Federal Commissioner of Taxation v Everett [1978] FCA 39; (1978) 38 FLR 26 * (Editor'S Note: An Appeal By the Commissioner To the High Court Was Unsuccessful-See (1980),; 54 ALJR 196) (26 October 1978)

FEDERAL COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. EVERETT [1978] FCA 39; (1978) 38 FLR 26
*(Editor's Note: An appeal by the

Commissioner to the High Court was
unsuccessful-see(1980)[1980] HCA 6; , 54 A.L.J.R. 196.)

Income Tax - Partnership

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Bowen C.J.(1), Deane(2) and Fisher(3) JJ.

CATCHWORDS

Income Tax - Equitable assignment of interest in partnership for consideration - Assignor trustee for assignee - What constituted corpus of trust estate - Whether assessable income of assignor or of assignee - Income Tax Assessment Act 1936 (Cth.), s. 19, Pt III, Divns 5, 6 - Partnership Act, 1892 (N.S.W.), s. 31.

Partnership - Equitable assignment of interest in partnership - Nature of partnership interest - Rights of assignee - Partnership Act, 1892 (N.S.W.), s. 31. Appeal from the decision of the Supreme Court of New South Wales upholding an objection by the taxpayer against an assessment for the income year ended 30th June, 1973. The assessment included in the taxpayer's taxable income a sum of $11,185 shown as having been paid to his wife. By a deed of assignment the taxpayer had in consideration of the sum of $3,832.50 paid to him agreed to convey and assign to his wife six-thirteenths of his share in the partnership of Dibbs, Crowther & Osborne a firm of solicitors. Both the taxpayer and his wife were solicitors. The assignment purported to assign a part of his interest in the partnership, including the right to receive an appropriate share of the profits of the partnership. The assignee was not by virtue of the assignment to be a partner and her rights were limited in the manner provided in s. 31 of the Partnership Act, 1892 (N.S.W.). Under s. 31 of that Act an assignment by a partner of his share in the partnership does not, as against the other partners, entitle the assignee to interfere in the management or administration of the partnership business or affairs, or to require any account of the partnership transactions or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled.

It was not suggested that the assignment was a sham or that s. 260 of the Act applied.

Held: Per Bowen C.J. and Fisher J., Deane J. dissenting - Appeal dismissed with costs.

Per Bowen C.J. - (1) The taxpayer had a beneficial interest in the partnership assets, a right to his portion of the surplus after the realization of the assets and the payments of debts and liabilities.

Bakewell v. Deputy Federal Commissioner of Taxation (S.A) [1937] HCA 11; (1937), 58 CLR 743; Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. [1974] HCA 22; (1974), 131 CLR 321; Livingston v. Commissioner of Stamp Duties (Q.) [1960] HCA 94; (1960), 107 CLR 411, referred to.

(2) A partner's right to income does not normally crystallize or become detachable until the end of the accounting period. At that point in time the share of profits of each partner becomes certain in the sense that it is capable of being rendered certain and his share of the net income for purposes of divn 5 of Pt III of the Act becomes certain in the same sense. Federal Commissioner of Taxation v. Happ (1952), 9 ATD 447, referred to.

(3) A partner may effect an equitable assignment of his share for value whether as to the whole or in part.

Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963), 109 CLR 9; Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965), 113 CLR 385, referred to.

(4) The assignment did not make the wife of the taxpayer a partner - Dodson v. Downey, (1901) 2 Ch 620, referred to - but was an effective transfer of a six-thirteenths interest in the various rights in relation to the partnership assets.

(5) The rights assigned are of such a nature that although the beneficial interest passed to his wife, the actual rights themselves and the capacity to exercise them in the partnership remained in the taxpayer who, in relation to them, was in the position of a trustee.

Hocking v. Western Australian Bank [1909] HCA 68; (1909), 9 CLR 738, referred to.

(6) The profits of the partnership during the year ended 30th June, 1973, did not constitute detachable income of the assignee prior to the end of the income year. The trust attached eo instanti to that share of the profits assigned.

