Michael McPhee and Inspector-General in Bankruptcy - [2013] AATA 457

[2013] AATA 457

Division GENERAL ADMINISTRATIVE DIVISION

File Number(s)

2011/0997 and 2011/2961

Re

Michael McPhee

APPLICANT

And

Inspector-General in Bankruptcy

RESPONDENT

DECISION

Tribunal
Mr S Penglis, Senior Member

Date 28 June 2013

Place Perth
The reviewable decisions dated 18 February 2011 and 28 June 2011 are hereby affirmed.
...(Sgd) S Penglis..........................
Mr S Penglis, Senior Member
Catchwords
BANKRUPTCY – whilst practising as a legal practitioner in partnership, applicant executed an Everett Assignment in favour of his wife whereby he assigned half of his interest in the partnership - whether the Everett Assignment between applicant and his wife had subsequently been abandoned – whether, if not abandoned, the Everett Assignment continued to operate in any way in respect of income earned by the applicant as a sole practitioner – held that, on the facts, the Everett Assignment had been abandoned by the parties thereto and, in any event, could not have operated in respect of income earned by the applicant as a sole practitioner - decisions under review affirmed

Legislation
Bankruptcy Act, 1996 (Cth), ss 139W, 139ZA and 1392A
Partnership Act, 1895 (WA), ss 42(2) and 55
Cases
CGM Investments Pty Ltd v Chelliah [2003] FCA 79
Federal Commissioner of Taxation v Everett (1980) 143 CLR 440
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6
Jones v Dunkel (1959) 101 CLR 298
Letizia Building Co Pty Ltd v Redglow Asset Pty Ltd [2013] WASC 171
LVR Australia (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90
McPhee and Inspector-General in Bankruptcy [2011] AATA 322
McPhee and Inspector-General in Bankruptcy [2012] AATA 628
Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279
REASONS FOR DECISION
Mr S Penglis, Senior Member
28 June 2013
OVERVIEW

