Rowe, B. v The Commissioner of Taxation

[1982] FCA 107

Re: BARBARA ROWE and HAROLD GRAHAM ROWE
And: THE COMMISSIONER OF TAXATION (1982) 60 FLR 475
Nos. G29 and 30 of 1981
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Deane(1), Fisher(1) and Davies(1) JJ.

CATCHWORDS

Income Tax - Assessable income - partnership of husband and wife - assignment of share in partnership to trustee company - as from a prior date - termination of partnership - new partnership between husband, wife and company - whether net income up to termination of partnership was income of the old partnership between husband and wife.

Income Tax Assessment Act, 1936-1975: ss. 90, 91, 92

Income Tax - Assessable income - Partnership - Assignment of share in partnership to company - Assignment expressed to operate retrospectively - Whether assignment terminated existing partnership - Whether original partners assessable on partnership income up to assignment date - Income Tax Assessment Act 1936 (Cth), ss. 90, 91, 92.

HEADNOTE

The taxpayers were husband and wife. They had carried on a rural business in equal partnership. On 18th April, 1975, Rowe Holdings Pty. Ltd. was incorporated to act as trustee of a family trust which was established on 23rd April, 1975. On 16th May, 1975, both taxpayers assigned to the company "as at and from" 1st July, 1974, one-half of their respective shares in the partnership. By deed it was provided that the taxpayers and the company would continue the partnership business. The Commissioner assessed each of the taxpayers on half of the income of the partnership for the whole of the year of income ending 30th June, 1975. The taxpayers appealed unsuccessfully to a Board of Review, and then to the Supreme Court of Queensland. The taxpayers appealed.

Held, appeals allowed, that on its construction, the assignment of 16th May, 1975, terminated the existing partnership between the taxpayers and created a new partnership between the taxpayers and the company. The taxpayers were therefore each assessable on half the partnership income only up to that date. They were assessable to that date because the assignment could not operate retrospectively. Rose v. Federal Commissioner of Taxation (1951), 84 CLR 118; Commissioner of Taxation v. Happ, (1952) ALR 382, referred to. The taxpayers and the company were assessable on their respective shares in the new partnership from that date. The assessment on the taxpayers should accordingly be set aside so that new assessments could issue.

HEARING

Brisbane, 1982, June 3. #DATE 3:6:1982

APPEALS.

Appeals against the dismissal by Dunn J. of the Supreme Court of Queensland of the taxpayers' appeals from a decision of a Board of Review dismissing their appeals against the disallowance by the Commissioner of their objections to assessments in respect of the year of income ended 30th June, 1975.

G. L. Davies Q.C. and J. H. Byrne, for the applicants.

C. W. Pincus Q.C. and R. I. Hangar, for the respondent.

Solicitors for the applicants: B. J. O'Donovan, Commonwealth Crown Solicitor.

Solicitor for the respondent: McCullough & Robertson.

J. H. TELFER

ORDER

1. Appeal allowed.

2. Assessment remitted to the respondent Commissioner so that it may be amended in accordance with the reasons for judgment of the Court.

3. The appellant pay the respondent Commissioner's costs of the appeal.

JUDGE1

We have come to a firm conclusion in these appeals. That being so, we think it preferable that we should give judgment forthwith. We are assisted in adopting that course by the careful and helpful arguments of counsel.

A partnership is not a company. It has no personality independent of those who constitute it. The gross income of a partnership is earned jointly by the partners. The outgoings of a partnership are joint outgoings of the partners. The profits of a partnership are their profits.

The Income Tax Assessment Act, 1936 ("the Act") does, for some purposes, treat a partnership as if it were a distinct entity from those who constitute it. Section 91 of the Act requires that a partnership shall furnish a return of the income of the partnership. Section 92 includes in the assessable income of a partner not a share of the gross income derived but "his individual interest in the net income of the partnership of the year of income". Section 90 defines the net income of a partnership as meaning the assessable income of the partnership, calculated as if the partnership were a taxpayer, less allowable deductions other than concessional deductions and deductions in respect of past losses. These provisions of the Act are, however, essentially for accounting purposes. There is nothing in the Act which denies or alters the basic legal principle that the profits or net income of a partnership are the profits or net income of those who constitute it.