Palette Shoes Pty. Ltd. v. Kohn [1937] HCA 37; (1937), 58 CLR 1, referred to.

(7) The wife of the taxpayer was not a partner within the definition of "partnership" in s. 6 of the Act. Where a trustee of an estate is a partner with active duties to perform, s. 6 does not operate so as to bring in as partners for income tax purposes, beneficiaries who are presently entitled. Division 6 of Pt III applies to determine whether the trustee or the beneficiary is to be taxed upon the income.

Tindal v. Federal Commissioner of Taxation [1946] HCA 26; (1946), 72 CLR 608, referred to.

(8) It is not correct for income tax purposes to regard the six-thirteenths share of income separately from the six-thirteenths share in the assets. The wife's interest in income was based upon the deed of assignment but the income flowed in substance from the six-thirteenths partnership share for which she paid.

The net income was a share of net income of a trust estate for the purposes of divn 6 of Pt III of the Act. It is difficult to determine what the corpus of the trust estate consists of where there is a trust in respect of assets of a business but the income produced flows not simply from those assets but also significantly from the efforts of partners.

Howey v. Federal Commissioner of Taxation [1930] HCA 45; (1930), 44 CLR 289; Peate v. Federal Commissioner of Taxation [1964] HCA 84; (1964), 111 CLR 443, referred to.

(9) Section 19 is not so expressed as to render an assignor liable to income tax where he has executed an assignment of income in advance for valuable consideration when either the character of the income is such that it is capable of immediate assignment or its character is such that the assignee becomes the immediate beneficial owner of it the instant it is ascertainable.

Per Fisher J. - (1) Assignments in equity, if voluntary, are only effective if limited to existing rights and interests.

Tailby v. Official Receiver (1888), 13 AC 523; Re McArdle, (1951) 1 Ch 669; Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963), 109 CLR 9; Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965), 113 CLR 385, referred to.

(2) The taxpayer's interest is an interest not capable of assignment in law (being part only of a chose in action) and therefore compliance with the statutory provision as to assignment at law was not necessary.

Olsson v. Dyson [1969] HCA 3; (1969), 120 CLR 365; Re Steel Wing Co., (1921) 1 Ch 349, referred to.

(3) The taxpayer's proprietary interest in the partnership existed at the date of the assignment as the tree which produced the fruit, and as such was capable of assignment.

(4) As to the interest of a partner in the partnership as distinct from the assets comprising the partnership property, it is a chose in action.

Re Bainbridge; Ex parte Fletcher (1878), 8 Ch D 218, referred to.

(5) An interest in a partnership is without doubt assignable as a matter of law.

Hocking v. Western Australian Bank (1909), 9 CLR 739, referred to.

The consequence of the assignment is not that the assignee becomes a partner, rather that the vendor remains a partner but as trustee for the assignee of the portion subject to the assignment.

(6) A partner does not derive assessable income upon the rendering of a memorandum of fees. A taxpayer who carries on a business in partnership determines and quantifies his assessable income for tax purposes in a manner which differs fundamentally from a sole practitioner. The partner's assessable income is not his share of the fees rendered by the partnership i.e. his share of its gross income, but his share of the net income of the partnership as defined by s. 90. It follows that the partner derives assessable income upon the ascertainment of the net income of the partnership for the year of income. Contention that the assignor derived the income prior to assignment, rejected.

(7) The assignee did have a proprietary interest in the assessable income derived by the partnership at the time and from time to time consequent upon the rendering of accounts. The assignee is entitled to a beneficial interest in the assets of the partnership generally and in particular has an interest in the work in progress which produces the fees for which the account is rendered.

(8) Section 31 of the Partnership Act has no direct impact on the rights and obligations of the assignor and assignee inter se which are regulated by the deed of assignment. The section is primarily intended for the protection of the taxpayer's partners.

Dodson v. Downey, (1901) 2 Ch 620, referred to.

