Mews and Commissioner of Taxation
[2008] AATA 357
•30 April 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 357
ADMINISTRATIVE APPEALS TRIBUNAL )
) No WT200600870
TAXATION APPEALS DIVISION ) Re
JEFFREY ARTHUR SYDNEY MEWS
Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date30 April 2008
PlacePerth
Decision The Tribunal affirms the decision under review on the basis that:
(a) The amount of $195,800 is assessable to the applicant in the year of income ended 30 June 2000 as income under s 6-5(1) of the Income Tax Assessment Act 1997 being income according to ordinary concepts; and
(b) No part of the said amount is assessable to the assignee of the assignment effected by the applicant in relation to his interest in the partnership of Price Waterhouse or the partnership of Pricewaterhouse Coopers.
..........[Sgd Mr A Sweidan].......
Senior Member
CATCHWORDS
Income tax – whether amount received by applicant after retirement from partnership was income according to ordinary concepts – whether part of amount received should be assessable to assignee of part of partnership interest
LEGISLATION
Income Tax Assessment Act 1997 s 6-5(1)
CASES
Brogan v Stafford Coal & Iron Co Ltd 41 TC 305 at 328
Everett v FCT 10 ATR 608
FCT v Stone [2005] HCA 21; 59 ATR 50
FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693
FCT v Montgomery (1999) 198 CLR 639 at 663; 42 ATR 475 at 492
First Provincial Building Society Limited v Federal Commissioner of Taxation 95 ATC 4145 at 4149
Gospel (Executor Leslie Howard Stainer dec’d) v Purchase [1951] 2 All ER 1071; 32 TC 374.)
G. P. International Pipecoaters Pty Ltd v FCT (1989-90) 170 CLR 124 at 138
Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 55
Scott v FCT (1966) 117 CLR 514
The Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 at 627
REASONS FOR DECISION
30 April 2008 Mr A Sweidan, Senior Member BACKGROUND AND FACTS
The relevant facts which are not in dispute are as follows:
1In the period between 1 July 1976 to 31 December 1998 the applicant was a partner in the Australian firm of Chartered Accountants known as Price Waterhouse, (“PW”).
2With effect from 3 July 1998 PW admitted the Australian firm of Chartered Accountants known as Coopers & Lybrand to the PW partnership, and PW changed its name to PricewaterhouseCoopers (“PWC” or “the Partnership”).
3In August 1997, having regard to his advancing age and the terms of the retirement policies of PW in relation to persons aged 55 years or more which were then under review, the applicant tendered twelve month’s notice of his intention to retire from PW, with effect from 31 December 1998.
4By Memorandum dated 10 December 1997 from John F Harvey, the then Chairman of PW, the applicant was advised that his proposed retirement from PW with effect from 31 December 1998 had been approved by the Policy Board of PW. The terms on which his retirement would be implemented are set out in Mr Harvey’s Memorandum dated 10 December 1997. The respondent has admitted the contents of that Memorandum in his Answers dated 21 January 2008, and further that the applicant retired from the partnership and at the time the payment in issue was made the applicant was a retired partner of PWC.
5By a further Memorandum dated 24 September 1998 from Stephen Bowles, following the admission of Coopers & Lybrand to PW, the applicant was advised of the principal financial matters arising on his retirement from PWC on 31 December 1998. A copy of that Memorandum is in evidence. The respondent has admitted that Mr Bowles wrote that Memorandum and did so on behalf of PWC.
6At all material times the Partnership operated for accounting purposes on the basis of a financial year ending on 31 December in each year, and prepared financial and accounting records accordingly. The taxation returns of the Partnership were prepared and lodged on the basis of annual periods ending on 31 December in each year. Those returns are, in accordance with the taxation law relating to Substituted Accounting Periods, (“SAP”), and with the authority of the respondent, prepared and lodged for annual periods ending on 31 December, being in lieu of the return normally required in respect of the subsequent income year ending 30 June. The respondent has admitted this.
7At all material times the applicant was an absolute assignor in relation to 40% of his interest in PW, and following the merger, in the Partnership, the assignee being the trustees of the Mews Family Trust (“the assignee”). In the early 1980’s the respondent challenged the efficacy of this assignment (“the Everett Assignment”). Following objection proceedings the respondent allowed the objection.
8In order to implement the merger of PW with Coopers & Lybrand in Australia a committee, known as the Residuary PW Committee, (“Residuary PW Committee”), was formed which was charged with protecting the interests of the PW partners and addressing outstanding issues pertaining to such partners. The respondent admits that such Committee was formed to deal with the interests of former partners of PW who became partners in PWC.
9From information supplied by the respondent to the applicant, including the ATO Position Paper which was in evidence before the Tribunal, but which the applicant said was not otherwise not known to the applicant and which was not disputed by the applicant, it appears that:
9.1WDB Insurance Ltd, (“WDB”), was an unlisted public company resident in Bermuda which was established as a not for profit captive public insurer of the PW international confederation. It received premiums from Price Waterhouse firms throughout the world, and provided insurance coverage to such firms. Its share capital was owned by Price Waterhouse Administration (International) Ltd, (“PWAIL”).
9.2prior to the amalgamation with Coopers & Lybrand (“CL”), WDB provided professional indemnity insurance to all Price Waterhouse firms, including PW.
9.3Neither PW nor PWC was a shareholder of PWAIL.
9.4On 30 June 1998 WDB ceased issuing professional indemnity insurance policies to PW, including PWA. WDB continued in business until 30 June 1999 to process claims notified to that date. All liabilities of WDB were reinsured with another insurer from 1 July 1999.
9.5As from 30 June 1998, pursuant to a Reinsurance Agreement between L & F Indemnity Ltd, a private company resident in Bermuda, (“L & F”), which merged with WDB, L & F undertook the insurance of PricewaterhouseCoopers firms throughout the world. As from 1 July 1999 the liabilities of WDB under insurance policies it had issued were reinsured by L & F.
9.6As at 30 June 1999 WDB had accumulated a surplus of assets, (“the surplus”), had ceased writing insurance business, and had no further liabilities.
9.7In September 1999 WDB presented a proposal to the Board of Price Waterhouse International, (“PWI”), it being a confederation of the former Price Waterhouse partnerships carrying on the business of providing accounting and related financial services in territories throughout the world. WDB proposed that its surplus funds be returned to participating PW firms worldwide through a premium rebate calculated in proportion to the premiums paid by those firms in the period 1 July 1987 to 30 June 1998. PWI approved the proposal.
