Spence v Federal Commissioner of Taxation

[1967] HCA 32

HIGH COURT OF AUSTRALIA

Windeyer J.

SPENCE v. FEDERAL COMMISSIONER OF TAXATION

(1967) 121 CLR 273

4 October 1967

Income Tax (Cth)

Income Tax (Cth)—Income—Assessable income—Profit from sale of land purchased by partners for resale at a profit—Death of partner—Profits received after death in respect of sales taking place both before and after death—Income Tax Assessment Act 1936-1965 (Cth), ss. 26 (a), 36A, 101A.

Decision

October 4.
WINDEYER J. delivered the following judgment:-
No. 6 of 1967. This is an appeal against an assessment of income tax. I have considered the matter, but I have not had an opportunity to put my judgment into writing. I therefore propose to deliver it orally. It will be transcribed. Copies will be delivered to the parties after I have revised it. (at p274)

2. As I suppose the parties are more interested in the result than in the reasons, I may say at once that, in my view, the taxpayer is entitled to succeed. (at p274)

3. There are three appeals before me. They relate to the years ended 30th June 1963, 1964 and 1965. The critical question is the same, I understand, in each. I therefore shall give my judgment in the first of the three, case No. 6 of 1967, and formally make the same order in the other two. (at p274)

4. Mrs. Edith Spence, the taxpayer, is the widow of Samuel Cleveland Spence who died on 12th May 1960. By his will he left all his estate amounting to a sum of 29,000 pounds - I shall speak in the currency which obtained at the time the question arose - to the taxpayer. He appointed her executrix of the will. Probate was granted to her. The question in this case arises because during his lifetime he and his wife, the taxpayer, carried on business in partnership. One of their partnership activities was in buying and selling land. (at p274)

5. Some of their land had been sold before the death of the deceased upon terms that the purchase price was payable by instalments. Some instalments which had not become due and payable until after his death have since been received by Mrs. Spence. Other land, which was unsold when he died, has been since sold by Mrs. Spence and she has received the purchase price. It has been sold at a profit in the sense that, after provision for outgoings, Mrs. Spence has received more for it than she and her husband had paid for it. (at p274)

6. There is thus what has been called by counsel a "profit content" in each of the instalments received by the taxpayer since the death of the deceased; and also, in the sense I have described, in the sum for which she has sold land which was then unsold. (at p275)

7. The Commissioner claims that this so-called profit forms part of the assessable income of the taxpayer and is taxable accordingly. (at p275)

8. I have said that the taxpayer and her husband were partners. The Commissioner disputed this. He says that they were coowners, not partners. That is the first question to be decided. (at p275)

9. The husband and wife in fact considered themselves as jointly interested in everything they had. The matrimonial home was held by them as joint tenants. So was all other land which at any time they owned. Shares in companies were either held in their joint names or in equal parcels in the name of each. They had a bank account into which all moneys derived by either from any source were paid. Each of them could operate on this account. They drew upon it for all of their individual or joint requirements. They had complete confidence in one another. They made mutual wills each leaving all to the other. They had no children. (at p275)

10. The taxpayer gave evidence. She was asked why the lands bought for sale in the course of the partnership business were held in joint tenancy. She replied: "It was something that was just part of our way of life; we owned everything together; we were married and that was it." She said too, "joint property and partnership would have been synonymous as between my husband and me". She was, as was quite apparent, not suggesting that there was not a partnership; she was speaking as a wife who was a partner. (at p275)

11. It is not surprising to find land which is partnership property held as a joint tenancy. When a husband and wife are partners in business this I think is a quite normal arrangement, in no way inconsistent with the land being partnership property. If there were no more in this case than the fact that the two were husband and wife, had confidence in one another, and regarded all their property as belonging to them both, it might be said that, adapting a sentence from the judgment of Rich and Dixon JJ. in Booth v. Booth (1935) 53 CLR 1, at p 27 , the explanation of their conduct was simply that they placed complete confidence in one another, and treated their proprietary rights as merely a reflection of their matrimonial relationship. If that were all, the Commissioner would be right in his view that on her husband's death Mrs. Spence became entitled to the land as the surviving joint tenant, not as successor by will to his interest in the property of a partnership. What the consequences for income tax of that would be I do not have to say, because I do not think it is the proper conclusion from the facts. (at p276)