The applicant is a senior legal practitioner practising in Western Australia.
For many years the applicant practised law as a member of a partnership (Partnership).
On or about 26 February 1980, whilst a partner, the applicant entered into a deed of assignment with his wife (in her capacity as trustee of the M.J.McPhee Family Trust) whereby he assigned half of his interest in the Partnership to her (Deed of Assignment). Such arrangements were not uncommon at that time and were known as an Everett Assignment (being a reference to the decision of the High Court of Australia sanctioning such arrangements in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440).
Distributions were made from the Partnership over a period of time in accordance with the Deed of Assignment. In due course that ceased. Its cessation generally corresponded in time with the Partnership establishing a service trust arrangement of which, amongst others, the applicant’s wife (in her capacity as trustee of the M.J.McPhee Family Trust) was a beneficiary (Service Trust).
The Partnership ultimately ended in 1998. The applicant thereafter continued to work as a sole practitioner.
The applicant was subsequently made bankrupt (on 30 April 2008) on his own petition.
Decisions were made on 18 February 2011 and 28 June 2011, by a delegate of the respondent, affirming contribution assessments of:
(a)$28,095.45 for the period 30 April 2009 to 29 April 2010, issued by the applicant’s Trustee in bankruptcy (Trustee) on 4 November 2010, and
(b)$62,190.91 for the period 30 April 2010 to 29 April 2011, issued by the Trustee on 27 April 2011.
These are the reviewable decisions the subject of these applications.
The issue before me is whether the Deed of Assignment had the consequence that 50% (or some other percentage) of the income of the applicant derived from his legal practice as a sole practitioner during the relevant contribution assessment periods was not his income, but rather the income of his wife (in her capacity as trustee of the M.J.McPhee Family Trust).
For the reasons set out below, I find that no part of the income of the applicant derived during the relevant contribution assessment periods was income of the applicant’s wife and that, consequently, the reviewable decisions must be affirmed.
STATEMENT OF AGREED FACTS
The parties, very helpfully, agreed a statement of facts as follows:
“1.      The applicant is a legal practitioner admitted in 1973.
2.        In June 1980 the applicant was in a legal partnership with Jonathan Meyer known as McPhee & Meyer.
3.        On 25 June 1980 the MJ McPhee Family Trust was settled by Mr Meyer with Johanne Mary McPhee (JM McPhee) as trustee.
4.        On 26 June 1980 by Deed of Assignment dated 26 June 1980 between the applicant and JM McPhee as trustee for the MJ McPhee Family Trust, the applicant assigned to JM McPhee as Trustee of the MJ McPhee Family Trust a 50% interest in the legal partnership McPhee & Meyer together with “all rights attaching that interest held by the Assignor in the Partnership as from and including the current financial year of the Partnership”. Mr Meyer consented in writing to the assignment.
5.        At various times between June 1980 and 1987 the McPhee & Meyer partnership admitted new partners – Mr Barter, Mr Clarke and Ms Davis.
6.        At various times between 1987 and 16 August 1989 the McPhee Meyer partnership admitted new partners Messrs Martin and Pynt. On 16 August 1989 the business name Michell Sillar McPhee Meyer was registered and commenced 1 September 1989. The business name registration records the partners as Messrs McPhee, Meyer, Barter and Clarke, Ms Davies and Messrs Martin and Pynt.
7.        On 22 May 1990 Luxer Holdings Pty Ltd was incorporated and on 30 May 1990 Messrs McPhee, Meyer, Barter and Clarke, Ms Davies and Messrs Martin and Pynt were each appointed directors of Luxer Holdings Pty Ltd.
8.        On 4 December 1990 a Deed of Partnership was entered into for a partnership styled Michell Sillar McPhee Meyer (the Deed of Partnership). Item 1 of Schedule 1 listed Messrs McPhee, Meyer, Barter and Clarke, Ms Davies and Messrs Martin and Pynt as the partners and each executed the Deed. Clause 14(a) of the Deed of Partnership provides that: “the death retirement expulsion or bankruptcy of any Partner shall not dissolve the Partnership as between the remaining Partners unless there shall be only one remaining Partner”.
9.        On 16 August 1991 Ms Davies retired from the Michell Sillar McPhee Meyer partnership.
10.      On 1 July 1992 a Deed of Trust was executed creating the Luxer Unit Trust with Luxer Holdings Pty Ltd as trustee of the Luxer Unit Trust and entities associated with each remaining partner (Messrs McPhee, Meyer, Barter, Clarke, Martin and Pynt) as the original unit holders.
11.      Also on 1 July 1992 a service agreement was executed between Luxer Holdings Pty Ltd in its capacity as trustee of the Luxer Unit Trust described as the Manager and Messrs McPhee, Meyer, Barter, Clarke, Martin and Pynt carrying on business as solicitors under the name Michell Sillar McPhee Meyer described as the continuing partners and the Principal. Under the service agreement the Manager was appointed by the Principal to provide the Principal’s business with facilities and services as described in the service agreement. From this time JM McPhee was a unit holder of the Luxer Unit Trust and receiving distributions of income from that trust.
12.      On 30 November 1992 Messrs Meyer and Martin retired from the Michell Sillar McPhee Meyer partnership.
13.      At an unknown time between 4 December 1990 and 14 July 1993 the Michell Sillar McPhee Meyer partnership admitted a new partner Mr Ryall.
14.      On 14 July 1993 the business name registration of Michell Sillar McPhee Meyer was cancelled and the business name Michell Sillar McPhee was registered commencing 1 July 1993 and recording the partners as Messrs McPhee, Barter, Clarke, Pynt and Ryall.
15.      Mr Pynt retired on or about 30 June 1994, Mr Clarke retired on or about 31 March 1995 and Mr Ryall retired on or about 29 March 1996.
16.      By 1996 the Michell Sillar McPhee partnership had reduced to two partners Messrs McPhee and Barter.
17.      On or about 10 July 1996 Mr Barter ceased work due to serious illness. On 20 April 1998 Mr Barter withdrew from the Michell Sillar McPhee partnership.   On 21 April 1998 Mr Barter’s registration as a person carrying on business under the name Michell Sillar McPhee ceased.
18.      In settlement of the affairs of the partnership on 20 April 1998:
a.        a Deed of Assignment assigning the income protection insurance policy to Mr Barter was made;
b.        a Deed of Covenant relating to the liability to Glentham Pty Ltd was made;
c.        The applicant, Mr Barter, their associates and Luxer Holdings Pty Ltd entered into a Deed of Settlement for the transfer of:
i.         the Barter shares in Luxer Holdings Pty Ltd to the applicant; and
ii.        the units in the Luxer Unit Trust to JM McPhee.
19.      On 10 June 1998 the shares in Luxer Holdings Pty Ltd held by associates of retired partners Messrs Pynt, Clarke and Martin were transferred to the applicant. The units in Luxer Unit Trust held by associates of Messrs Pynt, Clarke and Martin were transferred to JM McPhee.
20.      On 1 November 1999 the applicant registered for an ABN as an individual sole trader using the trading names – MJ McPhee Barrister & Solicitor and Michell Sillar McPhee.
21.      On 18 August 2008 the applicant ceased registration as a person carrying on business under the name Michell Sillar McPhee and on 11 October 2009 Luxer Holdings Pty Ltd was dissolved.
22.      From 21 April 1998 the applicant conducted legal practice as a sole practitioner with Luxer Holdings Pty Ltd providing the administrative functions for the legal practice as it had done for the former partnership. Management fees paid to Luxer Holdings Pty Ltd for these services were distributed to JM McPhee as the unit holder in the Luxer Unit Trust until the applicant's bankruptcy.”
BANKRUPTCY ACT, 1966 (Cth)
Section 139W(1) of the Bankruptcy Act, 1966 (Cth) provides as follows:
“As soon as practicable after the start of each contribution assessment period in relation to the bankrupt, the trustee is to make an assessment of the income that is likely to be derived, or was derived, by the bankrupt during the period, of the actual income threshold amount that is applicable in relation to the bankrupt when the assessment is made and of the contribution (if any) that the bankrupt is liable to pay in respect of that period under section 139S.”
Section 139W(4) of the Bankruptcy Act provides as follows:
“As soon as practicable after making an assessment, the trustee must give to the bankrupt written notice setting out particulars of the assessment and informing the bankrupt about the possibility of a variation under section 139T.”
Section 139ZA of the Bankruptcy Act provides that the respondent may review a decision of a trustee to make such an assessment, either on the respondent’s own initiative or if requested to do so by the bankrupt for reasons that appear to the respondent to be sufficient to justify such review.
THE DEED OF ASSIGNMENT
The Deed of Assignment, and its effect, was succinctly summarised at paragraphs 14, 15 and 16 of the respondent’s Statement of Facts Issues and Contentions in the following terms (with which the applicant did not take issue):
“14.     On 26 June 1980, the Applicant assigned 50% of his share in the legal partnership McPhee & Meyer (the McPhee & Meyer partnership) to his wife, as trustee for the McPhee Family Trust in accordance with the decision in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 (the Everett assignment).