9.8In September 1999 WDB notified Mr Harvey that WDB proposed to distribute a part of the accumulated surplus, (“the Allocated Amount”), to PWC. Mr Harvey referred the matter to the Residuary PW Committee.
9.9The Residuary PW Committee caused a company to be incorporated, known as Injun Pty Ltd, the shares in which were held by members of the Residuary PW Committee on trust.
9.10A committee (“RPWC”) was formed to deal with the interests of former partners of PW who became partners in PWC, RPWC caused a company, Injun Pty Ltd, to be incorporated.
9.11On or about 21 October 1999 the Residuary PW Committee resolved to distribute the Allocated Amount to existing PW partners who were partners of PWC as at that date, being 21 October 1999, and who had been partners of PW as at 30 June 1998, referred to and described as the Legacy Partners. The terms of this resolution are contained in a document in evidence before the Tribunal.
9.12RPWC resolved to distribute the premium rebate paid by WDB to PWA to partners who of PWC as at 21 October 1999 had been partners of PWA as at 30 June 1998 (“the Legacy Partners”).
9.13The resolution was passed on the basis that:
9.13.1The merger was regarded as the event which had crystallized the Surplus, and 30 June 1998 was the “clean date” closest to the merger;
9.13.2The Allocated Amount was considered to be income of the PWC partnership: (s 37 Documents T 25 and T 2.)
9.14As only those partners of PWC who were members of PW were entitled by the terms of such resolution to share in the Allocated Amount, the Residuary PW Committee considered the Allocated Amount should be deposited to a bank account held by Injun.
9.15On 8 December 1999 WDB resolved to pay premium rebates to the insured Price Waterhouse firms equal to the amount of the Surplus of US $280 million.
9.16On 19 January 2000 WDB deposited $31,436,824, being the Allocated Amount, to the credit of Injun’s bank account, pursuant to a direction from the Residuary PW Committee to do so.
9.17As at 8 December 1999 WDB had no liability in respect of claims notified to WDB when it carried on business as an insurer of worldwide Price Waterhouse firms.
10The applicant was not a party to any of the matters referred to or described in paragraph 9 above but did not dispute any of such matters.
11The applicant was not a partner of PWC as at 21 October 1999. The applicant was a partner of PWC who had retired as a partner of the firm as at 31 December 1998.
12Under the terms of a deed of settlement which the respondent entered into with certain partners of PWC, which the applicant declined to accept, it was agreed that the payment of the Allocated Amount to Injun on 19 January 2000 would be treated as part of the income of PWC for the SAP ending 31 December 2000 in lieu of 30 June 2001, and was assessable income of PWC in that income year. In the settlement, 80% of the Allocated Amount was treated as taxable income, and the balance was exempted.
13On 19 January 2000 Injun paid to the applicant’s joint bank account with his wife, an amount of $195,800.
14In about September 2000 the applicant was advised by PWC, as his Tax Agent, that the assessable income of:
14.1the applicant, for the year ended 30 June 2000 from the PWC partnership, was an amount of $71,704, being an amount in respect of unbilled work in progress at 31 December 1998 and realized in the partnership’s income year ended 31 December 1999;
14.2the assignee for the year ended 30 June 2000 from the PWC partnership was an amount of $47,803 being the amount allocated to the assignee in respect of unbilled work in progress at 31 December 1998 and realized in the partnership’s income year ended 31 December 1999.
15The applicant was advised at the same time that the remaining unbilled work in progress as at 31 December 1998 to be realized in the year ending 31 December 2000 by the PWC partnership was $120,000, of which $72,000 would be attributed to the applicant and $48,000 would be attributed to the assignee in the 2001 year of income.
16The taxation returns prepared and lodged by PWC as tax agent on behalf of the applicant and the assignee show these amounts.
17In each case the amount so returned represented an allocation of partnership income to 31 December 1999 and 31 December 2000. Payments in respect of the period 1 January 2000 to 30 June 2000, and the period 1 January 2001 to 30 June 2001 were included in the applicant’s tax return for the years ended 30 June 2001 and 2002 respectively.
18The same procedure and principles have applied and continue to apply to the retirement payments made by PWC to the applicant pursuant to his retirement from the partnership.
19On 17 January 2005 the respondent issued to the applicant notices of amended assessment for the 2000 and for the 2001 income tax years, increasing the applicant’s assessable income for both years by an amount of $195,000.
20In relation to the 2000 year of income the respondent included in the applicant’s taxable income an amount of $195,000 described as “Pship Distribution (Non PP) $195,000. Your share of the WDB Premium Rebate has been included in your assessable income pursuant to s 6-5 or Part 3-1 of ITAA 1997”.
21In relation to the 2001 year of income the respondent included in the applicant’s taxable income an amount of $195,000 described as “Pship Distribution (Non PP) $195,000. Your interest in the WDB Premium Rebate, being part of the "net income" of PWC, has been included in your assessable income pursuant to s 92 of ITAA 1936”.
22After the applicant had raised a number of queries as to the basis it had been concluded that he was a partner in receipt of a share of income, the respondent made further enquiries. As a result the Australian Taxation Office wrote to the applicant by letter dated 22 March 2005, in which it confirmed that the applicant was a partner who had retired. In this letter the respondent maintained the assessment of liability to tax on the basis of the 2000 assessments on the basis this was assessable under s 6-5(1) or CGT Event H2. The respondent did not maintain the CGT claim before the Tribunal.
23The respondent prepared a position paper dated 28 November 2003 on the basis that all the recipients of the payment in question were current partners, and makes no mention of retired partners. This was first supplied to the applicant in May 2006. It proceeds on the basis of an analysis of the assessability under s 92 in the 2001 year of income, and in the alternative on the basis that it is ordinary income of each partner in the 2000 year of income, or an assessable capital gain in relation to the interest of each partner in the professional indemnity policies.
24Also in evidence were copies of the taxation advice regarding the assessability of the payments in respect of retirement benefits paid to the applicant as a share of partnership income, and which are subject to the “Everett assignment”. In the 2005 year for instance the gross payment is $107,292, of which $42,917 is paid to and assessed in the hands of the assignee.
25At a later date the respondent cancelled the 2001 notice of amended assessment. The 2000 amended assessment is the subject of these proceedings, the respondent having disallowed the applicant’s objection to the amended assessment.
26As mentioned above the contest between the remaining PWC partners and the respondent was resolved pursuant to a Deed of Settlement executed by the partners and the Commissioner in February or March 2006, by which 80% of the payment to the remaining partners was assessed as partnership income in the 2001 year of assessment under s 92.