(9) Although there is considerable force in the argument that the assignee was for the purpose of the Income Tax Assessment Act a partner and in receipt of income jointly with the other partners, the appeal is considered on the assumption that she is not a partner and that the taxpayer is, in the circumstances, a bare trustee without any duties to perform. Division 6 of Pt III applies and it is the portion of his share in the partnership which is the trust estate which produces income.

(10) The assignee could challenge or restrain the partners (other than the taxpayer) if they acted or sought to act improperly in a prejudicial manner to her interests. The partners have actual notice of the interest of the assignee in the partnership property which is in their hands and to this extent they are constructive trustees of this property for and in a fiduciary relationship with the assignee and would be subject to the supervision and direction of a court of equity. The assignee could herself take action against the partners (and not only the assignor) to restrain improper dealings with her beneficial interest.

Arbuckle v. Federal Commissioner of Taxation (1964), 13 ATD 378; Johnstone v. Commissioner of Inland Revenue (N.Z.), (1966) NZLR 833; Kelly v. Commissioner of Inland Revenue (N.Z.), (1970) NZLR 161, referred to.

Per Deane J. (dissenting) - (1) A partner's share in partnership profits should not in all cases and for all purposes be regarded as income flowing from the corpus of his "share in the partnership". The taxpayer's right to participate in any partnership profits is a contractual provision of the partnership agreement under which he has agreed to devote his time and efforts to the partnership business. Where questions involving the derivation of income are concerned, the determination of whether the income of a partnership should be seen as flowing primarily from the assets of the partnership or from the personal exertions of the partners or of whether a particular partner's share of profits should be regarded as flowing primarily from his "share in the partnership" or from his personal exertions as a partner, will probably involve considerations of the circumstances of the particular case. In the present case the income and profits of the partnership were derived by the partners from their activities (including use of partnership assets and employment of partnership staff) in the carrying on of the partnership business and were the fruits of the personal exertion of the four partners. The share of the profits to which the taxpayer was entitled could not be realistically regarded as primarily flowing from or being "the fruit of" any contribution to partnership capital or any interest in the totality of the partnership assets or in any surplus of partnership assets upon dissolution.

(2) The deed of assignment related to future profits and contained no provision designed to ensure that there would, in fact, be any future profits of the partnership in which the taxpayer "would otherwise have been entitled" to share. The question arises whether that entitlement (the taxpayer's entitlement to share in any partnership profits) was an existing right or interest susceptible of immediate effective assignment in equity or a future right or expectancy not susceptible of such effective immediate assignment.

Performing Right Society v. London Theatre of Varieties, (1922) 2 KB 433; Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963), 109 CLR 9; Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965), 113 CLR 385, considered.

The taxpayer's entitlement was not a present chose in action but a right to the future division of partnership profits if and when the partners jointly earned them.

(3) The taxpayer's wife was not a partner and the fact that one of the partners may hold part of his ultimate share in any partnership profit upon trust for a third person does not mean that the third person is in receipt of income jointly with his trustee and the other partners.

(4) While a partner has an undivided beneficial interest in the gross income or receipts of a partnership, his individual or separate entitlement is, in the ordinary case, only his share in profits.

(5) Section 96 refers to "income of the trust estate". It does not encompass income, derived by a person from his own property or by means of his own exertion, in respect to which a trust arises at the moment of derivation.

Stewart Dawson Holdings Pty. Ltd. v. Commissioner of Taxation (1965), 39 ALJR 300, referred to.

The relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion being part of his earnings derived from his professional activities and did not constitute the income of income producing property or income of a trust estate.

Arbuckle v. Federal Commissioner of Taxation (1964), 13 ATD 378; Stewart Dawson Holdings Pty. Ltd. v. Commissioner of Taxation (1965), 39 ALJR 300; Arcus v. Commissioner of Inland Revenue (N.Z.), (1963) NZLR 324; Hollyock v. Federal Commissioner of Taxation [1971] HCA 43; (1971), 125 CLR 647, referred to.

HEARING

Sydney, 1978, April 13-14; October 26. 26:10:1978
C.A. Porter Q.C. and W. Kearns, for the appellant.