15.      Everett assignments have been commonly used by professionals such as lawyers who practise in partnership as a means by which to minimise their liability for income taxation. Put simply, the assignment is a transfer of the whole or part of a partner’s interest in the partnership from the assignor to the assignee. It includes share of profits and also extends to income (Everett p454). See also the decision in Liedig [1994] FCA 1058 at [28] which explains Everett:
The assignment in Everett’s case brought about the result that the assignment was effective immediately and conferred upon the assignee an immediate equitable entitlement to the income referable to the share assigned as might subsequently be derived. The income derived became net income of the trust estate, within the meaning of s.95 of the Act and the assignor, as trustee, was not liable to tax upon it. There was an immediate trust established of a proprietary right which yielded or earned future income so that the income was accurately described as income of the trust estate.
16.      The Everett assignment carried with it the right for the assignee to receive 50% of the Applicant’s proportion of the profits of the McPhee & Myer Partnership. The Deed of Assignment mirrors the deed in the Everett decision.”
THE RESPONDENT’S REASONS FOR THE REVIEWABLE DECISIONS
By letters dated 18 February 2011 and 25 July 2011, a delegate of the respondent provided reasons for the reviewable decisions which were substantially to the same effect, namely:
·the Deed of Assignment “would have terminated” at the latest in 1998 when the applicant’s final remaining partner, Mr Barter, retired from the Partnership due to ill health (at which point in time the Partnership was dissolved as a matter of law);
·nothing in section 42(2) of the Partnership Act 1895 (WA) or anything else otherwise provided to the applicant’s wife any right to share in the applicant’s future income.
With respect to the second of the reviewable decisions, the respondent’s delegate also made mention of an earlier decision of this Tribunal to the effect “that even if the earlier assignment had continued in force to effect an Everett Assignment in relation to the applicant’s interests in the success of the partnerships, by 1 July 1992 the Deed of Assignment had been abandoned for the Service Agreement with the Luxer Unit Trust.”
THE HEARING OF THE APPLICATIONS
On 22 June 2009, the Trustee assessed the applicant with an income contribution liability of $32,277.40 for the contribution assessment period from 30 April 2008 to 29 April 2009. The amount was calculated on a gross income of $175,000 from the applicant’s legal practice as a sole practitioner.
The applicant contended that his income contribution for that period should be calculated on a gross income of $87,500 on the basis of the Deed of Assignment.
That matter ultimately came before the Tribunal constituted by Senior Member Sweidan. The Tribunal dismissed the applicant’s contentions: McPhee and Inspector–General in Bankruptcy [2011] AATA 322 (2011 Decision). This is the earlier decision of the Tribunal referred to in [17] above.
Accordingly, when the applicant filed these applications, the respondent made an application to the Tribunal pursuant to section 42B of the Administrative Appeals Tribunal Act 1975 (Cth) alleging that, in light of the 2011 Decision, these applications were frivolous or vexatious and should be summarily dismissed.
I heard and dismissed that application: McPhee and Inspector-General in Bankruptcy [2012] AATA 628. In summary, I did so because there was what I described to be “at least a serious question to be determined” as to whether or not the decision of the Full Federal Court of Australia in LVR Australia (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 meant that, in delivering the 2011 Decision, the Tribunal failed to exercise its jurisdiction by reason of it having copied various paragraphs of the respondent’s submissions without attribution.
For the same reason, I am now of the opinion that I should not have any regard to the 2011 Decision with respect to my determination of these applications, and have not done so.
It should also be noted that, after the hearing of the applications, further written submissions were received (to which I have had regard), namely:
·submissions from both parties as to the application of Jones v Dunkel, the application (if any) of any limitation period with respect to any potential claim by the applicant’s wife and on the issue of constructive trusts arising from Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6;
·submissions from both parties on the issue of “abandonment” and submissions from both parties on the same topic in reply to each other’s submissions.
THE WITNESSES
In addition to giving evidence himself, I received evidence on behalf of the applicant – no witnesses were called by the respondent - from:
·Teik Peng Oh;
·Felicity Davies;
·John Meyer;
·Christopher James Martin;
·Richard Ewan Sandover;
·Anthony Clarke
The applicant’s evidence in chief largely comprised his affirmation of a written witness statement which was received into evidence without objection. In amplification of the Statement of Agreed Facts (referred to in the applicant’s witness statement as “SF”), the applicant gave the following evidence:
“4.      An additional fact to paragraph 11 of SF should be that there was no vesting of the Luxer Holdings Unit Trust at the time of the settlement with Mr Barter and the other partners.
5.        As a result of the settlement MJ McPhee Family Trust held all the units and there was no vesting of the MJ McPhee Family Trust.
6.        In relation to paragraph 14 of SF I add that Mr Ryal was at no time an equity partner. He was what is known as a “salaried partner” (viz his income was fixed and he was given no access to assets and liabilities of the partnership). As a result of that status he was not given access to the Luxer Unit Trust.
7.        Further facts relating to these arrangements are as follows;
a.        There was never a vesting of the Luxer Unit Trust after the 1998 settlement with the other partners.
b.        The result of those arrangements were that the MJ McPhee Family Trust held all the units and there was no vesting of the MJ McPhee Family Trust.
c.        The transfer of units in the Luxer Unit Trust by associates (their own family trusts, of Messrs. Pynt, Clark, and Martin) were transferred to JM McPhee in her capacity as trustee of the MJ McPhee Family Trust.
d.        As a result of these changes JM McPhee in the capacity of the MJ McPhee Family Trust, held all of the units (and continues to hold those units) in the Luxer Unit Trust.
8.        The 1998 settlement settled affairs between myself, my Family Trust, and the former partners on the retirement of Michael Barter.
9.        I produce the documents below.
10.      There is nothing in those documents which would affect a final settlement, or any settlement, between myself and the Family Trust, on matters outstanding on the 20^th April 1998, or at any time thereafter.
11.      In addition to the agreed facts, I wish to state the following;
12.      The addition of new partners to the partnership referred to in paragraph 6, 7, 8 and 9 of the agreed facts were noted from time to time in the accounts of the partnership. I produce the said accounts below.
13.      None of these admissions of partners involved a formal or even informal finalizing accounts of a previous partnership.
14.      The affairs of the original partnership continued and people came and went, and when they came they took on a share of existing assets and liabilities. When they left, the liabilities were passed on to the continuing partners (ultimately to myself) per clause 16 of the Partnership Agreement. In the case of Michael Barter, the taking on of those liabilities was part of the arrangement.
15.      The clause referred to in paragraph 9 of the agreed facts (clause 14(a) of the Deed of Partnership) reflected the events in the partnership that had occurred up to that point as well as an agreement as to what was to occur thereafter.
16.      From about 1992 the management company Luxer Holdings Pty Ltd took over the management of the firm.
17.      This was a trustee company of the Luxer Unit Trust.
18.      The holders of the units in the unit trust were the respective family trusts of the partners.
19.      The distributions were made from fees paid to the management company to the family trusts, with all the units in the unit trust administered by the management company.
20.      On the 10^th June 1998 all of the units and interests of the previous partners were acquired by the MJ McPhee Family Trust, I took shares in the company Luxer Holdings Pty Ltd.
21.      The units were transferred to JM McPhee as trustee of the MJ McPhee Family Trust.
22.      The documents relating to this transfer speak for themselves, and I produce them below.
23.      From 1992 through to 2006 inclusive, the MJ McPhee Family Trust received income by the said management company and unit trust in an amount of approximately one half of the total income shared with myself. This is in accordance with the first trustee’s report (pages 80-1 of the “T documents”) after analysis of the accounts, a copy of which will be produced.
24.      From this analysis the following facts are clear;
a.        In the period 1992 – 2006 my share of the income was $903,091;
b.        In the same period via firstly the assignment of income and then the arrangements made under the Luxer Unit Trust, the Family Trust received a total of $836,175.
c.        My percentage of the total income was thus 52.65% for those years, and the Family Trust total was 47.34%.
d.        There were slight adjustments on an annual basis up and down in both cases, but this was in accord with the arrangements between myself and the trust.”