ISSUES FOR THE TRIBUNAL
27The issues for determination are therefore as follows:
27.1Was the amount of $195,800 assessable income in the hands of the applicant in the year of income ended 30 June 2000 under s 6-5(1) of ITAA 1997.
27.2If the amount of $195,800 was assessable income of the applicant did the assignment effected by the applicant in relation to his interest in the partnership and the income of the partnership operate to reduce the applicant’s assessable income by 40%?
APPLICANT’S CONTENTIONS
28The amount of $195,000 was not assessable income of the applicant in the year ended 30 June 2000
Ordinary Income
28.1S 6-5(1) of ITAA 1997 provides that:
“Your assessable income includes income according to ordinary concepts which is called ordinary income.”
28.2The concept of “income according to ordinary concepts” gives statutory recognition to the reference in Scott v FCT (1935) 35 SR (NSW) 215 where it was held at 219 –
“The word ‘income’ is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts.”
28.3Scott was a matter where a one-off payment was made to the chairman of a statutory body which was dissolved under conditions permitting the recovery of compensation by some office-holders. The Full Court of New South Wales held by majority that no part of the amount of £7000 paid to the chairman was within the meaning of “income”.
28.4In G. P. International Pipecoaters Pty Ltd v FCT (1989-90) 170 CLR 124 at 138 the High Court said, in relation to the test whether an amount is income or capital:
“To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business.”
Amount paid was not from a venture or business between the applicant and PWC
28.5Receipts from carrying on business are often identified as income according to ordinary concepts: see FCT v Stone [2005] HCA 21; 59 ATR 50. As the High Court there held, a conclusion that a receipt is one of income according to ordinary concepts will ordinarily carry a conclusion that the person is carrying on a business. In the present case there is no evidence that the applicant was carrying on business following his retirement from PWC. He was a passive recipient of the payment from PWC or Injun. The applicant was simply notified by Mr Harvey’s memorandum that a payment would be made to him and to other parties, at a time when more than a year had passed since he had retired from the firm.
28.6The amount was not paid to him as “income from personal exertion” or as “income derived from personal exertion” as defined in s 6 of ITAA 1936. The categories of income there defined are limited to amounts received “in the capacity of employee or in relation to any services rendered” or by reference to “the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person”.
28.7At the time of the payment the applicant was not an employee of PWC nor was he carrying on business with the firm. He held no office within the firm, nor had he acquired any property while with the firm for the purpose of profit-making by sale or from carrying on any profit-making undertaking or sale.
28.8Following his retirement from PWC with effect from 31 December 1998, the applicant had no right, entitlement or other interest in the assets, liabilities or income of PWC or of WDB, either as an owner, partner or former partner, other than:
28.8.1the right to receive from PWC an annual retirement payment by way of a pension from the income of the firm in respect of its SAP and paid monthly in accordance with a formula determined by the terms of the Partnership Agreement as that applied in December 1998;
28.8.2the obligation to return as income, in the year ending 30 June 2000 and in the year ending 30 June 2001 respectively, 50% of the untaxed work in progress carried forward at the date of retirement, this having been income earned while still a partner.
28.9The applicant had ceased by agreement to be a partner of PWC with effect from 31 December 1998. Accordingly, he had no further share in the partnership: Partnership Act s33, and was no longer in business as a partner.
No profit making purpose or intention
28.10The circumstance where a taxpayer may derive a single payment which is regarded as income is described in FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693 as follows:
“The important proposition to be derived from Californian Copper and Ducker is that a receipt may constitute income, if it arises from an isolated business transaction or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer’s business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.”
28.11There was no agreement reached between the applicant and PWC or the RPWC by which the amount in question became payable to him. It was simply deposited to his bank account, with no prior contract or agreement to that effect. He provided no services to the firm in connection with or in relation to the payment. It was an unsolicited receipt. The applicant was no longer in business with PWC and was never in business with Injun. He did not enter into any transaction or other arrangement in relation to the circumstances which later generated the payment.
Not a regular or periodic payment
28.12Regularity or periodicity of payments may be used to determine whether an amount is of an income nature or not. For example, in FCT v Montgomery (1999) 198 CLR 639 at 663; 42 ATR 475 at 492 a lease incentive payment was made to a firm of solicitors to take up a lease in premises from which they carried on their business. The receipt of the amount paid under the inducement agreement was not a receipt in the ordinary course of business of the firm. While the transaction was properly to be regarded as singular or extraordinary, it was held to be a receipt of income. It was held that the inducement payment was a once and for all payment made or received on the occasion of the acquisition of part of the structure of an ongoing business.
28.13This was a case where a single payment was regarded as being on income account because it was received on the occasion of the acquisition of part of the structure of an ongoing business. The applicant’s position in this case is diametrically opposed to that situation. It was not paid as an inducement nor was it paid in connection with the commencement of a business, the commencement of employment nor as some form of golden handshake.
28.14It has been suggested that when the payer of a sum is under no legal obligation to make the payment, identifying the amount as the product of an income producing activity may be a way of describing the reasons which lead to a conclusion that the amount is one of income, but the question of recurrence or periodicity bears upon whether there is an income producing activity: see Stone at ATR 62 [60]. In the present case there is no such periodicity or recurrence of payment, and such an enquiry would serve merely to confirm that the payment is it not of an income nature nor is it income.
28.15It was contended for the applicant that the facts established that this was a one off payment by PWC to the applicant “merely because he had been a partner as at 30 June 1998 who had retired, and by reason of that fact alone he qualified for the payment”. (emphasis added) If he had decided to resign as a partner, either in August 1997 when he commenced negotiating his departure from the firm, or if he was a partner who resigned and was not a partner who retired he would not have qualified, so it was contended.
No use of capital or other asset
28.16The applicant owned no asset, right or other property which enabled him to claim, recover or enforce any claim against WDB, PWC, the Residuary PW Committee or Injun in relation to the amount of $195,800 or any other amount.
28.17The applicant had no legal, contractual or other right to receive any part of the Allocated Amount paid to Injun or the amount of $195,800 either from WDB or from PWC. The amount was paid to him as a payment from the net income of PWC merely by reason of and as a result of a resolution of the Residuary PW Committee and even though he was not a partner of PWC as at 21 October 1999.
Voluntary payment
28.18It was also contended that the amount was paid to the applicant “merely by reason of his personal qualities”. The applicant said in evidence that when he asked Mr Bowles, the National Finance Partner, why he had received the payment, he was told “because we like you”. This it was contended shows that it was a payment by reason of his personal qualities. It was said to be a voluntary payment of money either by Injun or by Injun on behalf of the Residuary PW Committee when there was no legal, contractual or moral obligation to do so. Injun was a company incorporated by the RPWC in late 1999. It was not an entity with which the applicant had any prior business or other relationship.
