Single v Federal Commissioner of Taxation

[1964] HCA 33

HIGH COURT OF AUSTRALIA

Kitto, Menzies and Owen JJ.

SINGLE v. FEDERAL COMMISSIONER OF TAXATION

(1964) 110 CLR 177

15 May 1964

Income Tax (Cth)

Income Tax (Cth)—Assessable income—Deceased solicitor—Receipt by executrix of share of costs in respect of work done before death in matters then unfinished—"Amount &hich would have been assessable income in the hands of deceased person if . . . received by him during his lifetime"—Included in assessable income—Income Tax and Social Services Contribution Assessment Act 1936- 1958 (Cth), s. 101A.*

Decisions

May 15.
The following written judgments were delivered:-
KITTO J. The appellant, as executrix of the will of a deceased member of a firm of solicitors carrying on their professional business in New South Wales, has been assessed to income tax upon the footing that certain amounts paid to her as executrix by the surviving partners in the firm formed part of the assessable income of his estate and that no beneficiary was presently entitled to any part of the income of the estate at any relevant time. (at p185)

2. There are two assessments, and they have been made in reliance upon s. 101A of the Income Tax and Social Services Contribution Assessment Act 1936-1957 and 1936-1958 (Cth). That section is expressed to apply to the case where in a year of income a trustee (including an executor: s. 6) of a deceased person's estate receives an amount which would have been assessable income in the hands of the deceased person if it had been received by him during his lifetime, and it provides that the amount shall be included in the assessable income of that year of the trust estate and shall be deemed to be income to which no beneficiary is presently entitled. The effect of the deeming provision of the section is to include the amount in the assessable income upon the balance of which, after allowable deductions have been subtracted under s. 95, the trustee is by s. 99 made liable to pay tax as if that amount were the income of an individual. The deeming provision makes no difference in the present case even if s. 101A applies, for it is found in the case stated that in the relevant years no beneficiary was in fact presently entitled to any part of the income of the testator's estate. (at p185)

3. In respect of each assessment the question is submitted to the Full Court by way of case stated whether the relevant amount formed part of the assessable income of the testator's estate in accordance with s. 101A. The assumption is implicit that the amounts are not, independently of that section, assessable income of the estate. The case stated does not ask whether the assumption is justified, and although the question was raised in the course of the argument the parties have not fully argued it. I therefore refrain from expressing a final opinion upon it; but I am unwilling to be taken as inferentially endorsing the assumption and I therefore point out at once some considerations that may be thought to tend against it. By s. 25(1)(a) of the Act the assessable income of a resident taxpayer includes the gross income derived directly or indirectly from all sources, which is not exempt income. There is no question of exempt income in this case. The ultimate question in regard to the assumption is therefore whether the amounts under consideration came to the appellant's hands with the character of income according to ordinary conceptions. (at p186)

4. The amounts were paid to the appellant pursuant to a term of the partnership agreement. The agreement was not in writing, but according to the stated case it included a term that upon the death of a partner his estate was to be paid (a) the amount standing to the credit of his capital account, including undrawn profits and a share of goodwill valued at @3,000, and (b) a share (being 25 per centum in the case of the deceased) of book debts and costs collected after the death for work done by the firm up to the date of death, whether in respect of completed matters or otherwise, and whether or not accounts had or could have been rendered at the date of death. The amount provided for in (a), with interest, was to be paid by regular instalments over ten years. Payments in accordance with (b) were to be made quarterly in respect of amounts collected during the preceding quarter, no collecting charges or expenses being debited against them. No question is before us concerning payments under (a), or concerning payments under (b) so far as it relates to costs for work completed in the testator's lifetime. The amounts to which the case relates were received under (b) in respect of costs for work which was in hand but uncompleted at the date of death. (at p186)