Under the heading “The 1998 Dissolution”, the applicant gave evidence of a dispute which arose between himself and his last remaining partner, Michael Barter, with respect to Mr Barter’s retirement from the Partnership, including in regard to the benefit of a life insurance premium. Of the settlement that was ultimately reached between the applicant, his wife, Mr Barter and his wife and others, the applicant gave the following evidence:
“40.     By this arrangement, Michael Barter’s family trust Roseview Holdings Pty Ltd transferred to JM McPhee as trustee of my family trust all of the units in an entity called the Luxer Unit Trust and all the shares in the company Luxer Holdings Pty Ltd.
41.      JM McPhee as trustee of my family trust and a party entitled to a share of the partnership assets, covenanted not to make any claim on the Barter Estate.
42.      In addition at that time in order to bring up to date all other transfers relating to the units in the Luxer Unit Trust.
43.      Like transfers were signed by the company called Scansion Pty Ltd, which was the trustee of the Family Trust of Steven Pynt and Janice Brenda Clarke, who was the trustee of the trust for my former partner Anthony Clarke, and Delys Joy Martin who was the trustee of the family trust of my former partner Christopher Martin.
44.      I produce copies of these consequential transfers.
45.      The effect of this settlement was that when Michael Barter became totally disabled, the sum of $200,000 was received by me from Australian Casualty Co Ltd, in addition to the monthly payments.
46.      In accord with the agreement between the parties as to the disposition of this sum, $100,000 was paid to the Barter family.
47.      JM McPhee as trustee of the family trust was party to these arrangements and her undertaking to the Barters is relevant to this situation because of the rights of the Trust (my Family Trust) to an equal share in that insurance payout.”
Under the heading “Post 1998 Settlement”, the applicant gave the following evidence:
“48. From April 1998 when the settlement occurred, and through to bankruptcy in April 2008, the company Luxer Pty Ltd continued to operate as a management company. In this period (post 1998), the units in the Luxer Unit Trust were held by JM McPhee as trustee of the MJ McPhee Family Trust, and are still so held.
49. The income received by the family trust during this period is outlined above.”
Under the heading “Prior to 1998 and the Deeds of Assignment”, the applicant gave the following evidence.
“50.     The history of this arrangement prior to 1998 was as follows;
51.      I entered into a Deed of Assignment with my family trust on the 26th June 1980. A copy of the Deed is produced above.
The Deed assigned an equal share of my interest in the partnership and “all rights attaching to that interest”. One of those rights was to take the interest in the original partnership with Mr Meyer, in the extended partnership with Mr Meyer, and others.
52.      At the time the Deed was entered into there were only two partners, myself and Jon Meyer.
53.      During the 1980s certain other partners joined, namely Michael Barter, Felicity Davis, Gary Martyn, Christopher Martin, Anthony Clarke and Steven Pynt.
54.      Partners Barter and Davis, when they first joined, were salaried partners.
55.      They were in the same status then, as Christopher Ryal became when he joined the partnership in the early 1990s.
56.      By December 1990, most of not all of the salaried partners had become equity partners, and they had each entered into their own Everett Assignment arrangements. This appears from the accounts produced, for the years each was in partnership.
57.      There can be no question that there was mutual consent among all the partners for the ongoing effect of the Everett Assignments, at least while they remained in the partnership, and there was mutual consent by word or conduct among all the partners for the ongoing use of Everett Assignments during the partnership. The distribution statements of the partnership in each year show this to be so. These accounts were passed in each year.
58.      In my case as outlined above the trust continued to receive approximately an equal share of income to myself, and the issue is whether or not it is still entitled right up to the bankruptcy when the trustee refused to pay.
59.      When the management company structure came into operation there was no termination of the Deed of Assignment created in 1980.
60.      From inception of the Luxer Management structure, the Family Trust obtained its share of income by the arrangements with Luxer and the Unit Trust Deed by which the Family Trust held units in the Luxer Unit Trust.
61.      This was a means by which the Family Trust’s entitlement was met during the years the Luxer arrangement operated.
62.      There was no dispute between the trust and myself in relation to those arrangements during those years.
63.      There is still no dispute, notwithstanding that the management company arrangement is no longer in operation.
64.      It has been my case from the beginning of the bankruptcy for the reasons stated in the contentions the Everett Assignment still applies, and the Family Trust is entitled to its share of income.
65.      This is the substance of the present dispute.”
The applicant gave evidence with respect to what he described as “a related matter” in paragraphs 66-71 (inclusive of his witness statement). I consider the matters referred to therein wholly irrelevant to the proper resolution of this matter and therefore do not set them out or summarise them herein.
In paragraph 72 of his witness statement, the applicant said as follows (more in the form of a submission, than as evidence):
“It is thus my case;
a.For the reasons outlined in the statement of contentions the right of the Family Trust to an equal share of income has continued unabated since the Everett Assignment was entered into in 1980.
b.Upon the final dissolution of the partnership in April 1998 the arrangements between the Family Trust and myself continued, to the present time, based on a constructive trust but as a result of the dissolution, by virtue of the provisions of section 42(2) of the Partnership Act (WA). This in turn arises directly from the original Everett Assignment.”
In cross-examination by Ms Price, Counsel for the respondent, the applicant gave the following further evidence:
(a)when asked whether it was correct that “once the Luxer service arrangement came into place on 1 July 1992, the partnership had basically substituted the service arrangement for the Everett Assignment arrangements”, the applicant said “I think that’s a fair assessment really”;
(b)he did not know why the partners did not acknowledge their respective assignments to their associated interests for the financial year ended 30 June 1992;
(c)he agreed that the Service Trust provided to the Partnership the premises from which the Partnership operated (by paying the rent with respect thereto), paying for the non-professional staff and general operating costs of the Partnership and charging the Partnership a management fee for those services;
(d)he agreed that whilst it did not affect his Deed of Assignment because it was entered into prior to 20 September 1985 (when capital gains tax liability was introduced), the Commissioner of Taxation had generally raised in the public arena implications for persons who had entered into Everett Assignments on and after that date arising from the introduction of capital gains tax);
(e)as to why the Partnership entered into the service arrangement with the Service Trust, the applicant could not recall save that it was after receiving advice and that he remembered “it being efficient and dealt with things without having different arrangements for different things”;
(f)there was no “full and general account taken of the partnership on its dissolution”, nor of the applicant’s wife’s interest in the Partnership on its dissolution:
(g)when the Service Trust arrangements were being entered into, the applicant said he “probably did” have a conversation with his wife as to why those arrangements were being entered into, but could not recall (some 30 years down the track) what was said;
(h)he could recall no conversation with his other partners to the effect that each of them would terminate their respective Everett Assignments and he denied that there was any such arrangement made that they would do so upon the establishment of the Service Trust;
(i)at no time from 1 July 1992 (when the Service Trust arrangement was entered into) to the time of the applicant’s bankruptcy did the applicant’s wife ever ask for 50% of his share of the income from the Partnership or of his practice as a sole practitioner (other than what she received by way of a distribution through the Service Trust);
(j)the applicant’s wife has never made a claim against him for any payment of income from his practice under the terms of the Everett Assignment;
(k)the applicant gave the following evidence in response to questions asked of him by Ms Price and then myself:
“45 Can I take it you won’t accept my proposition that she was happy to receive distributions from the service trust arrangement in satisfaction of anything she would be entitled to under the Everett assignment?---Well on an annual basis I think we agree that if that’s not available I don’t – she’s – if the service trust income is not available my point is that she is entitled to the original source income. I know we are at odds on this but that’s what I think. Given that the original source income itself granted the right to things that came from the source there’s no reason you can’t go back to the source.
SENIOR MEMBER: Well, sorry, when you say “source” - - -?---I mean the original assignment document.
But what is being distributed, Mr McPhee, of course is very different. One is a distribution of partnership profits and the other is a distribution of management profits?---Yes, yes certainly.
The picture that I have is that in 1991 the distribution of – after 1991 there was no further distribution to Mrs McPhee of any partnership profits although she continued to receive up to a point as trustee of your family trust distribution of management profits. Is that correct?---That’s right.
Because they’re two different things, aren’t they?---Yes, but they come from the same source.
Well they come from the same source, that’s why I asked you about the source, but they’re two different things?---Yes.?”
Mr Oh is a chartered accountant who was formerly a manager with Arthur Andersen & Co. Mr Oh was involved in preparing accounts for the Partnership up to 1991. Mr Oh recalled that the applicant’s Everett Assignment “was not affected by subsequent offers from the Australian Taxation Office to settle capital gains tax liabilities said to arise from Everett Assignments entered into after 19 September 1985”. He said “I believe that all of the partners effected the same or similar arrangements as they were admitted to the Partnership and the introduction of new partners did not affect Mr McPhee’s Assignment. I recall that this was confirmed in the way the accounts were prepared”. He also gave evidence that “when the legal practice service trust was eventually formed in the early 1990’s, the partners’ family trust took units in the service trust, which resulted in a similar effect to the previous Everett Assignments”.
In cross-examination, when asked what he meant by “similar effect”, Mr Oh stated “an income-splitting effect was the similarity. With the advent of a service trust, the idea was that part of the income of the legal practice was then paid as a practice administration service fee to the service trust”. He agreed that an Everett Assignment differed from the service trust arrangement in that under the Everett Assignment the partners could stream whatever portion of their partnership profits they agreed to, whereas under the service trust arrangement what was being streamed was payment for services provided to the Partnership. He stated, however, “but the effect was similar in the sense of the streaming”.
Mr Oh stated that he was not aware of any steps taken to wind up the applicant’s Everett Assignment nor record any discussions relating to “the winding up of the Everett Assignment”.
The witness statement of Ms Davies was admitted by consent without cross-examination. In essence, Ms Davies’ evidence may be summarised as follows:
·she was a partner of the Partnership in the financial year ended 30 June 1987 having joined the firm as a salaried partner in that year and remaining a salaried partner for the years ending 1988 and 1989;
·Ms Davies had “an assignment of income in place in the year ending 30 June 1990 and 50% of my income was assigned to the McCann Family Trust which was my family trust at the time”;
·the same arrangements occurred for the year ending 30 June 1991;
·Ms Davies left the firm on 16 August 1991;
·Ms Davies was aware at the time that other partners had assignments in place, although she cannot now remember any of the details;
Mr Meyer joined the Partnership on 1 January 1980. He said that “we each entered into Everett Assignments or other similar arrangement”. Mr Meyer knew that Mr McPhee entered into an Everett Assignment and that Mr Meyer himself had “a similar arrangement and that continued until I left the Partnership in 1992”. Mr Meyer said he had “seen the books of account for the relevant years” and confirmed that “they show accurately the use of arrangements between Michael, myself and the other partners in those years”.
In cross-examination, Mr Meyer was unable to recall why the Everett Assignments were not given effect to by the partners for the financial year ended 30 June 1992 “other than that it was a particularly bad financial year … and that the partners may not have distributed at all”. He was asked “Now, do you recall at the time the Luxer service arrangements were agreed to by the partners and introduced that they had all agreed to abandon their Everett Assignments?”, to which he responded “no”.
Mr Martin gave evidence that he was previously a partner of the Partnership. This occurred when the firm of which he was then a partner “merged with McPhee & Meyer, I think, in August 1988”. He had executed an Everett Assignment “as to probably 50% of my interest” in the firm which merged with the Partnership “in or about 1984”. He retired from the Partnership on 2 December 1992. When asked whether he recalled why the Partnership introduced the Luxer Service Trust arrangement, Mr Martin stated “that is soon after that period of time in which the Commissioner, as I recall, had offered a moratorium in respect to Everett Assignments, and I think they were – people were concerned about that particular device. I think, and it was probably the fact that McPhee and Meyer or whatever it was called at that point was changing premises and was probably an opportune time to change the way in which you – in which services were provided to the Partnership, and perhaps to create an entity which could do that”. Mr Martin could not recall the Partnership receiving professional advice in relation to Everett Assignments, but did recall “receiving a letter as somebody who had an Everett Assignment which offered somewhat of a moratorium, and I remember having conversations with different people about whether or not they would take up the offer”. Mr Martin said “I do feel that probably the Partnership had probably had advice that the logical thing to do in taking that lease of the new premises was to properly return to a more traditional service entity-type arrangement”.
Mr Martin could not recall Arthur Andersen providing any advice to the Partnership with respect to Everett Assignments. Mr Martin could not recall any discussions between the partners about terminating their Everett Assignments when the Luxer Service Trust arrangement was introduced in 1992.
Mr Sanderson is a partner of the law firm, Jackson McDonald, a position he held in 1996 when he received instructions to act on behalf of Michael Barter, the applicant’s last partner. Mr Barter was Mr Sanderson’s brother-in-law, Mr Sanderson was assisting Mr Barter work through his affairs when “he was given little time to live”. Mr Sanderson negotiated with the applicant on behalf of Mr Barter in relation to Mr Barter’s retirement from the Partnership and an insurance policy (in respect to which there was a dispute, the detail of which is not presently relevant).
Mr Clarke’s evidence was that he joined the Partnership in about 1987 as a salaried partner, becoming an equity partner in the financial year ended 30 June 1989. He said that, upon becoming an equity partner, he entered into an Everett Assignment “to assign some of my income to my family trust”. Mr Clarke had seen the accounts of the firm for the relevant period and was “satisfied those accounts passed, including reference to my and Michael’s Everett Assignment”. Mr Clarke gave the following further evidence:
“10.     In about 1993 a management company named Luxer Holdings Pty Ltd took the management of the firm and it in turn managed the unit trust in respect of which Michael’s family trust and mine and the other partners took units in the family trust arrangement administered by the management company.
11.      These arrangements generally reflected, through such unit trust, the arrangements that had been in place prior to the formation of the management company, and remained in place, for Michael and his family, and mine, and the other partners, while I remained in the partnership.
12.      My family trust received returns from the Luxer Unit Trust until 1994. The accounts show the last distribution was in 1994 after which I left the firm.”