28.19In the respondent’s amended Statement of Facts, Issues and Contentions the term “Legacy Recipient” has been used – given the ordinary meaning of legacy is a gift of money, this was said to be an accurate description of the applicant’s position as a “passive recipient”.
28.20The applicant referred to Hayes v FCT (1956) CLR 47 where the taxpayer was an accountant who had been in a business relationship as an employee as supervising accountant and general adviser to a business for a number of years. He later ceased to be a full time employee, but became a shareholder and director, and secretary of the company. Following restructuring of the company he ceased to be a shareholder and director. He remained as secretary after the company had been acquired by other interests. He continued to do small services for his former employer, and he and his wife continued to be on good personal terms with his employer. On the incorporation of the public company, Richardson, his former employer, gave him a number of shares as a gift. It was held the gift was not a receipt of income, it being impossible to relate the receipt to any income producing activity on the part of the taxpayer.
28.21It was held, per Fullagar J at CLR 54:
“A voluntary payment of money or a transfer of property by A to B is prima facie not income in B’s hands. If nothing more appears than that A gave to B some money or a motor car or some shares, what B receives is capital and not income. But further facts may appear which show that, although the payment or transfer was a “gift” in the sense it was made without legal obligation, it was nevertheless so related to an employment of A by B, or to services rendered by B to A, or to a business carried on by B, that it is in substance and in reality, not a mere gift but the product of an income earning activity on the part of B, and therefore to be regarded as income from B’s personal exertion.
“While I would not say that the motive of the donor in making the payment or transfer is, in cases of this type, irrelevant, motive as such will seldom, if ever, in my opinion be a decisive consideration. In many cases, perhaps in most, a mixture of motives will be discernible. On the one hand, personal goodwill may play a dominant part in motivating a voluntary payment, and yet the payment may be so related to an employment or a business that it is income in the hands of the recipient. On the other hand, the element of personal goodwill may be absent – the dominant “motive”, may have been of the most purely selfish and “commercial” character and yet it may be impossible to find any connection with anything that can make it income. The question in each particular case is as to the character of the receipt in the hands of the recipient: Moorhouse v Dooland. The test to be applied is an objective, not a subjective, test. This, I think, is the whole point of a passage in the judgment of Kitto J in the Squatting Investment Case which is quoted both by the majority and by the dissentient member of the board of review
His Honour speaks of “gifts” as being “taxable” if they are “made in relation to some activity or occupation of the donee of an income producing character.” The point is illustrated by reference to expressions used in some of the English cases, and His Honour then contrasts “mere gifts” – “gifts” which are not related in any such activity or occupation and have no significant character except his expressions of a desire to benefit the donee. The objectivity of the test considered appropriate by His Honour has already been made very plain, for, referring to the facts of the particular case, he has said:
“In truth and in fact the money is distributed under the Act to the persons who supplied wool for appraisement cannot be regarded otherwise then as part of the total sum which has taken the place of the wool in the hands of those persons. (2)
In other words, part of the price paid for the wool supplied, and therefore having its true source in a revenue producing activity carried on by the suppliers.
The view that what the appellant received in this case was income seems to rest on the view that the gift of the shares was motivated, at least to a substantial extent, by gratitude for services rendered, and advice and assistance given, by the donee to the donor in the past. But this is clearly not enough to make what he received income in his hands. It may be conceded that this motive of gratitude played a part in the donor’s decision to make the gift. But gratitude for services rendered was by no means the sole or exclusive motive. It is clear that the donor was moved very largely by a general feeling of goodwill arising from a close relationship which had both a business aspect and a personal aspect. It is clear also that he was moved to no small extent by the fact that Hayes had, some three years before, parted very much against his will with his shares in the proprietary company. He had told Hayes that he would “make it up to him”, and he was now “making it up to him”.
28.22The applicant submitted that the RPWC resolution to distribute an amount of $195,800 to the applicant was voluntary, and one in respect of which the applicant had no enforceable rights. It was pointed out that the resolution is silent as to the payment having been in consideration of any income producing activity on the part of the applicant.
28.23The applicant also referred to Scott v FCT (1966) 117 CLR 514 in which a solicitor had acted for a client for many years and had received proper remuneration for his services as a solicitor. The client gave him £10,000. The High Court found that the payment was a gift, in the sense that it was gratuitous, not made in discharge of an obligation and not taken by the recipient as discharging an obligation.
28.24It was further held in Scott that the definition of “income from personal exertion” does not bring anything into charge as income. It refers to what is already by its nature income. By describing what “income from personal exertion” is the definition is indirectly indicative of what income is but that is as far as it goes. It was further held that the gift of £10,000 was referable to the attitude of the donor personally to the donee personally. It was not given or received as a recompense for services rendered so as to have the quality in the hands of the donee of income assessable to tax. In this regard the applicant referred to the following passage from the High Court decision:
“I return to the general concept of income. Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man’s calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance. It is apposite to quote here a passage from the judgment of Kitto J. in The Squatting Investment Co. Ltd v Federal Commissioner of Taxation (1). His Honour said: “…it is a common place that a gift may or may not possess an income character in the hands of the recipient. The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances; and even in respect of a true gift it is necessary to inquire how and why it came about that the gift was made.” An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered. It was said for the Commissioner that if a service was such as the recipient was ordinarily employed to give in the way of his calling, and the gift was a consequence, however indirect, of the donor’s gratitude and appreciation of that service, then it must necessarily be part of the donee’s income derived from the practice of his calling, and caught by s.26 (e). But as thus expressed, this proposition is, I think, a mistaken simplification. It was based upon the fact that in Hayes v Federal Commissioner of Taxation (1) Fullagar J. regarded as decisive that it was impossible to relate the receipt of the shares there given to any income-producing activity on the part of the recipient. In the present case the taxpayer was engaged in an income-producing activity, his practice as a solicitor, to which it was said the gift could be related. But because the absence of a particular element was decisive in favour of the taxpayer in one case it does not follow that the presence of that element is decisive in favour of the Commissioner in another case. The relation between the gift and the taxpayer’s activities must be such that the receipt is in a relevant sense a product of them.”
28.25The applicant argued that the nature of the payment must be characterized in the hands of the applicant as recipient, and not in the hands of the RPWC or Injun as payer: see further Hayes at 55. The donor’s motive was said to be irrelevant. The applicant so it was contended gave no consideration in relation to the payment so it was not enforceable either at law or in equity, and cannot and did not constitute a contractual, or other legal or equitable right. The Position Paper relied upon by the respondent acknowledges that the right to receive the premium was conferred without consideration, is not enforceable in either law or equity, and therefore cannot constitute a contractual or other legal or equitable right.