A.M. Gleeson Q.C. and D.G. Hill, for the respondent.
Cur. adv. vult.

Solicitor for the appellant: Alan R. Neaves (Commonwealth Crown Solicitor).

Solicitors for the respondent: Dibbs, Crowther & Osborne.
ADA MOSHINSKY

DECISION

October 26.

The following written judgments were delivered.
BOWEN C.J. This is an appeal by the Commissioner of Taxation from a decision

of the Supreme Court of New South Wales upholding an objection by Mr. Peter R. Everett against an assessment for the income year ended 30th June, 1973. The assessment increased Mr. Everett's taxable income as returned by including a sum of $11,185 shown as having been paid to his wife. In argument before the Supreme Court it appeared to be common ground that the commissioner had also assessed Mrs. Everett upon the same amount, although her assessment was not before the court. (at p30)

2. The facts giving rise to the present appeal are set out in the judgments of Deane J. and Fisher J. and need not be repeated in detail. By deed of assignment dated 7th January, 1969, between Mr. Everett (vendor) and Mrs. Everett (purchaser), in consideration of the sum of $3,832.50 to be paid by the vendor to the purchaser as therein provided the vendor as beneficial owner, did thereby convey and assign to the purchaser six-thirteenths of the vendor's share in the partnership carried on under the firm name of Dibbs, Crowther & Osborne together with all those rights including the right to receive an appropriate share of the profits of the partnership to which an assignee of a share in a partnership is entitled by virtue of s. 31 of the Partnership Act, 1892 (N.S.W.). Under s. 31 an assignment by a partner of his share in the partnership does not, as against the other partners, entitle the assignee to interfere in the management or administration of the partnership business or affairs, or to require any account of the partnership transactions or to inspect the partnership books but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled. (at p30)

3. Dibbs, Crowther & Osborne are a firm of Sydney solicitors. The deed clearly expresses the intention of Mr. Everett to effect for valuable consideration a present conveyance of part of his share in the partnership to his wife. Mrs. Everett was a solicitor and a qualified person for the purposes of the Legal Practitioners Act, 1898 (N.S.W.), so no breach of s. 40F in divn VI of that Act prohibiting the sharing of profits with an unqualified person, was involved. The purchase money was paid in various amounts over a period of time, the last payment being made on 1st July, 1972. It is not suggested that the assignment was a sham or that s. 260 of the Income Tax Assessment Act 1936 (the "Act") applied. (at p30)

4. Before dealing with the effect of the assignment it is necessary to make some observations about the nature of a partnership share. As a partner Mr. Everett had a beneficial interest in the partnership assets. That interest is not to be described as a title to specific property but as a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities (Bakewell v. Deputy Federal Commissioner of Taxation (S.A.) [1937] HCA 11; (1937) 58 CLR 743, at p 770 ; Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. [1974] HCA 22; (1974) 131 CLR 321, at p 327 ). Notwithstanding the peculiar fluctuating character of the interest of a partner, it is regarded as an interest in every asset of the partnership and is properly described as a beneficial interest (Livingston v. Commissioner of Stamp Duties (Q.) [1960] HCA 94; (1960) 107 CLR 411, at p 453 ). So far as profits are concerned the partnership accounts for purposes of the agreement between partners and the income tax legislation were maintained on an accruals basis (Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612, at p 650 ). In the case where accounts are kept on this basis it may be said in one sense that a partner earns income when a bill of costs is sent out to a client. However, the partner does not gain the right to have this income detached at that point of time. His interest in it will continue to fluctuate. Indeed, if subsequent losses are made, the eventual position may be that he has no profit or income for the year in question. Both for partnership purposes and for income tax purposes the accounts of such a partnership are kept on an annual basis. It is true that in some circumstances, for example, if a partner dies, accounts may be compiled up to the date of death. Upon accounts being taken up to that date, the rights of partners to their shares of profits will crystallize then rather than in the ordinary way. In the ordinary course their rights to income will not crystallize or become detachable until the end of the accounting period. At that point of time the share of profits of each partner becomes certain in the sense that it is capable of being rendered certain and his share of the net income for purposes of divn 5 of Pt III of the Act becomes certain in the same sense. It is then his income whether in fact it is detached or not (Federal Commissioner of Taxation v. Happ (1952) 9 ATD 447, at p 451 ). Of course, the partnership agreement may provide for advances to be made from time to time against the ultimate annual share of profits but such an arrangement does not alter the position as I have stated it. (at p31)