SOME RELEVANT DOCUMENTS

The Deed of Assignment dated 26 June 1980 between the applicant and his wife, Johanne Mary McPhee as trustee of the M.J.McPhee Family Trust, relevantly provided that “in consideration of these presents the Assignor hereby ASSIGNS to the Assignee 50% of the Assignor’s interest in the Partnership referred to in the Recital hereof together with all rights attaching to that interest held by the Assignor in the Partnership as from and including the current financial year of the Partnership”.
The relevant Deed of Partnership provided, by clauses 14 and 15, that the death, retirement, expulsion or bankruptcy of any partner “shall not dissolve the Partnership as between the remaining Partners unless there shall be only one remaining Partner” and that “the admission of any further Partners to the Partnership or the merger of the Partnership with any other partnership shall not dissolve the Partnership nor create any new Partnership”.
The Service Trust was created by a Deed of Trust dated 1 July 1992. It was a Unit Trust in respect of which the nominees of each of the then partners of the Partnership were each issued one ordinary and one special par unit. In the case of the applicant, the unit holder was his wife “as Trustee of the Michael John McPhee Family Trust”.
By an agreement also dated 1 July 1992, Luxer Holdings Pty Ltd as trustee of the Luxer Unit Trust, entered into a Service Agreement with the then partners of the Partnership by which it agreed to, amongst other things “control and manage the administrative and accounting functions” of the Partnership.
By letter dated 19 December 1997, the applicant wrote to Mr Sanderson of Jackson McDonald stating, inter alia “(t)he matter is settled, I understand, on this basis; namely … 1. The partnership be deemed formally dissolved on notification and agreement of these terms …”.
By Deed of Settlement dated 20 April 1998, the applicant, his wife and Luxer Holdings agreed with Mr Barter, Mr Barter’s wife and Mr Barter’s company, Roseview Holdings Pty Ltd (which held units in the Service Trust) with respect to Mr Barter’s retirement from the Partnership as a consequence of the terms of settlement set out in the 19 December 1997 letter from the applicant to Mr Sandover of Jackson McDonald referred to above (such letter being expressly referred to in the Deed and a copy attached thereto).

On the same day, by Deed of Covenant between the applicant, Mr Barter and Mr Barter’s father, the dispute with respect to the insurance policy was settled.
The Partnership accounts up to and including the year ended 30 June 1991 show that the Deed of Assignment (and similar arrangements entered into by the applicant’s other partners) were given effect to. Accordingly, by way of example, for the financial year ended 30 June 1991, the accounts show that $59,079 was distributed to the applicant and a further $59,079 distributed as an “assignment to M.J.McPhee F/T”.
Financial statements for the Partnership for the year ended 30 June 1992 record “0” with respect to the “assignment to M.J.McPhee F/T” and similar entries for each other partner. The evidence adduced at the hearing does not provide any clear reason why the Deed of Assignment was not given effect to that year. Accordingly, I make no findings as to why that happened.
Distributions to the beneficiaries of the Luxer Unit Trust commenced in the financial year ended 1993. In that year, the financial statements for the Partnership, for the first time, showed the payment of management fees (to the Luxer Unit Trust). Also in those accounts, distributions to each of the partners are stated and there is no reference to any of their “assignments”.

GENERAL FINDINGS OF FACT

I was not invited by either party to find that the evidence of fact given by any witness to be unreliable, either generally or in any particular regard.
I am satisfied, both by the evidence given and the demeanour of each witness when giving their evidence, that the absence of any such submissions was quite proper: no basis exists for making any such finding.
I therefore make findings of fact in accordance with paragraphs 1 to 22 (inclusive) of the Statement of Agreed Facts and in accordance with the evidence referred to in [26] to [52] above.

TERMINATION OF DEED OF ASSIGNMENT UPON ENTRY OF NEW PARTNERS AND DEPARTURE OF EXISTING PARTNERS

It was submitted on behalf of the respondent that the subject matter of the Deed of Assignment was the Partnership as it existed as at the date of the Deed and that, without the affirmation of all of the partners, it ceased to operate upon the creation of a new partnership arising from the introduction of a new partner or the departure of an existing partner. In respect of this argument, a concession was made that the evidence established such affirmation up until 1991.
There is no substance in this argument by reason of the express provisions of the written Deed of Partnership which provided for a continuation of the Partnership notwithstanding the entry of new partners and the departure of existing partners. By reason of that clause, as a matter of law, a new partnership did not arise each time a new partner was admitted or existing partner departed. Rather, there was a continuation of the self-same Partnership as existed as at the date of the Deed of Assignment and thus a continuation of the subject matter of the Deed of Assignment notwithstanding such changes to the Partnership.
It was also submitted on behalf of the respondent that the Deed of Assignment did not continue to operate when new partners were added to the Partnership because, notwithstanding the clause in the Partnership Agreement providing for the continuity of the partnership notwithstanding changes to its membership, there was no evidence of new partners agreeing to the Deed of Assignment.
There is no substance in this argument either; there is nothing in the Partnership Agreement, nor anything in law or equity, that required the Deed of Assignment to be agreed to by the applicant’s other partners, either at the date of the Deed of Assignment, or subsequently, in order for it to be effective. It therefore follows that the fact that persons who became the applicant’s partners subsequent to the date of the Deed of Assignment may not have agreed to its terms (either expressly or by implication) is irrelevant.