28.26The decision of WDB to distribute the Allocated Amount to PWC, and the decision of Residuary PW Committee to cause Injun to pay $195,800, were claimed to be voluntary decisions of all of those entities which the applicant argued ultimately resulted in a “windfall and entirely unexpected receipt” by the applicant of that amount, and that it was therefore not assessable income.
28.27The applicant pointed out that on the basis of the documents which the respondent has supplied, no member firm of the Price Waterhouse organization had a legal entitlement to any part of the surplus. They were not shareholders of WDB.
28.28The applicant submitted that the share of the surplus paid to PWC should more properly have been characterized as a payment of capital in it’s hands, despite the description of the payment as Premium Rebate: see Brogan v Stafford Coal & Iron Co Ltd 41 TC 305 at 328 and following.
28.29Whether the Allocated Amount was of an income nature or of a capital nature in the hands of the PWC partnership, and whatever its description as a Premium Rebate for accounting purposes may have been, has, so it was contended, no bearing in regard to its characterization as a receipt in the hands of the applicant: see Hayes supra. It was claimed that it was an ex gratia payment to the applicant made on a voluntary basis for no consideration, and therefore not assessable income.
Year of derivation
28.30As the Allocated Surplus (or, at any rate, part thereof – as to which see para 26 above) formed part of the assessable income of PWC, the applicant contended that such income was derived by that firm in the year ending 31 December 2000 in lieu of 30 June 2001. The applicant relied on the evidence of Mr Butler, a former partner of PWC in this regard
28.31Accordingly, the applicant contended that the amount paid to the applicant, if assessable in his hands, “by PWC from its assessable income” would only have been derived by him as a share of partnership income in the year ending 31 December 2000 in lieu of 30 June 2001. He said that it can not be treated as having been derived by him in the year before it is derived by the partnership, because it was paid as a share of the partnership income and part of the net profit. The assessment issued by the respondent is therefore according to applicant an assessment in relation to the wrong year of income.
28.32It was contended that prior to retirement the applicant’s only interest as a partner of PWC was a right to a portion of the surplus of the partnership after the realization of the assets and payment of the debts and liabilities of the partnership: Partnership Act s 33; Everett v FCT 10 ATR 608.
29If the amount of $195,800 was assessable income of the applicant, did the assignment effected by the applicant in relation to his interest in the partnership operate to reduce the applicant’s assessable income by 40%?
29.1The applicant pointed out that the Everett assignment, by its terms, specifies that it relates to a present and future assignment of all income, profits or gains from any source which would otherwise be payable to the applicant by the Partnership. It operated in relation to the assessment of work in progress derived by the applicant in the SAP for the years ending 2000 and 2001.
29.2The applicant said that the assignment was absolute and remains on foot, binding the Partnership, the applicant and the Assignee until either the Partnership ceases to exist or the assignee ceases to exist. Both the Partnership and the assignee continue to exist.
29.3It was contended if it should be held that the applicant derived the amount of $195,000 as a former partner of PWC, or that he was as at January 2000 entitled as a former partner to receive that amount, then that payment is subject to the assignment, being a share of the income within the definition of Property.
29.4It was also pointed out that following the applicant’s retirement he was still entitled to a share of work in progress of the firm and reported this as assessable income in the 2000 and 2001 years of income. This was a condition of his retirement as shown by the Bowles memorandum. This was a continuing interest in the income of the firm, and subject to the assignment.
29.5Applicant argued that it would be artificial to determine that the work in progress was subject to the assignment yet did not apply to this payment in 2000.
29.6Finally it was contended that even if it should be held that the amount paid to the applicant was derived by him as ordinary income, but not as a share of the partnership income, then such payment is still properly subject to the terms of the assignment.
TRIBUNAL’S FINDINGS
30For the reasons which follow the Tribunal finds that:
30.1The fact that the payment was made voluntarily and after the applicant retired as a partner of PWC, does not mean that it did not constitute income according to ordinary concepts.
30.2The payment was clearly made to the applicant pursuant to the resolution of the RPWC. Further, the payment was not made because of some personal quality the applicant possessed but because he had been a partner of PW as at 30 June 1998 who had subsequently retired.
30.3The payment was connected to his past membership of PW and PWC, the Premium Rebate being a distribution from the surplus generated by WDB from premiums previously paid by members of the PW international confederation, including PW so that the payment was connected to the applicant’s past income earning activities and the business activities of PW.
30.4The payment was income according to ordinary concepts in the hands of the applicant, was not a distribution from partnership profits and is not caught by the “Everett Assignment”. The payment is correctly assessable in the year of income ended 30 June 2000.
Voluntary payments
31As has often been observed whether a particular receipt is income depends upon its character in the hands of the recipient. It does not depend on whether it was a payment that the payer was lawfully obliged to make: Scott v Commissioner of Taxation (1966) 117 CLR 514 at 526; The Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 at 627, Kitto J (“it is a commonplace that a gift may or may not possess an income character in the hands of the recipient”).
32The fact that a payment is made without consideration and is, in that sense, a gift will not be determinative that the payment is on capital account: First Provincial Building Society Limited v Federal Commissioner of Taxation 95 ATC 4145 at 4149, Hill J. In determining the character of a receipt in the hands of the recipient the whole of the circumstances must be considered and in the case of a voluntary payment, it is necessary to enquire into “how and why” the payment was made: Squatting Investment Co Ltd above, at 627-8, Kitto J.
33In determining whether a voluntary payment is income, the motives of the donor may be of some relevance but they will not be decisive. The test is objective not subjective: Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 55.
34It is clear that a voluntary payment may still be income according to ordinary concepts even though the recipient has ceased the income producing activity with which the payment was connected: Case no G35 (1956) 7 TBRD 199 and Case 46 (1958) 8 CTBR (NS) 221. The relevant principle is that:
“sums representing the taxpayer’s professional or other business activity do not change because they are received after the cessation of the business. They retain the essential quality of income and are assessable to the taxpayer in the year in which they are derived whether or not the business, the source of the income, has been discontinued .“
(Case 46, above at 224, Mr McCaffrey citing Gunn’s Commonwealth Income Tax Law and Practice (5th ed at 41 – 42 (where reference is made, in turn, to the observations of Lord Simonds LC in Gospel (Executor Leslie Howard Stainer dec’d) v Purchase [1951] 2 All ER 1071; 32 TC 374.)