5. It is clear that a partner may effect an equitable assignment of his share for value and that he may do so either in whole or in part (Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9, at p 29 ; Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965) 113 CLR 385, at p 396 ). However, the deed of assignment in the present case did not make Mrs. Everett a partner or confer upon her any right to interfere in the management or administration of the partnership (see deed of assignment; Partnership Act, 1891, s. 31; Dodson v. Downey (1901) 2 Ch 620, at p 622 ). So far as the deed of assignment related to assets it was, in my opinion, effective to transfer a six-thirteenths interest in the various rights in relation to the partnership assets. It was not, as in Arbuckle v. Federal Commissioner of Taxation (1964) 13 ATD 378 , entirely nugatory. However, the bundle of rights which Mrs. Everett thus acquired did not include the rights of Mr. Everett as a partner to interfere in management or administration of the partnership business or affairs or to require an account of partnership transactions or to inspect the partnership books. These rights remained with Mr. Everett. Even the rights which did pass by the assignment to Mrs. Everett did not enable her to obtain access to the assets or even to have the quantity of her interest determined unless and until dissolution should occur. The question of dissolution would continue to depend upon the circumstances and the actions of the partners including Mr. Everett. The result of this, as it appears to me, is that the rights assigned are of such a nature that although the beneficial interest passed to Mrs. Everett, the actual rights themselves and the capacity to exercise them in the partnership remained in Mr. Everett, who, in relation to them, was in the position of a trustee. Circumstances might arise in which a court of equity would intervene at the suit of Mrs. Everett should Mr. Everett or his partners act wrongly in a manner destructive of her six-thirteenths interest in the assets of the partnership. If she brought proceedings she would have to join Mr. Everett as a party. (at p32)

6. Turning to the interest of Mrs. Everett in income, it was argued that throughout the year Mrs. Everett actually derived a six-thirteenth share of partnership income as bills of costs were sent out to clients. I am unable to accept this argument. There exists in relation to the interest of an assignee in a share of profits a complex of contingencies. The assignor has to continue faithfully to perform his obligations to his other partners. If he fails to do so or if he gives notice of termination he may even bring about a dissolution. The choice rests with him. He may even bring about a situation, where there arises a cross-claim for damages (Airey v. Borham [1861] EngR 553; (1861) 29 Beav 620; 54 ER 768 ; Dyer v. Samman (1956) VLR 49 ). To a substantial degree, therefore, the interest in profits will depend to a large extent upon the efforts of every partner and may even be affected by the action of claimants against the partnership and creditors. (at p32)

7. In my opinion the profits of the partnership during the year ended 30th June, 1973, did not constitute detachable income of the assignee prior to the end of the income year. When the year ended on 30th June, 1973, the profits became ascertainable. It matters not that for practicable reasons the accounts of the partnership might not in fact be drawn up until later. Mr. Everett, at the end of that year, became a trustee of a six-thirteenth share of profits for Mrs. Everett (Hocking v. Western Australian Bank [1909] HCA 68; (1909) 9 CLR 738, at pp 743-744 ). The trust attached eo instanti to that share of profits (Palette Shoes Pty. Ltd. v. Krohn [1937] HCA 37; (1937) 58 CLR 1, at pp 16-17, 27 ). At no time did the beneficial interest in the six-thirteenth share of profits vest in Mr. Everett. Immediately it was ascertainable it vested in Mrs. Everett. (at p33)

