divided upon the basis of the annual accounts.

3. For the year ended 30 June 1980, the taxpayer was assessed upon the basis that partnership profits were earned by the partnership, and thus by the taxpayer partner, progressively during the year and that the assignment was ineffective to divest the taxpayer of any part of his share of those profits earned before 27 June 1980. The taxpayer contended that the effect of the assignment was otherwise and that he was entitled only to 51 per cent of his share of the profits earned by the partnership during the year ended 30 June 1980, the assignee being entitled to the remaining 49 per cent.

4. The Commissioner sought to justify the assessment by arguing that although partners may agree that partnership accounts are to be taken at a particular time, such as the end of the financial year, and that, as between the individual partners, entitlement to receive a share of the profits of the partnership arises only at that time, nevertheless for the purposes of the Income Tax Assessment Act, the derivation of income by the individual partners from those profits extends over the whole of the financial year and is not restricted by reference to any particular time.

5. The fallacy in the Commissioner's argument is immediately evident when it is recognized that the profits of a partnership in which a partner is entitled to share, are, broadly speaking, the net gain made by the partnership business during the relevant accounting period. There is no purpose to be served here in any examination of what may properly be regarded as receipts and what may properly be regarded as expenses in calculating this gain. Cf. In re Spanish Prospecting Company, Limited (1911) 1 Ch 92. What is important is that profits can only be calculated periodically, that is to say, by reference to some defined accounting period, because they represent the amount remaining after deducting from the gross proceeds the expenses incurred in their production during that accounting period. Cf. Shaw v. Federal Commissioner of Taxation (1920) 27 CLR 340. Obviously receipts and expenses will differ from time to time and the profits of a partnership will vary according to the time at which the accounts are taken. The accounting period adopted by a partnership for the ascertainment and division of profits is ordinarily annual but it is a matter for agreement by the partners or, in the absence of agreement, inference.

6. The customary annual basis for the preparation of partnership accounts is adopted by the Income Tax Assessment Act. The Act, for accounting purposes, although not so as to impose any liability upon the partnership to tax, treats a partnership as an entity separate from its members. Under s.91, a partnership is required to furnish a return of the income of the partnership and, under s.92, the assessable income of a partner includes "the individual interest of the partner in the net income of the partnership of the year of income". The Act speaks of net income rather than the profits of the partnership business although the two things are conceptually the same in this context, and "net income", in relation to a partnership, is defined by s.90 to mean the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions other than concessional deductions and deductions in respect of past losses. Under s.6, "year of income" means, in relation to a person other than a company, the financial year for which income tax is levied, or the accounting period, if any, adopted under the Act in lieu of that financial year. Ordinarily (and in this case), the financial year will be the relevant year of income for tax purposes, both in relation to a partnership and its individual members.

7. The adoption by the Act of the financial year as the relevant period for accounting purposes does not, however, mean that the calculation of the profits of a partnership business cannot take place by reference to a date other than the end of that year. Indeed, circumstances may require accounts to be taken at a different date as, for example, upon the earlier dissolution of the partnership. In Federal Commissioner of Taxation v. Happ (1952) 9 ATD 447 the partnership was dissolved before the end of the financial year and, as Williams J. pointed out at p 451: "If the business had continued to be carried on until the end of the financial year the net income could not have been ascertained until then. But when the business was brought to a premature close the question whether net income had been earned by the partnership in the financial year depended upon the success or failure of the trading over a lesser period."

8. The liability of individual partners to tax under the Income Tax Assessment Act is not dependent upon the actual division of profits or net income. As was observed in Rowe v. Federal Commissioner of Taxation (1982) 60 FLR 475, at p 476, if it were otherwise the partners could delay their liability in respect of a tax year by refraining from drawing up accounts until after 30 June. A partner's share in a continuing partnership is his proportion of the partnership assets upon a notional winding-up, that is to say, the realization and conversion into money of the assets and the payment of the partnership debts and liabilities: Bolton v. Federal Commissioner of Taxation (1965) ALR 481, at p 485 per Windeyer J. Thus at any particular time a partner has an interest in the partnership which includes an interest in the profits, if any, were it appropriate to calculate profits at that time. The point of this case is, however, that for tax purposes the net income (or profit) of a partnership, which can only be calculated by reference to some accounting period, is to be calculated by reference to a year of income, that is to say, upon an annual basis. And it is a partner's individual interest in that net income so calculated which is included in his assessable income. Unlike gross income, which may be derived continuously, net income can only be calculated by reference to a defined period of time and so can only be brought into a partner's assessable income after that period has ended.

9. If, as in this case, the interest of a partner entitles him to a division of the profits of the partnership calculated by reference to the same financial year, any assignment, before the end of that financial period, of a proportion of that interest carries with it a right to that proportion of the year's profits. In Everett the assignment of a proportion of the partner's interest in the partnership was limited by the deed of assignment so that it did not carry with it any share in the accumulated profits of the partnership business up to the date of the assignment. Notwithstanding this limitation it was an assignment of a present interest carrying with it a right to income generated in the future rather than an assignment of future income. No such limitation was imposed by the deed of assignment in this case and, perhaps for that reason, there was even more clearly here an assignment of a present interest in the partnership carrying with it an entitlement to a proportion of the profits of the partnership calculated with reference to the appropriate accounting period, being in this instance the financial year.

10. I would dismiss the appeal.

Orders

Appeal dismissed with costs.