The retirement of the applicant
35It is common cause that the applicant was a partner in PW and thereafter PWC until 31 December 1998.
36On 3 July 1998, PW admitted the Australian firm of Coopers & Lybrand to the PW partnership and the name of the partnership changed to PricewaterhouseCoopers: para 2 of the applicant’s SFIC (and see clause 8 of the Amalgamation Agreement).
37As already noted the applicant’s retirement was the subject of correspondence between himself and others in PW and PWC: see annexures “JASM-5” (letter dated 28 August 1997 from the applicant to Mr Harvey), “JSM-1” (memo dated 10 December 1997 from Mr Harvey to the applicant) and “JASM-2” (memo dated 24 September 1998 from Mr Bowles to the applicant) (References to annexures with the prefix “JASM” and “JSM” are to annexure to documents annexed to applicant’s witness statements). Self-evidently, the correspondence did not refer to the Premium Rebate or any entitlement to share in the Rebate as there were no decisions made by WDB and consequently, the RPWC about that matter until 1999.
38PW had a retirement policy that permitted a partner to retire at 55 years of age. The retired partner would receive retirement payments in the form of consulting fees: para 11 of the applicant’s statement made 31 October 2007.
39The applicant attained the age of 55 years in April 1999. He reached an agreement with PW that he could retire on 31 December 1998, just short of his 55th birthday: see annexures “JSM-5” and “JSM-1”. There is no evidence to suggest that this agreement was treated other than as a retirement by the applicant on attaining the retirement age under PW’s retirement policy; indeed, the evidence is to the contrary. The applicant sought to be and was treated as being a partner who had retired on reaching the retirement age specified in the firm’s retirement policy. That clearly accorded with the applicant’s understanding.
WDB and the Premium Rebate
40WDB was a captive insurer to the Price Waterhouse international confederation, of which PW was a member. It issued policies of insurance to and received premiums from members of the confederation: Respondent’s Reasons for Decision, T2 at 10 (and see paras 2(a) and (b) of the memorandum of advice forming part of T9 at 63, the position paper, T25, at 117 and the policy of insurance dated 9 March 1998).
41As a result of the amalgamation of Price Waterhouse and Coopers & Lybrand International Inc, WDB ceased issuing policies to the PW international Confederation, including PW, as at 30 June 1998 (the amalgamation of PW and the Coopers & Lybrand Australian partnership took effect on 3 July 1998). WDB continued in business to 30 June 1999 to process “tail” claims and from 1 July 1999, the liabilities of WDB were reinsured with another insurer: see Reasons for Decision T2, 8 at 10 (and the memorandum of advice at paras 2(f) and (g) and the position paper at 117).
42On 30 June 1999 WDB proposed that its surplus funds be returned to the firms constituting the Price Waterhouse international confederation through a premium rebate calculated in proportion to the premiums paid by each member firm in the period of 1 July 1987 to 30 June 1998 (Reasons for Decision at 10,para 2(h) of the memorandum of advice and the position paper at 117).
43On 8 December 1999 the board of directors of WDB resolved that:
(a)WDB pay out premium rebates to its insured in the aggregate amount of USD 280m in accordance with a Rebate Schedule;
(b)WDB issue an endorsement to its policies of insurance for providing for a premium rebate, the endorsement to be in such form as was approved by Mr Andrew Elliott as the “Authorised Person”;
(c)WDB instruct Aon to issue a credit note to each of the company’s insured advising of the premium rebate in accordance with the Rebate Schedule.
(See the minutes of a meeting of the board of directors of WDB held on 8 December 1999.)
44.The amount of premium rebate payable in respect of premiums paid by PW and the distribution of that amount was the subject of further deliberation by the RWPC.
Residuary Price Waterhouse Committee and distribution of the Premium Rebate
45.The RPWC was established pursuant to cl 13 of the PWC partnership agreement.
46.The proposed premium rebate to be paid by WDB was referred to the RPWC as it was a matter that did not concern the business of the previous Coopers & Lybrand partnership and its former members.
47.At a meeting of the RPWC held on 21 October 1999 it was resolved that (among other things):
“…the distribution of surplus funds received from the legacy PW Global Captive Insurance Company, WDB, will be made in the manner set out in the table paper and in accordance with the following principles.
Those partners of the Legacy Price Waterhouse Australian firm, who were partners on 30 June 1998 and remain partners of the firm, will share in the distribution.
Those partners of the Legacy Price Waterhouse Australian firm who have retired by virtue of reaching retirement age on or after 30 June 1998 will share in the distribution …”
(See annexure “JSM3”.)
48.The amount of premium rebate to be received by PWC was at least $31,436,824 (referred to in the Reasons for Decision as the “Allocated Amount” and in the respondent’s SFIC as the “Premium Rebate”).
49.Injun was a company that the RWPC caused to be incorporated. The share capital of Injun was held in trust for the partners of PW who became partners in PWC: Reasons for Decision at 10 (see the memorandum of advice at 2(e) and the position paper at 117).
50.On 10 December 1999 WDB was directed to pay an amount of $31,436,824 into the bank account of Injun. That amount was received by Injun on about 19 January 2000 (Reasons for decision at 10, memorandum of advice at para 2(l) and position paper at 118).
The payment to the applicant
51.The applicant was clearly a person who came within the terms of the resolution of the RPWC passed on 21 October 1999 – he had been a partner of PWC as at 30 June 1998 who had subsequently retired on attaining the retirement age (alternatively, he was treated as such notwithstanding that he retired three months before his 55th birthday). Significantly, that was confirmed by the memorandum dated 17 December 1999 from Mr Harvey to the applicant (annexure “JASM-6”) in which it was stated that:
“Accordingly, the PW Residuary Board (Committee) has determined that the surplus will be shared amongst those partners who were partners on 30 June 1998 and who have not subsequently resigned (as opposed to retired) from the firm, in line with their shares at that date.”
52.It is furthermore clear that this accorded with the applicant’s understanding. He acknowledged that he appreciated from reading Mr Harvey’s memorandum that he would share in the distribution on the basis that he was a person who had been a partner of PW at 30 June 1998 who had subsequently retired.
53.On 19 January 2000 (being the same day as the Premium Rebate was received into the bank account of Injun), an amount of $195,800 was transferred from Injun to a bank account operated by the applicant and his wife (Reasons for Decision at 10 and ANZ statement of account at 114 of the s 37 documents).