5. The general rule that by the death of a partner a partnership is dissolved as regards all the partners is subject to any agreement between the partners: Partnership Act, 1892 (N.S.W.), s. 33(1). From the stated case it appears that in the partnership agreement there was a term that the death of a partner should not operate to dissolve the partnership, and that the partnership would be continued by the surviving partners. The operation of this term and the term already mentioned, taken together, was that after the death of the testator the surviving partners became automatically partners together in a new firm to take over and carry on the business of the old partnership, and that the share and interest of the testator in the business and assets of the old partnership passed to the surviving partners in return for their obligation to make to his estate the payments that have been mentioned. That obligation constituted the consideration for what may be called, with sufficient approximation to accuracy, the sale of rights which otherwise would have formed part of the capital of the estate. That, however, is not decisive as to the income or capital nature of the payments when received. A capital asset may be sold for a price consisting either of a capital sum or of income, or partly of capital and partly of income. The moneys we are concerned to characterize in this case were of no fixed total: the amounts to be received by the estate depended first upon actual collections and secondly upon apportionment of the amounts collected as between work done before the death and work done thereafter. Moreover, what the estate became entitled to upon the death (so far as material) was not a sum to be measured by reference to the amount of all costs collected after the death which should answer the description of being costs "for work done by the firm up to the date of death", but was a fixed share, a proportionate part, of each amount of costs of that description when collected, though payment was deferred until the end of each quarter. Such costs were of course the fruits of the business in which the testator had worked, and were plainly of an income nature in the hands of the surviving partners who received them. It was in the character of a share of those income receipts that the amounts now in question were to be received by the estate. Therefore each of the amounts now in question was composed of items each of which was a share of an income receipt and had become payable in that character. They were to be received quarter by quarter until costs of the description should cease to come in. It is not obvious to me why each such share of a relevant income receipt did not partake of the income character of the whole. I refer to the following cases on similar problems: Inland Revenue Commissioners v. Ledgard (1937) 2 All ER 492, at pp 493, 495 ; Inland Revenue Commissioners v. Hogarth (1941) SC 1, at pp 7-9 and Trustees Executors &Agency Co. Ltd. v. Clarence (1951) 52 SR (NSW) 164; 69 WN 2 . Reference may also be made to Stainer's Executors v. Purchase (1952) AC 280 and Carson v. Cheyney's Executor (1959) AC 412 . (at p187)

6. If the assumption that the amounts in question are not of an income character be incorrect, the assessments under appeal need no support from s. 101A and that section has nothing to say to the case. The reason is that the business of the section plainly is with amounts received which, but for its operation, would not be assessable income in the hands of the trustee. But (and I proceed now to the questions submitted by the case stated) the class of amounts with which the section is concerned is even more restricted than that. The section applies, as I read it, only where, apart from its operation, the amount received by the trustee is to be excluded from the category of assessable income in his hands for the reason that the death converted a pre-existing right to receive it (as income) into a capital asset of the estate. It seems to me to postulate, as the condition of its application, that the case is one in which the fact of the death is the one circumstance from which the conclusion results that the amount is not assessable income of the trustee. I say this as a matter of impression from the section as a whole, and not only because it was enacted in view of this Court's decision in Commissioner of Taxation (N.S.W.) v. Lawford (1937) 56 CLR 774 . The feature of the section which has most significance on the point is, I think, that the required hypothesis is unrelated to any particular point of time. There is nothing to be seen in the section but a notional reversal of the order in which the death and the receipt occurred. If no right existed before the death to receive the specific amount which later the trustee received - that is to say if the amount was not owing before the death so that the debt became upon the death a capital asset of the estate - it would be necessary to suppose more than the bare fact of receipt of the amount by the deceased person in his lifetime in order to turn the amount into assessable income in his hands: it would be necessary to suppose in addition, as having existed at the time of the hypothetical receipt, some set of facts which, if it had then existed, would have given the amount the character of assessable income in the hands of the deceased, e.g. (in the present case) that costs which in the actual event were recovered in respect of an ultimately completed matter had been accurately pre-estimated and prepaid in the testator's lifetime, and then divided by the partners amongst themselves by special agreement but still as an amount of costs. It does not seem to me that s. 101A is addressed to a case in which such an additional supposition is necessary. (at p188)

7. I would answer each of the questions in the case stated: No. But as I have indicated, I would not think, as at present advised, that that answer necessarily disposes of the appeal. (at p188)

MENZIES J. In my opinion the receipts here in question were assessable income of the estate of Herbert Vallack Single deceased by virtue of s. 101A of the Income Tax and Social Services Contribution Assessment Act. (at p189)