12. The history of the business dealings of the taxpayer and her husband is as follows. Mrs. Spence's father, whose name was Fox, had been a land and estate agent in a suburb of Perth. In 1943 while her husband was away with the A.I.F. Mrs. Spence bought this business from her father for herself and her husband; and on his return from the war, they carried it on under the name of "Fox &Spence" until some time in 1951. It was then sold to a buyer - a firm. The buyer carried on the estate agency business still under the name of "Fox &Spence". But Mr. and Mrs. Spence had no longer any interest in it, although they continued to own the premises where it was conducted, and they received rent for them. (at p276)

13. Having sold the estate agency Mr. and Mrs. Spence began a new business venture, still in partnership, now in the name "S. C. &E. Spence". They described themselves as "accountants, tax agents and valuers". Mr. Spence was a fully qualified accountant and sworn valuer and Mrs. Spence was a registered tax agent. They had an active and remunerative business in these capacities. They were also at one period engaged by two mining companies in connexion with the placing of shares in those companies with the public. The deceased was for a time secretary of one of the companies. The taxpayer for a time did clerical work in connexion with the floating of the other. For these services they received salaries. These salaries, like all other fees and all dividends from investments they had made, were brought into a common stock as part of their gross income. (at p276)

14. It was after they gave up the estate agency that they began buying and selling land on their own account. Their dealings were at first in house-building lots at Scarborough. Later they purchased a larger tract - some four hundred acres or more - at Riverton. This they purchased in conjunction with a Mr. and Mrs. Bell. Bell was a farmer, and at the time it was bought this land might have been used for grazing. Not until later was it zoned for urban development. After a time it was partitioned, the Bells taking one half, the Spences the other half. The portion taken by the Spences was, like all their other lands, held by them as joint tenants. (at p276)

15. The taxpayer in her notice of objection claimed that this Riverton land was bought for grazing purposes and not for purpose of resale. She has now abandoned this contention; and although she does not concede that it was untrue in fact, I do not have to consider it. I need say only that, so far as the facts appear, the land may have been bought originally with an idea of carrying on some grazing business for a time, although after the partition, if not earlier, the intention of the Spences was that it should be realized as part of their land dealings. (at p277)

16. Part of this land at Riverton was sold on terms before the death of the taxpayer's husband. She received instalments which became due after his death. Other parts of the land she has herself sold since his death. The questions which arise in relation to the proceeds of sale of land at Riverton are thus the same now as those arising as the result of sales of other land. But it was said for the Commissioner that in respect of the Riverton land the notice of objection states as the taxpayer's ground that this was not bought for resale; and that, this objection not being now relied upon, the taxpayer cannot dispute the assessment so far as based on any sales of this land. But the taxpayer ought not to be limited in this way in presenting her case. The notice of objection was full and clear. In relation to the Riverton land it stated reasons why the taxpayer said that it was not acquired by her for profit making by sale. But it contained a further claim that, if any part of the moneys received by the taxpayer as the proceeds of sales of this land was assessable to tax (which was denied), then only half should be taxed as the taxpayer and her husband had acquired the land as partnership property. I therefore over-rule the Commissioner's attempt to limit the taxpayer's objection. (at p277)

17. I am completely satisfied that Mr. and Mrs. Spence were partners in their land dealings. They were carrying on business in common with a view to profit, within the meaning of s. 7 of the Partnership Act of Western Australia. They were "carrying on business as partners" within the definition of the Income Tax Assessment Act. If the course of their business dealings did not establish that, it would be put beyond question by the tax returns they rendered from 1951 onwards. In these they showed their business as a partnership undertaking, the profits of which they shared. They also of course rendered individual returns, as persons who are partners sharing profits must do. Their assessable incomes were substantially the same. Their taxable incomes differed because of differing deductions for medical expenses, life assurances and so forth. They kept no books recording partnership transactions separately from purely domestic transactions. But they recorded all transactions in a cash book. From this a separate partnership account could be prepared if necessary. And this book, with other records they kept, sufficed to enable the partnership income tax returns to be accurately prepared. In these they described their business as that of "S. C. &E. Spence, Tax Agents, Accountants and Valuers". These returns gave among other information details of their profits on the sale of lands, and of various outgoings attributable to their ownership of land. They each signed these returns which were rendered each year from 1951 onwards. In the face of this neither could have denied to the other, nor to any other party, that they were partners and that their land formed part of the partnership property. The documents they signed were as eloquent of this as any formal partnership agreement could be. By all the ordinary tests for determining whether or not a partnership exists, or for distinguishing partnership from co-ownership, they were partners. In the partnership returns the receipts from sales of land were not treated as part of the gross income in accordance with s. 25 of the Income Tax Assessment Act. What was done was to treat the land dealings as a profit-making undertaking and to show the profit element in each sum received as an item of the assessable income of the partnership business as a whole. (at p278)