The payment was income according to ordinary concepts
54.There is no evidence that the payment was made in consequence of any personal quality possessed by the applicant and the Tribunal finds that it was not. The evidence clearly shows that although the payment was unexpected, voluntary and unsolicited, it was made to the applicant because of, and in his capacity as, a former partner of PW who had been a partner of that firm on 30 June 1998 and who had retired (but not resigned) as a partner of PWC between the commencement of the amalgamated firm and the date of the RPWC resolution and for no other reason. The applicant in fact agreed with that proposition in his evidence.
55.In the Tribunal’s view it is clear that the applicant was not especially identified by RPWC and gifted an amount because of some personal quality or relationship such as that which was found to be the reason for the payments in Hayes, above or Scott, above. Rather, the Tribunal finds that the applicant formed part of a class of persons who were defined predominantly by their membership of PW as at 30 June 1998; that is, by their membership of a professional partnership that required and effected professional indemnity insurance and paid premiums in the circumstances referred to in the discussion paper that was prepared for the meeting of the RPWC held on 21 October 1999 and in the memorandum of 17 December 1999 from Mr Harvey.
56.The effecting of professional indemnity insurance through a captive insurer was a necessary incident of the conduct of the business carried on by PW (as is disclosed in the discussion paper prepared for the meeting of the RPWC). The insurance arrangements and the payment of premium were undertaken in the course of PW’s business.
57.The minutes of the meeting of the board of directors of WDB held on 8 December 1999 indicated that the proposal was for WDB to make a premium rebate to its insureds out of its accumulated surplus. The paper accompanying the minutes indicated that this proposal was chosen over an alternative method of distributing the surplus by dividends and/or liquidation distributions to firms as shareholders in the parent of WDB. The premium rebate method was selected as the surplus would be distributed to firms in proportion to amounts contributed by them; that is, refunds were to be calculated on the basis of premiums actually paid by individual firms.
58.Accordingly, the Premium Rebate (Allocated Amount) received by Injun reflected the premiums actually paid in the past by PW and to which the applicant had contributed as a partner of the firm. As previously noted, that premium was paid as a necessary incident of the business activities undertaken by PW. The applicant clearly was a participant in those activities.
59.The minutes of the meeting of the RPWC held on 21 October 1999 (annexure “JSM-3”) and the discussion paper prepared for that meeting indicate that PW understood that the amounts to be distributed by WDB among legacy PW firms, including PW, was to be calculated by reference to premiums paid by each firm. There was, consequently, a common understanding between WDB and the RPWC as to the circumstances in which the Premium Rebate was to be paid and received and the basis upon which it had been calculated.
60.The memorandum of 17 December 1999 from Mr Harvey to the applicant summarised the circumstances in which it was proposed to distribute the surplus of WDB, including that it was proposed that payments would be made by WDB to individual firms calculated on the basis of premiums actually paid by those firms. The memorandum further set out the basis upon which it was proposed to distribute the Premium Rebate (Allocated Amount) among PW partners, including the basis upon which it was proposed to make a payment to the applicant. Accordingly, there was a common understanding between the applicant and the RPWC as to the circumstances in which the Premium Rebate would be received and distributed by the RPWC, including to the applicant. The Tribunal is of the view that the applicant’s understanding to that effect was obvious from his evidence.
61.It was plain that that common understanding was to the effect that the Premium Rebate was to be received by the RPWC and distributed to former members of that partnership on the basis that insurance arrangements had been effected with WDB and premium paid as an incident of the business activities of PW.
62.Further, and in any event, in the Tribunal’s opinion it is clear that the payment to the applicant was incidental and connected to his former membership of PW and the business activities undertaken by that firm. The payment was the culmination of a sequence of events that had their genesis in the business activities of PW and which linked the distribution by WDB to Injun with the payment of premiums by PW as part of those activities. Those premium payments were made while the applicant was a partner of PW. He remained and continued as a partner at the time of the events that precipitated the payment of the surplus by WDB to Injun and which created the fund from which the payment was made to him.
The payment was not a distribution from partnership profits
63.The applicant contends that the Premium Rebate (Allocated Amount) was income of the partnership of PWC and that the subsequent payment of his share of the Premium Rebate was made out of partnership profits.
64.The applicant first contends that the RPWC made its resolution on the basis that it “considered” the Allocated Amount to be income of the partnership of PWC ((para 10.11.2 of the SFIC). The applicant then relies upon the terms of the deed of settlement which was put to him and which he refused to conclude (annexure “JASM-13”).
65.However, there is no evidence from the partnership accounts or other primary accounting records of PWC that discloses that the payment of the Premium Rebate was recorded in the partnership accounts as forming part of its income and distributed as such to the partners of PWC. In the Tribunal’s opinion this is fatal to the applicant on an issue on which he bears the onus of proof under s 14ZZK of the Taxation Administration Act.
66.Indeed, the evidence is to the contrary:
(a)The distribution of the surplus of WDB was treated as being an issue for the shareholders in Price Waterhouse Administration (International) Ltd – that is, a matter concerning the “legacy PW global captive insurance company” and the “legacy PW professional indemnity insurance arrangements” that were being wound down (memorandum of Mr Harvey dated 17 December 1999 to the applicant; “JASM-6”);
(b)The Premium Rebate was a matter that was dealt with by the RPWC – the Residuary Board that had been created under the partnership agreement to look after the interests of the former PW partners and to deal with matters that arose following the amalgamation and which concerned only those partners (that is, matters that concerned the “old” firm and not the amalgamated firm);
(c)Critically, the RPWC instructed WDB to make the payment to Injun and not to PWC – (and see cl 30.1 of the partnership agreement that requires all moneys of the partnership including the amounts of the capital accounts of the partners to be promptly paid into the partnership bank account);
(d)In the Tribunal’s view it is clear that the RPWC determined that the Premium Rebate should be distributed among former partners of PW rather than the funds being applied for a purpose of the PWC partnership or distributed as profit to the PWC partners – as the event “crystallising” the distribution of the surplus by WDB was the amalgamation (rather than, for example, a proposal to reimburse PWC an amount in respect of past outgoings or business activities of the amalgamated firm);
(e)Significantly, the payment was not disclosed as partnership income in any statement provided by PWC to the applicant.
67.In the Tribunal’s opinion that part of the minutes of the RPWC relied on by the applicant as demonstrating that the Committee considered the Premium Rebate to be partnership income (“specifically, consideration is being given to whether the distributions are in the nature of a gift and whether it is prudent to withhold tax from the distributions in any event”) does not assist the applicant. The meaning of the statement is ambiguous; however, if the distributions to partners were being treated as being out of partnership profit, then the RPWC would not be contemplating withholding tax on the distributions. Rather, the more likely explanation is that the consideration referred to was whether the distributions were likely to be regarded in the hands of the recipients as a gift or income according to ordinary concepts so that the recipients should be warned about the possibility that they would be required to pay tax on the amounts received.