2. The deceased was, up to the date of his death, a member of a firm of solicitors and was entitled to receive a quarter of the profits of the firm. After his death and pursuant to the partnership agreement the appellant, as trustee of his estate, received from the firm as it was then constituted one quarter of certain costs paid to the firm after the death of the deceased. In so far as these payments consisted of what may be called the deceased's share of costs paid after the date of his death but due and payable at the date of his death, no question has been raised. Objection has, however, been taken to the Commissioner treating as assessable income those parts of the payments so received as consisted of a quarter of so much of the costs paid to the firm after the death of the deceased as were in respect of work done before his death in matters unfinished at his death. The case has been argued on the footing that costs in these matters became payable to the firm only upon completion of the whole of the work after the death of the deceased. (at p189)

3. The object of s. 101A is to make any receipts of the character therein specified assessable income of the trustee, that is those which would have been assessable income in the hands of the deceased if received by him during his lifetime. It does not seem to me to matter whether or not the deceased could during his lifetime have received the actual payments which the trustee of his estate received after his death. Nor does it matter that the deceased had no right to receive the payments in question during his lifetime. The section operates upon an assumption, viz. that the payments in question had been received by the deceased during his lifetime, and attributes to receipts by the trustee the character of assessable income if, on the assumption stated, it would have been assessable income in the hands of the deceased. (at p189)

4. In this case the assumption is that the deceased during his lifetime received a quarter of the costs of work done by his firm while he was a member but did so at a time when the firm was not entitled to be paid those costs because the matters were unfinished. There is of course no doubt that a division among the members of a firm of profits derived from prepaid costs would involve the receipt of assessable income by the members of the firm but I do not think the payments which the appellant received were exactly of that character. They were, as the case stated said, "a share of book debts and costs for work done by the said firm up to the date of death whether such work was done in respect of completed matters or otherwise and whether or not accounts had or could have been rendered at the date of death". It seems to me that, had the deceased at any time during his lifetime received a share of costs for work done by the firm while he was a member of it, he would have received assessable income. It follows, therefore, that receipts by the trustee were given the character of assessable income by s. 101A. (at p190)

5. The argument upon this appeal did indicate that there may be difficulties in the application of s. 101A in the variety of circumstances that may call for its application. This case does not, however, require us to go beyond what seems to me to be a straight-forward application of the section. (at p190)

6. I think the questions asked should be answered as follows: (1) Yes. (2) Yes. (at p190)

OWEN J. This stated case is concerned with the question whether two amounts received by the appellant in her capacity as executrix of the will of Herbert Vallack Single (hereinafter called the deceased) form part of the assessable income of the estate of the deceased. The first amount of 2,885 pounds was received by her in the income year ending 30th June 1958, the second of 1,822 pounds during the following year. Each was treated by the respondent Commissioner as part of the assessable income of the deceased's estate by reason of the provisions of s. 101A of the Act. (at p190)

2. The facts are that at the date of his death the deceased was a partner in a firm of solicitors practising in Sydney, his share of the net profits earned by the firm being 25%. The partnership agreement provided that, upon the death of a partner, the surviving partners would pay to his estate "(a) The amount standing to the credit of the deceased partner's capital account including undrawn profits and a share of goodwill, the value of the goodwill for this purpose being 3,000 pounds; and (b) a share of book debts and costs for work done by the said firm up to the date of death whether such work was done in respect of completed matters or otherwise and whether or not accounts had or could have been rendered at the date of death". The share to which paragraph (b) referred was 25% and payments in accordance with that paragraph were was 25% and payments in accordance with that paragraph were to be made quarterly "in respect of amounts collected during the preceding quarter" and no collecting charges or expenses were to be debited against such book debts or costs. (at p190)

3. The amounts here in question represented 25% of that proportion of the costs, collected by the surviving partners after the death of the deceased, which was attributable to work done during the deceased's life but uncompleted at his death, and the case has proceeded upon the basis that no part of those costs became due and payable by the clients to the partnership until completion of the work. (at p191)