ABANDONMENT

There is no evidence before the Tribunal to justify a finding that there was any conversation or correspondence between the applicant and any of his partners or his wife in which they expressly agreed to abandon the Deed of Assignment. The fact that no evidence was adduced of any such conversation or correspondence does not, however, mean that the Deed of Assignment was not in fact abandoned.
In this regard, the relevant legal principles were very recently summarised by Beech J of the Supreme Court of Western Australia in Letizia Building Co Pty Ltd v Redglow Asset Pty Ltd [2013] WASC 171. At [115] – [123] (inclusive) as follows:
“115    When the conduct of the parties reveals that neither intends that the contract be further performed, the parties will be regarded as having so conducted themselves as to abandon or abrogate the contract: DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 434; Summers v Commonwealth (1918) 25 CLR 144, 151 – 152; Ryder v Frohlich [2004] NSWCA 472 [135]; Fazio v Fazio [2012] WASCA 72 [71].
116     The inference of abandonment may be drawn when an ‘inordinate’ length of time has been allowed to elapse during which neither party has attempted to perform, or called upon the other to perform, the contract between them. Thus, ‘each party is entitled to assume, from the long continued ignoring of the contract on both sides, that the matter is off altogether’: Fitzgerald v Masters (1956) 95 CLR 420, 432; Ryder v Frohlich [135].
117     The significance of the length of time during which both parties take no step in relation to the contract depends on all the circumstances: Ryder v Frohlich [137]. Those circumstances include the nature of the contract, and any manifestations of intention between the parties.
118     The abandonment of a contract by inferred agreement does not depend on the subjective intention of the parties, but upon whether their conduct, including both acts and omissions, viewed objectively, manifests an intention to discharge the contract: Fazio [74].
119     A contract of this type, like any contract, may be inferred in the absence of an identifiable offer and acceptance: Fazio [188].
120     The contract may be inferred from what the parties did, as well as from what the parties did not do or say. Thus, the parties’ dealings are relevant both ‘for what was said and not said’: Fazio [189].
121     The question is whether the parties conduct, viewed objectively, reveals a tacit understanding or agreement, or a manifestation of mutual assent, which evinces an intention to create (here affect) legal relations: Fazio [190] – [191].
122     The test of whether what Mr Letizia said should be taken as intending to affect the plaintiff’s legal relationships with the partners is whether a reasonable person in the position of the partners would consider that Mr Letizia intended to be bound by what he said, taking into account all of the circumstances: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 [24] – [25].
123     Conduct of the parties subsequent to the date postulated of a contract may be considered in deciding whether a contract has been formed: Fazio [193] – [195].”
In the Federal sphere, similar propositions can be found in the decision of Finkelstein J of the Federal Court of Australia in CGM Investments Pty Ltd v Chelliah [2003] FCA 79, particularly at [17]-[22] and, on appeal, in Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279 at [2] and [38] – [45].
In this regard, the Tribunal refers to the following:
(a)the Deed of Assignment has not been complied with since in or about 1991;
(b)the nature of the Deed of Assignment is such that performance ought to have occurred each year (as it had occurred previously);
(c)an “inordinate” length of time has thus elapsed since the Deed of Assignment was last performed.
(d)during that period, the applicant’s wife did not call upon the applicant to perform the Deed of Assignment, nor did she complain of its non-performance.
In addition:
(a)it is open to the Tribunal on the evidence to infer, and the Tribunal duly does so, that the Deed of Assignment was abandoned in favour of a more effective income splitting mechanism, namely the creation of the Service Trust (by which the applicant’s wife, as a unit holder, received by distribution monies which otherwise would have formed part of the distribution to which the applicant and his wife would otherwise have been entitled as a partner and assignee). Of course, from a strict legal point of view, the Deed of Assignment and the introduction of the Service Trust were not necessarily mutually exclusive. However, it was accepted by the applicant that, in essence, they were each created for the same purpose (namely lawful tax minimisation) and there is no evidence before the Tribunal by which a finding could fairly be made that the introduction of the Service Trust was intended by the applicant and his wife to be in addition to the Deed of Assignment;
(b)the applicant did not provide, and his wife did not seek, an account when the partnership of which the applicant was a member terminated, or at any time subsequently.
In this regard, the applicant submitted that the Service Trust arrangement “should be seen as a temporary consensual variation of the rights arising from the original Everett Assignment”. The Tribunal agrees with the respondent’s submission in reply, namely that there is no evidence of any “temporary consensual variation” of executory obligations and interest under the Deed of Assignment and that the weight of the evidence is indeed to the contrary.
In one of his written submissions after hearing, the applicant sought to summarise the reasons why, on the facts of that case, the Full Court of the Federal Court of Australia overturned the trial judge’s findings in Wallera, and then made the following submissions with respect to “This Case”:
“1       In this case, in comparison with the facts in Wallera the following is undisputed;
a.The original Deed of Assignment was not limited to the interests in the partnership alone, but also “all rights attaching to that interest held by the assignor in the partnership as from and including the current financial year of the partnership” and that by that assignment the assignor “declared that he holds the interest … conveyed and assigned in trust for the assignee absolutely”.
(Applicant’s Book of Documents page 20)
b.It was thus contemplated that there would be rights “attaching to the partnership rights”. Such rights are not defined; and are open-ended.
c.They included the rights going relating to taking an interest in partnerships with others through to 1991 (as conceded) and through to 1998; and then onwards through to the present time by the operation of section 42(2) of the Partnership Act.
2         For these reasons, to regard the matter between the Applicant and the Trustee (his Wife – as the trustee of the Family Trust) as if they were acting “at arms length” – per Giles J in Wallera – is unreal and not judging the facts as they are, but as the Respondent would like them to be.
3         Further, in this matter, the arrangement between the parties existed from 1980 through to 2007. From the involvement of the management company, the trust continued its interest in the partnership and gained an equivalent right in terms of income to the Applicant throughout the period (see the Applicant’s Statement of Evidence – unchallenged – at paragraphs 23 and 24).
4         In this context, the one year break in 1991 does not have any effect considered in the overall context of a 27 year continuance and into the future. A working lifetime.
5         In this context, the fact that the Trustee of the trust saw fit to take her share of income in that way, as opposed to another for that period is within her rights on a consensual basis, there being no complaints from either side. The consensual nature of the arrangement is sworn to in the Applicant’s evidence (paragraph 63) to which there was no challenge.
6         Such commercial adjustments by the parties concerned are to be taken into account in judging whether there should be an inference of abandonment (per Gyles J in Wallera paragraph 67 and Keifel J paragraph 52). There was nothing to suggest here that the parties thought the matter was “off altogether”. See also Ryan J at paragraphs 3 and 4 outlined above.
7         To the contrary, the involvement of the trust during the period was continuous and active. The trust received its share of the profits through the management arrangements. It took part directly in the settlement, with the Barter interests in 1998 and took upon itself obligations in relation to that interest. But importantly, there was nothing in those settlement documents (Applicant’s Book of Documents pages 84-92) which would lead to the necessary inference that the Trustee had given up altogether, or at all, the underlying rights, arising from the initial Deed of Assignment in June 1980, which formed the basis of the Trustee’s entitlement under the management agreement arrangements; and onwards through to the date of bankruptcy in 2008. The contrary is the case. Far from being inactive, the trust was completely active on a consensual basis and on commercial terms.
8         When the management company was not able to continue because of the bankruptcy, the claim was made immediately on the Trustee in Bankruptcy. There is no suggestion, even now, that he was in any way led astray. The decision by the Trustee in Bankruptcy was the first time there was any dispute on the matter after a long period of consensual arrangements between the Applicant and the Family trust. For the Trustee in Bankruptcy to take the current point, as he has done, is simply to look at these parties as if they were “at arms length” and in contention. And as a result to look at the facts in an unreal way so as to arrive at an inference which a reasonable observer, looking at all the facts, would not arrive at. The proper inference is the same as that drawn by Gyles J in Wallera paragraph 67 that there was “a consensual acceptance of that situation” and thus no abandonment.”
The Tribunal does not accept that anything in the above submissions detracts from a finding that the Deed of Assignment has been abandoned. First, the fact that the Deed of Assignment was not limited to the interests in the partnership alone and the other matters referred to in numbered paragraph 1 of the applicant’s written submissions do not detract from any of the matters referred to in [63] and [64] above. Indeed, if anything, they seek to reinforce the matters referred to in those paragraphs.
Secondly, the introduction of the Service Trust provides a commercial explanation for why no steps were taken pursuant to the Deed of Assignment since 1991. It is not to the point to refer to “the consensual nature of the arrangement” as somehow inconsistent with an inference of abandonment. To the contrary, the “consensual nature of the arrangement” (ie, the Service Trust) fortifies that conclusion for the reasons previously given.
Next, I reject the applicant’s oral submission that what occurred was that the Deed of Assignment was put into abeyance rather than abandoned and reject the applicant’s written submission that “there was nothing to suggest here that the parties thought the matter was off altogether”. In this regard, I refer to and repeat [63] and [64] above.
In the same way, to point to the fact that the “Trust during the period was continuous and active” by receiving its share of the profits through the management arrangements and taking part in the settlement with the Barter interests in 1998, and that this was “on a consensual basis and on commercial terms” - all of which the Tribunal accepts and finds - is not to the point. The focus here is on the Deed of Assignment: not the Service Trust.
The Tribunal notes that there is no benefit to be gained in a comparison of the facts in Wallera to the facts of this case. Each case turns on its own facts (including facts which can properly be inferred from the evidence adduced at trial). The facts of this case are overwhelmingly consistent with the Deed of Assignment having been abandoned over 20 years ago.
The Tribunal also notes that the authorities make it clear that whether or not a contract has been abandoned ought be inferred and does not depend on the subjective intention of the parties. The question is whether the parties’ conduct, including both acts and omissions, viewed objectively, manifests as an intention to discharge a contract. Evidence by the applicant to the effect that the Deed of Assignment had not been abandoned ought therefore be afforded little (if any) weight. Similarly, little weight (if any) would have been attributed to any such evidence had it been adduced from the applicant’s wife. On the other hand, what the parties said at the time is admissible and is relevant. The point here is that no evidence was given of any discussion between the applicant and his wife that might negative the inference available as to abandonment (including the reasons therefor).
Given the inferences otherwise available and which properly may be drawn, if they could have been rebutted, they needed to have been rebutted by clear evidence having been given by the applicant and/or his wife as to relevant conversations or other conduct at the time inconsistent with the inference drawn. Quite apart from any adverse interest arising from the failure of the applicant to call his wife to give evidence (through the operation of the principles referred to in Jones v Dunkel (1959) 101 CLR 298), her absence and the nature of the applicant’s evidence means that there is nothing in evidence that causes me not to draw the inferences otherwise properly available on the evidence and make the findings outlined above. It is therefore not necessary to consider whether or not a Jones v Dunkel inference ought be drawn as a consequence of the applicant’s wife not giving evidence (and to make it clear no such adverse inference is drawn).
The clear conclusion to be drawn from the evidence and the analysis set out in the preceding paragraphs is that the applicant and his wife ought be regarded as having so conducted themselves as to abandon or abrogate it.
On this ground alone the reviewable decisions must be affirmed.
Whilst that is sufficient to dispose of this matter, I nevertheless proceed to consider and determine the issue whether, if it had not been abandoned, the Deed of Assignment operated so that 50% (or some other percentage) of the income of the applicant derived from his legal practice as a sole practitioner during the relevant contribution assessment periods was not his income, but rather the income of his wife.