It may be that particular provisions of a partnership agreement or principles of partnership law may deprive a partner of any entitlement to call for a distribution of profits or net income until after accounts have been drawn up. Such provisions do not however produce the consequence that the partner, for income tax purposes, has no individual interest in the net income of the partnership until the precise quantum of that net income has been determined by the preparation of accounts in respect of the relevant period (see, Rose v. Federal Commissioner of Taxation (1951) 84 C.L.R. 118 at p. 124). If they did, the partners would delay their liability to tax in respect of a tax year if they refrained from drawing up accounts in respect of the whole or any part of that year until after the 30th June. Net income must ordinarily be related to a period. For taxation purposes, in the case of a partnership, that period is the relevant tax year. That does not, however, necessarily mean that that is the only, or the critical, relevant period for taxation purposes. Where, for example, a partnership business has been carried on by one partnership for part of a tax year and by a different partnership for the residue of the tax year, there will, for taxation purposes, be two periods in respect of which net income will be required to be ascertained so as to divide overall income between the two partnerships. The fact that the accounts in relation to the first period are not drawn up until after the period has expired, will not alter the prima facie position that the persons who, as partners, derive the income during that period will be the persons in whose assessable incomes the net income of that period falls to be included, according to their respective interests, pursuant to s.92(1) of the Act. As Williams J. said in Commissioner of Taxation v. Happ ((1952) Argus L.R. 382 at p. 384):

"Sec. 90 of the Income Tax Assessment Act provides that "net income", in relation to a partnership, means the assessable income of the partnership calculated as if the partnership were a taxpayer, less all allowable deductions except the losses of previous years. Sec. 92 provides that the assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income, and his individual interest in a partnership loss incurred in the year of income shall be an allowable deduction. Now the partnership under discussion continued in fact until 22nd December, 1944, and therefore for a considerable period of the financial year ended 30th June, 1945. It was then dissolved by the agreement of 22nd December, 1944. Businesses are carried on by the individuals who are in partnership and not by the partnership firm as a separate conception. After 22nd December the business was carried on by a different partnership consisting of Mr. and Mrs. Plotke. The old business, that of the four partners, came to an end, and the business carried on by the two remaining partners began. It was a new business: Commissioners for General Purposes of Income Tax for City of London v. Gibbs, (1942) A.C. 402 at pp. 413, 415, 416, 421, 430 and 432; Rose v. Commissioner of Taxation (1951) A.L.R. 974 at p. 977. If the carrying on of the business until 22nd December, 1944, was profitable and net income was earned within the meaning of sec. 90 the assessable income of the respondent for the year ended 30th June, 1945, must have included his individual interest in that net income". (See, also, Commissioner of Taxation v. Melrose (1923) XXVI W.A.L.R. (C.L.) 22 at pp. 25-26; Federal Commissioner of Taxation v. Jefferies (1980) 80 A.T.C. 4659 at pp. 4661-4662).

The above are, in our view, basic principles of partnership and taxation law. They may have been ignored, as regards the financial year ended 30 June, 1975, which is the relevant tax year, by those who planned or managed the affairs of the appellant taxpayers ("the taxpayers") in the present case. They are however, on our view of the effect of the critical documents, fatal to the taxpayers' position.

The taxpayers are husband and wife. From 1957 until 30 June, 1974 they carried on a rural business as equal partners under a Deed of Partnership dated 11 July, 1957. Clause 9 of that Deed provided that the capital and net profit of the partnership were held in equal shares. Clause 16 provided that accounts, comprising a balance sheet and profit and loss account, were to be taken on the thirtieth day of June in each year during the continuance of the partnership and that, immediately after the preparation of the said balance sheet and profit and loss account, "the net profits (if any) shown for such account shall be divided".

On 18 April, 1975 a company, Rowe Holdings Pty. Limited ("the company"), was incorporated to act as trustee of a family trust which was established by Deed dated 23 April, 1975. Subsequently, two Deeds were executed on 16 May, 1975 by the taxpayers and the company. The first Deed executed was a Deed of Assignment. The second Deed executed was described as a "Supplementary Deed of Partnership".