4. Section 101A was enacted as the result of the decision of this Court in Commissioner of Taxation (N.S.W.) v. Lawford (1937) 56 CLR 774 , a case decided upon the New South Wales Income Tax (Management) Act which contained no provision similar to s. 101A. The facts were that, prior to the death of one of two persons practising in partnership as solicitors, certain costs had been earned by the firm and, at the date of the deceased partner's death, were owing by the clients concerned. After his death, the surviving partner collected those costs and paid to the executor of the estate of the deceased partner the proportion to which that partner had been entitled under the partnership agreement. The amount thus received by the executor was held not to be assessable income derived by him either in his representative capacity or at all. The receipt was a receipt of a capital asset, namely the deceased's share of book debts owing to the partnership at the date of his death. If the facts in the present case had been identical with those in Lawford's Case (1), s. 101A would undoubtedly have applied. Each of the amounts received by the appellant "would have been assessable income in the hands of the deceased if it had been received by him during his lifetime" and, by virtue of the section, would have been part of the assessable income of his estate. It was submitted, however, that the section has no application where the receipt by the trustee of the estate of a deceased person is a receipt of moneys which were not at the date of his death due and payable to the deceased or to the partnership of which he was a member. I am unable to see why the application of the section should be limited in the way suggested. What it requires is that an assumption be made that an amount which was in fact received by the trustee after the death of the deceased was received by the latter during his life and, that assumption being made, the section poses the question whether the receipt, which is to be assumed to have occurred, would have been a receipt of assessable income in the deceased's hands. There is, in my opinion, no justification for treating the section as requiring the introduction of a further assumption that the amount which the deceased is to be regarded as having received during his life was an amount which was then due and payable. (at p191)

5. It was further submitted on behalf of the appellant that the amounts received by her were paid by the surviving partners in the discharge of an obligation which only arose on and as a result of the death of the deceased. He could therefore never have received them in his lifetime and, in those circumstances, the section had no application. The obligation of the surviving partners to pay the moneys to the appellant was, so the argument ran, something quite different in kind from the obligation resting upon each co-partner, during the deceased's lifetime, to ensure that the profits earned by the partnership were distributed in accordance with the partnership agreement. I do not find it necessary to consider whether the section would apply if this had been so because I cannot accept the view that the two sets of obligations differed in the way suggested. Before his death, the deceased was entitled to require of his co-partners that his proportion of the profits earned by the partnership while he was a member of it be paid to him in accordance with the partnership agreement. That agreement obliged the surviving partners to pay to his executrix, after his death, the moneys which would have been payable to the deceased had the costs been collected before his death. The receipts by the executrix were, however, receipts of capital notwithstanding the fact that, if they had been received by the deceased during his life, they would have been receipts of income. The moneys coming into the hands of the executrix were capital because they represented portion of the deceased's share in the assets of the partnership. Had there been no express provision in the partnership agreement such as existed here the appellant would have been entitled to have the partnership wound up, the assets (which included the beneficial value of the uncompleted contracts between the partnership and its clients) realized and, after payment of the debts, the surplus distributed. The partnership agreement in the present case made provision which avoided a winding up with all its consequences and provided a method of determining the value of the uncompleted contracts and the deceased's interest therein. It contemplated the completion of the contracts by the surviving partners, the collection of the costs from the clients and a dissection made to ascertain what part of those costs related to work done while the deceased was a partner. This was what was in fact done and the appropriate proportion of those costs paid to the appellant. Basically the facts do not differ from those in Lawford's Case (1937) 56 CLR 774 and, if it were not for s. 101A, the receipts by the appellant would not have formed part of the assessable income of the estate. The section, however, brings them to tax. (at p193)

6. One further matter should be mentioned. In the course of the argument, the question was raised from the Bench whether the amounts in question were not part of the income (using that word in its generally accepted sense) derived by the appellant as the trustee of the deceased's estate. If so, s. 101A would, in my opinion, have no application and the amounts would be brought to tax under s. 99, there being no beneficiary presently entitled to any part of the income of the estate. Section 101A is not intended to apply to moneys coming into the hands of the trustee of a deceased estate which are in ordinary parlance "income" of that estate. Receipts of this nature are brought to tax by other provisions of the Act. For the reasons I have stated earlier, these receipts do not answer that description. (at p193)

7. I would answer the questions asked as follows: (1) Yes; (2) Yes. (at p193)

Orders

Questions in the Case Stated answered (1) Yes (2) Yes. Cost of Case Stated to be dealt with by the judge disposing of the appeal.