18. The partnership was solvent. It was dissolved by the death of her husband. The Commissioner - accepting, as I understood it, for the purpose of this argument that there was in fact a partnership - then suggests that there was an agreement between the partners that when one died the other should become entitled to all the partnership assets. The holding of land in joint tenancy, and the mutual wills were, he says, to give effect to that arrangement. The taxpayer says that, although the matter was not the subject of any express agreement, this was indeed what both of them desired; and I accept it as their intention. But accepting it, why does it mean that moneys which would have been income of the deceased partner had he lived became part of the assessable income of the survivor? That does not follow. A more exact analysis is necessary. I shall therefore deal separately with the two matters in question - moneys received by the taxpayer in respect of sales made by the partners before the partnership was dissolved by death; and moneys received by her in respect of sales made by her after the partnership was dissolved of land which had been partnership property. (at p278)

19. Taking first the moneys which became due and payable after the death of the deceased in respect of contracts which the partners had made before his death. These represented earnings of the partners while the partnership existed, although they were not actually received until after it had been dissolved. That half of so much of each of these amounts as represents profit forms part of the assessable income of the taxpayer is not disputed by her. As to the other half which would have become part of the assessable income of her husband had he lived it now comes to her as executrix and beneficially as the sole beneficiary under his will. I take it that, in respect of that half, his estate became liable to tax pursuant to s. 101A of the Act. Counsel for the taxpayer did not dispute this. Indeed he suggested it. What he did dispute - and in my view rightly - is the claim of the Commissioner that the taxpayer is to be assessed to tax as if the whole profit element in each instalment came to her as her income. My conclusion on this aspect is that in her individual capacity the taxpayer should be assessed at the rate appropriate to half only of the "profit content" as it was called. As a trustee of her husband's estate she should have been assessed to tax in respect of the other half, pursuant to s. 101A. Whether that can now be done is not a question which I have to decide. (at p279)

20. I turn to the other matter - the proceeds of sales of land made by Mrs. Spence since her husband's death. What she has sold is land which was formerly part of the partnership property and is now hers by virtue of her husband's will. (at p279)

21. The Commissioner's claim to bring the proceeds of these sales to tax was put in several ways. First it was said that they, or the profit element in them, would if the sales had been made while the partnership existed have formed part of the profits of the partnership business. That is indisputable. But the proposition that therefore they become assessable income in the hands of the person who succeeded to the partnership assets cannot possibly be sustained. (at p279)

22. Secondly it was said that, at the date of the death of the deceased partner, there was an unrealized profit of the partnership and that the whole of it can now be brought to tax as income of the surviving partner. This so-called unrealized profit existed, it is said, because the land had already increased in value beyond the sum which was paid for it. There was really no evidence that this was so; or, if it were so, of what was the amount of the so-called unrealized profit; and how it could be valued and brought to tax was not made clear. Section 36A was referred to. But, as this reference was not pursued, I say only that that section cannot, as I read it, make Mrs. Spence liable to tax. If it has any application, it would be to create a tax liability in the deceased as at the date of his death; and it would only do so if the unsold land could be considered as "trading stock" within the meaning of the section. Land of a person engaged in a business of buying and selling land, land-jobbing, can be likened in an economic sense to the stock-in-trade of a trader in chattels or in stocks and shares. But I do not have to decide whether that means that land can be, or that this land was, trading stock for the purposes of the Act. In my view s. 36A is not relevant to the present case. (at p280)

23. I think that it is a mistaken approach to the present question to ask what would have happened had the deceased not died. He did die and the land was unsold when he died. The taxpayer became the landowner. She could sell the land as and when she wished, or not at all. When she sold any part of it she was simply selling what had become hers. Her interest in it had as to a half come to her by way of testamentary gift from her husband. She could use that gift, turn it to account, in any way she wished. It is, I repeat, a mistake to say she got it simply by virtue of her joint tenancy. The legal estate devolved in accordance with the joint tenancy. To that extent the maxim which was mentioned - "ius accrescendi inter mercatores locum non habet" - does not apply: see Lindley on Partnership, 11th ed. (1951), p. 428. But it is applicable in equity; partners who hold as joint tenants in law hold beneficially as tenants in common. That is an old rule. It is more exactly stated today in terms of the Partnership Acts - the relevant provisions are ss. 30 and 32 in the Western Australian Act: the legal estate devolves according to its nature and tenure but in trust so far as necessary for the persons beneficially interested; and as between partners land which is partnership property is to be treated as personal estate. (at p280)