8. It was argued for the commissioner that the taxation of partnerships is governed by divn 5 of Pt III of the Act, that Mr. Everett was a partner and therefore, his individual interest in the net income of the partnership must be included in his assessable income (s. 92). It was sought to meet the argument by saying that Mrs. Everett was a member of a "partnership" for income tax purposes because of the definition of "partnership" in s. 6 of the Act. This definition refers to an assessment of persons in receipt of income jointly. It was submitted that she was a person in receipt of income jointly with the partners. However, it does not appear to me that Mrs. Everett falls within the words of the definition in s. 6. For one thing, her "receipt" of income did not occur as 30th June, 1973, ended although her beneficial interest in the income was then complete. It is at that time that divn 5 operates. In any event, it seems that where a trustee of an estate is a partner with active duties to perform, s. 6 does not operate so as to bring in as partners for income tax purposes beneficiaries who are presently entitled. This is a situation which may occur not infrequently. The correct approach in such a case appears to be to treat the trustee as the partner for income tax purposes and to look to other provisions of the Act such as those in divn 6 of Pt III to determine whether the trustee or the beneficiary is to be taxed upon the income (see Tindal v. Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608 ). The position may be different in the case of a bare trustee. Should Mr. Everett be treated simply as a bare trustee for Mrs. Everett's six-thirteenth share of profits as at the end of the year? In my opinion, although the beneficial interest in net income or profits vested in Mrs. Everett as the year ended, Mr. Everett still had rights and duties as a trustee which had to be exercised and performed at least until the partnership accounts were finalized. Furthermore, it is wrong and certainly at odds with reality to fasten upon the six-thirteenth share of net income or profits to the exclusion of the six-thirteenth interest of Mrs. Everett in the assets of the partnership from which in some degree the income or profits flowed and to the exclusion of the relationship between Mr. and Mrs. Everett in respect of that six-thirteenth interest in assets. (at p34)

9. It is necessary to turn to the provisions of the Act governing taxation of trustees and beneficiaries to see how they apply in such a case. The relevant provisions are s. 26(b) and those contained in divn 6 of Pt III. These provisions are often difficult to apply to particular cases (see Commissioner of Taxation v. Belford [1952] HCA 73; (1952) 88 CLR 589 ). However, the policy of the Act is reasonably clear. Except as provided in the Act a trustee is not to be liable as trustee to pay income tax upon the income of the trust estate (s. 96). It is the beneficiary who is presently entitled and not under any legal disability who is to be taxed (ss. 97, 26(b)). Of course, in various cases where it is not practicable and convenient to tax the beneficiary, as for example where the beneficiary is not presently entitled or is under some legal disability, provision is made for the trustee to be taxed (ss. 97, 98 and 99). (at p34)

10. In the present case, Mrs. Everett is presently entitled (Federal Commissioner of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199 ). She is not under any legal disability. One might have expected divn 5 and divn 6 to operate together in such a case so that Mr. Everett would be taxed upon the share of the net income of the partnership to which he was beneficially entitled and Mrs. Everett would be taxed upon the share to which she was beneficially entitled. But it is said this is not so. It is argued that divn 6 does not apply upon the ground that the income in question is not "the net income of a trust estate" as defined in s. 95. Further, it is said that divn 6 applies only where one can point to trust property which produces the income and reference is made to Howey v. Federal Commissioner of Taxation [1930] HCA 45; (1930) 44 CLR 289, at p 293 . I find this a question of some difficulty. Of course, where the corpus of the trust estate consists of income-producing property such as shares, debentures or land which has been leased, there is no difficulty. At the other end of the scale, if a person employed on a salary or on a salary and emoluments, declares himself a trustee of part of his salary or emoluments, one can readily agree with the argument (see Parkins v. Warwick (1943) 25 Tax Cas 419 ; cf. Johnstone v. Commissioner of Inland Revenue (N.Z.) (1966) NZLR 833 ; Kelly v. Commissioner of Inland Revenue (N.Z.) (1970) NZLR 161 ). (at p34)