EFFECT OF DEED OF ASSIGNMENT ON MR BARTER’S RETIREMENT

The issue for determination is whether the Deed of Assignment had any operation with respect to the income of the applicant during the relevant contribution assessment periods given that, by then, the Partnership had ended.
For the reasons which follow, the answer is that it did not.
Before turning to the applicant’s submissions, the applicant succinctly put his position in this regard in answer to questions put to him by Counsel for the respondent as follows:
“The whole basis of your case is that you say the Everett assignment continued on after 30 June 1991?---Well, I don’t think that states it clearly. I say the trust created by the Everett assignment continued. The Everett assignment creates a constructive trust in favour of the assignee and that continues. It’s never been removed.
Is the position that you accept that there was a termination of the partnership in April of 1998 when Mr Barter retired out of the partnership?---Yes.
You’re saying that at that point you did not account to your wife or your equitable interest in the assets of the partnership?---I’ve said a capital account, but I have accounted to the trust in terms of income in the sense that it – through to 2006 it came through the management company. So that’s an account, if paying income on assets retained is an account – on accounting in the verbal sense, not necessarily the noun sense which I think you’re using it.
On the dissolution of the partnership in April of 1998 Mrs McPhee – and this is on the assumption that she hadn’t acquiesced in the extinguishment or termination of the assignment earlier – but assuming the assignment had proceeded through to April of 1998, on the dissolution she would have been entitled to an accounting from you of your interest in the partnership?---Yes, and she got it.
…
You say that the Everett assignment continued on. What material, in the material that’s before the Tribunal, do you rely upon to say that this assignment continued on requiring you to pay 50 per cent of your income from your legal practice to your wife?---Well, the original assignment did not only assign the rights in the initial partnership, but all rights arising from that partnership. I can get the words for you if you want but it’s in the assignment document. So my life has been a continuum since then and we’ve come into partnerships, and people have come and gone and so on. But my entitlement, such as they are, have been continuously involved in this practice that we started in 1980 and my wife has come with me in the trust in the ups and downs, and until the bankruptcy her income was coming – was arrived – emanated out of the original structure and it’s still there. The original structure had to stop because I couldn’t be a director.
…”
Mr McPhee, perhaps you could take us to the deed of assignment and where the wording you say supports your position. This is at page 20, Exhibit A1?---Paragraph 1:
In consideration of these present the assignor hereby assigns to the assignee 50 per cent of the assignor’s interest in the practice referred to in the recital hereof together with all rights attaching to that interest by the assignor in the practice as and from and including the current financial year of the practice.
You’re saying that despite the different form and substance of the service trust arrangement that Mrs McPhee’s entitlements continued to flow throughout - - -?---Well, the entitlement if she wishes to make that claim, yes. If the service is – if the service trust is not working then she is entitled to it in my opinion.
…
Do you agree with my proposition that because of the different form of substance in the service trust arrangements that the deed was signed and simply been pulled out of the hat by you, Mr McPhee, in order to reduce your income contribution under the terms of your bankruptcy?---No, I kept the file in relation to these – to this assignment in my drawer all those years. I didn’t just pull it out of the hat, I put it in my first statement to the trustee. I made him aware of the position from the beginning. I always had it in my mind. It’s not a new invention or anything of that nature. We’ve been at odds about the matter since the thing started and I can show you the original file if you like, I’ve got it here today. It was something that I’ve had in my drawer all those years.”