By the Deed of Assignment, the taxpayers, for consideration, assigned to the company "as at and from" 1st July, 1974 "a one half of their respective one half interests in the capital, assets and future profits" of the partnership. Clause 4 of the Deed provided that delivery of the property "hereby sold and assigned has been or shall be deemed to have been given and taken on the First day of July, 1974". Clause 10 of the Deed provided that the parties thereto should enter into a Supplementary Deed of Partnership "which shall record the terms of the Partnership Agreement and the rights and duties of the partners, for the aforesaid continued business". The reference to the "aforesaid continued business" must be read in the context of the recitals in the Deed. Those recitals provided, inter alia, that the parties (i.e. the taxpayers and the company) had "agreed to continue the business of farmers and graziers under the style or firm name of "H. G. & B. Rowe".

The Deed of Assignment plainly proceeded on the basis that the relevant property was effectively assigned as at and from 1 July, 1974 and that the previously existing partnership between the taxpayers had come to an end on 30 June, 1974. Whatever may have been the consequences as between the parties, this was a position which could not retrospectively be brought about either as regards third parties or for the purposes of taxation law. The assignment took effect as a present assignment. For the taxpayers, it was submitted that the partnership between the two taxpayers survived the Deed of Assignment and continued until some subsequent time (presumably immediately thereafter) when it was displaced by the new partnership between the taxpayers and the company. We do not accept that submission. We find it impossible to read the Deed of Assignment otherwise than as recording an effective agreement between the parties that the partnership between the taxpayers was terminated. In our view, the Deed of Assignment operated as an immediate termination of that partnership.

Senior counsel for the taxpayers argued that the Supplementary Deed of Partnership was not of critical importance for the purposes of the present appeal. That may well be so. The Supplementary Deed of Partnership is, however, relevant at least in so far as it confirms that the partnership between the taxpayers did not survive the execution of the Deed of Assignment. Thus, it purports to regulate a new partnership between the taxpayers and the company which had been carried on from 1 July, 1974 (see clauses 1 and 4). As has been said, it was not possible for the taxpayers retrospectively to obliterate the partnership which they had carried on from 1 July, 1974 to the execution of the Deed of Assignment. Nor was it possible for them retrospectively to establish a new partnership as from that date. It was, however, competent for them to ensure that their previous partnership did not survive the execution of the Deed of Assignment. This they clearly did.

It follows that from 1 July, 1974 until the execution of the Deed of Assignment on 16 May, 1975, the taxpayers carried on the relevant farming and grazing business in partnership under the 1957 Partnership Deed. From the time of execution of the Deed of Assignment, the taxpayers ceased to carry on business as such partners. Thereafter, the business was carried on by the taxpayers and the company under a new partnership. The terms of that partnership were immediately afterwards defined by the Supplementary Partnership Deed. The income of the business for the period up to the execution of the Deed of Assignment was income of the old partnership of the taxpayers. The net income derived in that period was derived by the two taxpayers. No part of that income was derived by the company. Each taxpayer's individual one half interest in that income was included in his or her assessable income by reason of the provisions of s.92 of the Act.

In the result, we agree with the conclusion reached by Dunn J. in the Supreme Court of Queensland that the net income of the business, up to the execution of the Deed of Assignment on 16 May, 1975, was net income of the partnership between the taxpayers and was to be included in their assessable income pursuant to the provisions of s.92 of the Act and that the net income of the business for the residue of the year was net income of the new partnership to be included in the assessable incomes of the two taxpayers and the company according to their individual interests therein. The amended assessments divided the income of the business for the whole of the tax year between the taxpayers. The respondent did not oppose a submission on behalf of the taxpayers that, in the event we reached the conclusion which we have reached, the appropriate course in each appeal was to allow the appeal and set aside the amended assessment so that new assessments could issue adjusting the assessable income of each taxpayer so as to reflect the entitlement of the company to share in the net income of the partnership for the period from the execution of the Deed of Assignment until 30 June, 1975. In view of a passage in the transcript before the Board of Review which indicates that the case was conducted on the basis that an agreement had been reached between the parties in that regard, we consider that that is the appropriate course to adopt.

It should be mentioned that reliance was placed on behalf of the taxpayers on the decision of the High Court of Australia in Federal Commissioner of Taxation v. Everett ((1980) 80 A.T.C. 4076). We agree with the view expressed by Matthews J. in Federal Commissioner of Taxation v. Jefferies (supra, at p. 4661) that the decision in Everett's Case is not of direct relevance to the problem involved in the present appeals.