24. Speaking strictly what Mrs. Spence got by her husband's will was not any specific property which had belonged to the partnership but his share or interest in the partnership regarded as a surplus of partnership assets over partnership liabilities. And, of course, she took this as part of his whole estate - that is to say she took all that he had at his death, subject to the payment of debts, funeral and testamentary expenses and of duties arising as a result of his death. For these she, as executrix, was liable. And she, as a partner, had been liable equally with him for the partnership debts. Therefore, as the partnership was solvent and his estate was solvent and she was the sole beneficiary, she could quite properly be said to have by her husband's will become directly entitled in her own right to the entirety of the unsold land. In her husband's lifetime she had only, using the words of Romer J. in Manley v. Sartori (1927) 1 Ch 157, at p 163 , "an unascertained interest in every single asset of the partnership". On her husband's death she became entitled to each asset, including the unsold land, as her own. The price which she got by selling the land was more than the sum for which she and her husband as partners had bought it. Thus it may be said she sold the land at a profit. But that "profit" arose when she sold and not before. I do not think that the words of s. 26 (a) describe what occurred in this case. The joint ventures in land dealing were a profit-making undertaking of the partners. But that undertaking had come to an end. It was not from the carrying out of it that this so-called profit was derived. If any part of it could be said to be assessable income of Mrs. Spence, in my opinion it would be a half only. However the Commissioner did not put his claim on the basis of a half, and no argument was advanced in support of that view. It is true that in her notice of objection Mrs. Spence claimed that "only one half" of the net amounts received by her for land sold after her husband's death was taxable. She thus in effect admitted or conceded that a half was part of her assessable income. But her counsel did not repeat this before me. He simply disputed the proposition on which, on this aspect, the assessment was based. It was that the whole amount which would have been assessable income of the partners had the lands been sold before the death of either of them was assessable income of the survivor. In my opinion the taxpayer must succeed on this issue. However, I do not wish to preclude the Commissioner from issuing a new assessment based on the taxpayer being assessable for half the "profit" arising from sales made after the death of the deceased partner. I do not say that such an assessment would be valid. That proposition was not argued. I therefore express no opinion on it, beyond saying that it may well be correct, although a legal justification of it is not immediately apparent to me. It would be quite inconsistent with the position the Commissioner took before me, although it would accord with what he said in letters to the taxpayer in 1962. The Commissioner is, of course, not estopped by anything he wrote. But neither is the taxpayer bound by any concession in her notice of objection, especially as in this she was, it seems, accepting what in response to her inquiries the Commissioner had suggested was the position. I say that having regard to the Commissioner's letters of 20th August and 11th December 1962, however the former should be understood. (I should however say that a letter which was apparently sent by the taxpayer on 26th September 1962, was not among those tendered; and I do not know what its terms were.) If the Commissioner, when issuing a new assessment pursuant to my decision, should adopt the position that half of what would have been a partnership profit had the deceased partner not died before the land was sold can now be brought to tax as income of the taxpayer, then I would expect him to inform her of the provision of the Act on which he relies. She would then be in a position to consider whether to object. The Commissioner is not obliged to tell a taxpayer the basis of his assessment; but he is not required to refrain from doing so. (at p282)

25. I have not thought it necessary to set out the several amounts which go to make up the total sum in dispute in this case. The question is one of general principle; and I have stated my decision in principle in relation to (a) moneys received by the taxpayer from sales of land made while her husband was alive; and (b) moneys received by her from sales she made after his death. (at p282)

26. I allow the appeal, set the assessment aside, and remit the matter to the Commissioner to re-assess the tax and to issue a fresh notice of assessment. I make the usual order as to exhibits. The Commissioner must pay the taxpayer's costs. As the parties may wish to consider my reasons, and as it will be some days before they can be provided with a transcript of this judgment, this order will date as of this day week - that is 11th October. (at p282)

Orders

No. 6 of 1967. Appeal allowed with costs. Assessment set aside. Matter remitted to the Commissioner to issue a fresh notice of assessment in accordance with the judgment. Order to date as of 11th October, 1967.

(Similar orders were made in cases Nos. 7 and 8 of 1967.)