68.The Tribunal is further of the view that the terms of the deed of settlement do not assist the applicant. Plainly, the deed represented a commercial settlement of a dispute in which the respondent had contended that the payments in the hands of those persons who were still partners of PWC at the time that they received the payment was either partnership income assessable under s 92 of the Income Tax Assessment Act 1936 or income according to ordinary concepts assessable directly against the partners under s 6-5 of the Income Tax Assessment Act 1997. The deed refers to partners being assessed under amended assessments issued for both income years 2000 and 2001; it was not confined to assessments for income year 2001. Consequently, no inference can be drawn as to any view taken by the respondent or any agreement as between the respondent and the parties to the deed (of whom the applicant was not one) that the Premium Rebate and the amounts distributed to former partners of PW was partnership income. It should be noted that there was no admission of liability by the partners.
69.Similarly, in the Tribunal’s view no inference is to be drawn from the adjustment sheets or any explanatory note on the amended assessment:
(a)Adjustment sheets were prepared for amended assessments issued for 2000 and 2001 (see annexure “JASM-7”). Although both adjustment sheets refer to partnership income, the adjustment sheet for 2000 makes it plain that the respondent considered that the payment was assessable directly in the hands of the applicant as income according to ordinary concepts under s 6-5. The adjustment sheet for the amended assessment for 2001 (which was subsequently withdrawn – see above) then referred to assessable income under s 92.
(b)The respondent made his position plain in the letter of 22 March 2005 to the applicant (annexure “JASM-8”). In the Tribunal’s opinion the explanation set out in that letter superseded any explanatory note to the amended assessment or adjustment sheet that had been provided to the applicant. It is clearly the basis upon which the respondent rejected the applicant’s objection which is the decision under review in this application. The adjustment sheet and the explanatory note did not form part of the assessment.
In any event the Tribunal is of the view that the amended assessment is in respect of the correct income year
70.Partners of PWC will have the benefit of a SAP as they receive distributions out of partnership profits. The applicant was not a partner when he received the payment. Consequently, even if the funds received by Injun were to be regarded as forming part of the income of PWC then it was returnable by the applicant in the income year in which it was received – as the applicant has stressed he was not a party to any partnership agreement and he did not share in partnership profits as a partner after his retirement. The payment to him was the same as any payment by PWC to a third party – returnable for tax purposes by the payee according to when it was received. The basis on which recipients who were partners of PWC in January 2000 were required to return the payments and the basis on which the applicant was required to return his payment are clearly not necessarily the same thing.
71.This is supported by the retirement advice contained in Mr Bowles memorandum of September 1998 (“JASM-2). Consultancy fees were returnable by the applicant in the year in which they were received – that is, the consultancy fees received between 1 January 1999 and 30 June 1999 were returnable in the year ended 30 June 1999. According to the applicant’s evidence, the memorandum recorded his understanding of his tax position post retirement. He did not suggest that his understanding had changed by January 2000.
72.It appears that subsequently in 2005 (or some time prior) the applicant moved to a position of returning his consultancy fees as though he had the benefit of the PWC SAP. However, how that occurred and why is not the subject of any evidence and in the Tribunal’s view no inferences should be drawn from the advices given by PWC for 2005 –2007.
The Everett Assignment
The applicant’s contention
73.The applicant contends that by deed dated 7 May 1980 he assigned to the Mews Family Trust 40% of his “interest in the partnership of Price Waterhouse” and that his wife is the ultimate sole beneficiary of the 40% assigned portion: see Reasons for Decision, T 2 at 13. The applicant further contends that the Everett Assignment, by its terms stipulated that it related to “a present and future assignment of all income profits or gains from any source which would otherwise be payable to the applicant by the Partnership”: see para 23.1 of the applicant’s Statement of Facts, Issues and Contentions. Accordingly, it is said that the assignment reduced the applicant’s assessable income by 40%.
The deed of assignment
74.The deed of assignment is annexure “JASM-4”. By its terms, the deed provided that:
(a)“the Partnership” meant the partnership subsisting between those persons who for the time being and from time to time carried on the practice of their profession as Chartered Accountants principally in Australia principally under the registered business name “Price Waterhouse & Co”;
(b)“the Property” meant “that proportion specified in Schedule 3 of the Partner’s share for the time being and from time to time in the Partnership and includes the right to receive the share of the profits of the Partnership to which the Partner would otherwise be entitled …”.
75.In the Tribunal’s opinion it is abundantly clear that the payment made by Injun to the applicant was not made to him in his capacity as a partner of PW and/or PWC but rather in his capacity as a former partner who was a partner of PW as at 30 June 1998 and who had subsequently retired prior to the payment being made. Consequently, the payment was not made pursuant to a right to receive any share of the profits of the partnership to which the applicant would otherwise be entitled. As such, the payment was assessed, and is in the Tribunal’s view correctly assessable, as income according to ordinary concepts under s 6-5 of the Income Tax Assessment Act 1997 and not as partnership income assessable under s 92 of the Income Tax Assessment Act 1936. The payment is therefore not caught by the terms of the deed of assignment.
76.That is further made apparent by the fact that there was, at the time that the payment was made, no property in existence the subject of the deed. The applicant had retired as a partner on 31 December 1998 and there was therefore, as acknowledged by the applicant, no share in the Partnership in existence after that date
EVIDENTIARY OBJECTIONS
77.The applicant raised objections on a number of grounds to the admissibility of various documents tendered by the respondent.
78.The Tribunal is of the view that all of the documents in question are relevant to the matters in issue and should be admitted in evidence. The Tribunal takes the view that it is not necessary to provide additional reasons for its decision in this regard.
DECISION
79.The Tribunal affirms the decision under review on the basis that:
(a) The amount of $195,800 is assessable to the applicant in the year of income ended 30 June 2000 as income under s 6-5(1) of the Income Tax Assessment Act 1997 being income according to ordinary concepts; and
(b) No part of the said amount is assessable to the assignee of the assignment effected by the applicant in relation to his interest in the partnership of Price Waterhouse or the partnership of Pricewaterhouse Coopers.
I certify that the 79 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: ...................[Sgd Ms C Skinner]................................
AssociateDate/s of Hearing 20 and 21 February 2008
Date of Decision 30 April 2008
Counsel for the Applicant Mr RWF Sceales
Solicitor for the Applicant Sceales & Company
Counsel for the Respondent Mr M Corboy SC
Solicitor for the Respondent Australian Government Solicitor
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