The submissions advanced on behalf of the applicant accepted (correctly) that the income the applicant has earned subsequent to the dissolution of the Partnership is not in terms covered by the Deed of Assignment. In other words, the subject matter of the Deed of Assignment was an interest in the Partnership: it was not an assignment of an interest in the applicant’s practice as a sole practitioner.
Rather, the applicant’s case was put on the basis that, as there was no taking of accounts upon the dissolution of the partnership as between the applicant and his wife, and as the applicant continued as a sole practitioner the business previously conducted by the Partnership, at all times subsequent to the dissolution of the Partnership the applicant held 50% of the Partnership property on constructive trust for his wife, which constructive trust extended to 50% of the income subsequently earned by the applicant as a sole practitioner.
The applicant submitted that he had an equitable duty to account to his wife for her half share in the Partnership upon dissolution. He also relied upon section 42(2) of the Partnership Act 1895 (WA) which, in respect to an assignment of a partner sharing a partnership, is in the following terms:
“In case of a dissolution of the partnership, whether as respects all the partners, or as respects the assigning partner, the assignee is entitled to receive a share of the partnership assets to which the assignee partner is entitled as between himself and the other partners and, for the purpose of ascertaining that share, to an account as from the date of dissolution.”
It was submitted on behalf of the respondent that the settlement with Mr Barter, to which the applicant’s wife was a party, constituted a discharge of the applicant’s obligation to account to his wife upon the dissolution of the Partnership. I do not agree. I find nothing in the settlement documentation that would support such a finding.
Notwithstanding, I find the applicant’s case in this regard to be fundamentally flawed and misconceived for a number of reasons.
No constructive trust of any nature has been ordered in favour of the applicant’s wife as against the applicant.
Assuming for present purposes (as it was not the subject of detailed submissions by the parties) that the applicant’s failure to account to his wife in respect of her half interest in the Partnership upon its dissolution is conduct in respect of which a constructive trust might be declared, it is far from clear that a constructive trust could fairly be a remedy in fact ordered should the applicant’s wife apply to a court for relief arising out of the applicant’s failure to account. In this regard, I refer to the recent decision of the Full Court of the Federal Court of Australia in Grimaldi, which is to underscore the fact that a constructive trust is no more than a remedy which may or may not be considered the appropriate remedy to be ordered in any particular case. Nothing has been raised by the applicant to persuade me that if the applicant’s wife now took action against him, in all the circumstances the appropriate remedy would be more than an account of profits and would extend to the ordering of a constructive trust.
This conclusion is reinforced when one has regard to the fact that some 15 years have already passed and the applicant’s wife has not required the applicant to account to her for her 50% interest of the Partnership property, let alone commenced legal proceedings. It is a trite proposition that delay, without more, is a factor that a court can have regard to when determining what is the most appropriate remedy in all the circumstances of the matter.
Moreover, even if it could properly be said that the applicant’s failure to account to his wife upon the termination of the Partnership means that he holds property for her on constructive trust, the subject matter of that constructive trust would be, at most, half of the former property of the Partnership and half of any asset of the applicant’s into which some of that property can be “traced”. The suggestion that income subsequently derived by the applicant as a sole practitioner is something into which the property of the Partnership can be traced is entirely devoid of merit. The income derived by the applicant as a sole practitioner is as a consequence of his subsequent personal exertion and expertise. True it is that in doing so he may have taken the benefit of assets previously owned by the Partnership in which the applicant’s wife may have had an interest and entitlement. However, no authority was provided to me to support the proposition (which I reject) that a constructive trust over the former assets of the Partnership would give her some proprietary interest in (ie, constructive trust over) part of the income subsequently earned by the applicant as a sole practitioner.
Another flaw in the applicant’s submission is that even if, contrary to my view, the applicant’s wife could establish a constructive trust in respect of income generated by the applicant as a sole practitioner, it is incorrect to assert that the extent of any such constructive trust would be 50% of the applicant’s income as this entirely ignores the fact that equity will generally provide for an allowance to be made to the extent that the subject matter of a constructive trust has been created or made more valuable as a consequence of the effort and exertion of the party against whom the constructive trust is to be ordered (where such effort and exertion is entirely separate from the conduct giving rise to the constructive trust).
In this regard I note that, in supplementary submissions filed after the hearing (dated 18 April 2013), the applicant made the following submissions:
“4.      Further in the course of the closing submissions debate centred upon the relevance of personal exertion of the Practitioner; and the extent to which same would affect the interest of the trust.
In such situations, the usual position, between partners is that;
“In the absence of a contrary agreement where the business of a partnership continued after a member has died or otherwise ceases to be a member without any final settlement of accounts being made, the outgoing partner or his or her estate has the option to be paid interest on the value of the share of the partnership assets being utilized or such share of the profits since dissolution as the courts finds it attributable to the use of those shares …”
Halsburys laws of Australia paragraph 305-310.
5.        In such circumstances, Lindley & Partnership (14^th Edition) at page 438 says this;
“A partner who continues in business after the dissolution of a partnership and makes use of either the former partners assets or business connection derived out of the former partnership assets or connection is accountable to his former partner or partners for the profits attributable thereto. Thus, in Pathirana v Pathirana (1967) 1AC233, the Plaintiff and the Defendant were partners in a Petrol Service Station in Ceylon. Following a dispute, the Defendant gave notice terminating the partnership and, before the notice expired, he obtained a renewal of certain petrol supply agreements in his sole name and, after the determination of the partnership, carried on trading from the same premises in his own name. The Privy Council held he was accountable to the Plaintiff for a share of the profits contributable to the new petrol supply agreements”.
6.        In Pathirana, a submission was made that an enquiry as to the contribution of a person exertion; use of assets – per a case of Manley v Sartori 1926 1 CH157 should be made. But the Privy Council declined to do that and made a “robust” assessment “in a practical way” by reducing the half share of the profits which the (former partner) would have received had the partnership continued to a one third share of the profit.
The form of order in Manley and Sartori, was follows;
“…That enquiries must be made for the purpose of ascertaining whether of any or if so what part of those profits (after deducting such sum and should, after enquiry be certified to be properly allowed to the Plaintiff in personal supervision and management of the business sharing the place) had been earned during the period by the surviving partners otherwise and by the years of the partnership assets including good will”.
These cases have been followed in Australia e.g. Oddy v Fry 1998 1VR142 at 149 and 151.
7.        In the instant case, there has been a continuous use of the partnership assets and good will from 1998 through to the present time.
8.        The only distinguishing point between the instant case and the above cases is the fact in the instant case there is no partnership involved as such. But, similar principles must, it is respectfully submitted, apply between the partner of the former partnership and his assignee.
9.        The previous arrangements between the Applicant and the Assignee should continue through to the present time, because since the original assignment in 1980, there had never any allowance made for his personal exertion. This is the reason why it is been considered that an ample allowance for his personal exertion has been made given that it is the same procedure that has applied since inception; between them.”
The authorities referred to by the applicant are wholly consistent with the proposition that some allowance must be made for a person’s personal exertion in the modelling of any order for a constructive trust or an account of profits to ensure that the order operates equitably, and that the party in whose favour the order is made is not unjustly rewarded by reference to the personal exertion of the other party unrelated to the conduct giving rise to the entitlement to relief.
In this regard I note that this analysis is wholly consistent with section 55 of the Partnership Act which provides as follows:
“(1) Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlements of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner, or his estate, is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of 6% per annum on the amount of his share of the partnership assets.
…
(3) In determining how far the profits made since the dissolution are attributable to the outgoing partner’s capital, the court shall have regard to the nature of the business, the amount of capital from time to time employed in it, the skill and industry of each partner taking part in it, and the conduct of the parties generally. And the court may allow to any such continuing partners such remuneration as to the court seems meet for carrying on the partnership business.”
Paragraph 9 of the applicant’s written submissions (reproduced at [90] above) are not only unsupported by, but are inconsistent with the authorities. Whatever the previous arrangements were as between the applicant and his wife with respect to their respective interests in the Partnership do not govern his wife’s entitlements with respect to income earned by the applicant subsequent to the dissolution of the Partnership. At best, what she is entitled to is to have her husband account to her for so much of the profits that he had subsequently made which were attributable to his subsequent use of her share of the Partnership’s assets, and in determining how far the profits made since the dissolution are attributable to her “capital”, regard would be had to the nature of the business and the skill and industry of the applicant.
It therefore follows that if I am incorrect in my finding that the Deed of Assignment had been abandoned by the parties thereto long before the Partnership came to an end, whatever rights were possessed by the applicant’s wife upon the dissolution of the Partnership does not give to her any entitlement at law, in equity or by statute to any proprietary interest (let alone a proprietary interest of 50%) in the income subsequently derived by the applicant as a sole practitioner and, in particular, during the relevant contribution assessment periods.
It is therefore unnecessary for me to further consider whether, whatever rights the applicant’s wife might have had to make a claim against the applicant as a result of him not accounting to her upon the dissolution of the Partnership, they have been abandoned by her, or are otherwise barred, as a consequence of her not making any claim or taking any other steps to enforce any such rights since the dissolution of the Partnership in 1998. In simple terms, if any such rights still exist, then the applicant’s wife can seek to enforce them against the Trustee and, if she is accepted or found to be entitled to a payment, then she will be entitled to participate in any distribution from the Trustee as a creditor of the applicant’s bankruptcy.
In this regard, I refer to and respectfully adopt paragraphs 9 and 10 of the respondent’s written submissions after trial dated 6 May 2013, which are as follows:
“9 If Mrs McPhee as trustee for the M J McPhee Family Trust was at the time of the income contribution assessments entitled to receive from Mr McPhee any sum pursuant to her interest under the terms of the Deed of Assignment, which is not established on the evidence, any such sum is separate and distinct from the income derived by Mr McPhee from his legal practice.
10 Mr McPhee is conflating any obligation he may have to pay a sum to Mrs McPhee pursuant to the Deed of Assignment with his obligation to make a contribution from his personal income earnings to his bankrupt estate. The duties are different conceptually, in principle and in the obligations that arise. Mr McPhee’s earnings from his own skill and exertion as a legal practitioner is his income according to ordinary concepts and is available for contribution to his bankrupt estate. The nature and character of the income is unchanged even if Mrs McPhee may commence proceedings and a court may find that Mr McPhee must pay from his funds and assets a sum of money to Mrs McPhee in respect of her proportion of any residue on dissolution of the partnership.”
For all of the reasons I have given above, the reviewable decisions dated 18 February 2011 and 28 June 2011 must be affirmed.

I certify that the preceding 97 (ninety-seven) paragraphs are a true copy of the reasons for the decision herein of Mr S Penglis, Senior Member .

...(Sgd) T Freeman...................
Associate
Dated 28 June 2013

Date(s) of hearing

25 and 26 March 2013

Written submissions after hearing

Applicant’s written submissions dated 9 April 2013, 18 April 2013, 7 June 2013, 14 June 2013 and 18 June 2013

Respondent’s written submissions dated 9 April 2013, 6 May 2013, 7 June 2013 and 14 June 2013

Applicant

In person

Counsel for the Respondent

L Price

Solicitors for the Respondent

C Kovacevic

Division	GENERAL ADMINISTRATIVE DIVISION
File Number(s)	2011/0997 and 2011/2961
Re	Michael McPhee
APPLICANT
And	Inspector-General in Bankruptcy
RESPONDENT

Tribunal	Mr S Penglis, Senior Member
Date	28 June 2013
Place	Perth

Date(s) of hearing	25 and 26 March 2013
Written submissions after hearing	Applicant’s written submissions dated 9 April 2013, 18 April 2013, 7 June 2013, 14 June 2013 and 18 June 2013
Respondent’s written submissions dated 9 April 2013, 6 May 2013, 7 June 2013 and 14 June 2013
Applicant	In person
Counsel for the Respondent	L Price
Solicitors for the Respondent	C Kovacevic