11. Where there is a trust in respect of assets of a business but the income produced flows not simply from those assets but also significantly from the efforts of partners including the trustee, the case is more difficult. Such cases cover a wide range. It may be a grazing business where sheep also play a significant part by producing wool. It may be a pharmacy where turnover of stock and the provision of professional services both contribute. It may be a legal practice where the firm name and goodwill (including wills in the strongroom) contribute significantly to income and where the premises, library, furniture and office equipment as well as the efforts of employees also contribute but where the provision of professional services by the partners is the most significant factor. In the case of doctors and lawyers there is an additional difficulty as was noted by Menzies J. in Peate v. Federal Commissioner of Taxation [1964] HCA 84; (1964) 111 CLR 443, at p 446 in that they are subject to both professional and statutory controls. (at p35)

12. Where there is a trust in respect of a partnership share in such a business, it appears to me that the beneficial interest in the income referable to that partnership share falls to be taxed under divn 6 or in appropriate cases under that division and s. 26(b). It would hardly be possible to disentangle what part of the income of the business was attributable to different factors, say, to goodwill or to the personal effort of partners. And it would be wrong, in my opinion, to attempt to introduce into divn 6 notions of "income from property" and "income from personal exertion" at one time important in the Act for the purpose of determining differential rates of tax. (at p35)

13. It is true that in the present case we are concerned with a trust in respect of a six-thirteenth share in the income of a partnership and that this income was not in itself a trust estate for the purposes of divn 5. But it does not appear to me to be correct for income tax purposes to regard the six-thirteenth share of income separately from the six-thirteenth share in the assets. Mrs. Everett's interest in income was based upon the deed of assignment but the income flowed in substance from the six-thirteenth partnership share for which she paid. Although she was an assignee of the rights in relation to partnership assets, these rights were of such a character that Mr. Everett remained the partner, with rights of management and administration. I have previously described the relationship between Mr. and Mrs. Everett. As I have said, it appears to me to be a trust relationship. Having regard to the purpose and effect of the words used in divn 6, I am of opinion, they should be held to cover such a case. In my view Mrs. Everett's six-thirteenth share of net income was a share of net income of a trust estate for the purposes of divn 6 and Mr. Everett was not liable to income tax upon it. (at p35)

14. Two further points should be mentioned. It is said that Mrs. Everett's share of the net income of the partnership calculated for the purposes of divn 5 will not necessarily correspond with her share in partnership profits calculated according to the agreement between the partners. Clearly this is so. It may be greater or it may be less. If it is less, then because the greater includes the less, no problem will arise. If it is greater, then it is clear that there is a part of the net income of the partnership for tax purposes to which Mrs. Everett is not entitled under the assignment and on which she should not be taxed but upon which Mr. Everett should be taxed. However, no evidence has been given which would enable the court to say whether the latter is the case, or if so, to what extent there is any difference. Indeed, the assessments raised against Mr. and Mrs. Everett appear from what was said in argument before the Supreme Court to be for the same amount. In the circumstances I am unable to give any effect to this argument. (at p36)

15. Finally, it is submitted that s. 19 of the Act requires the assigned share of income to be deemed to be derived by Mr. Everett, although not actually paid over to him but dealt with as he directed. However, it appears to me that s. 19 begs the present question. The object of that section has been stated to be to prevent a taxpayer escaping tax though his resources have actually been increased by the accrual of income and its transformation into some form of capital wealth or its utilization for some purpose (Permanent Trustee Co. of New South Wales Ltd. v. Federal Commissioner of Taxation (1940) 46 ALR 291 ). In my opinion, s. 19 is not so expressed as to render an assignor liable to income tax where he has executed an assignment of income in advance for valuable consideration and either the character of the income is such that it is capable of immediate assignment or its character is such that the assignee becomes the immediate beneficial owner of it the instant it is ascertainable. (at p36)

16. In the result I would dismiss the appeal with costs. (at p36)

DEANE J. The respondent Peter Robert Everett ("the taxpayer") is a solicitor. Prior to 1st July, 1966, he was employed as an "associate" by three solicitors who carried on their profession in partnership in Sydney under the firm name of Dibbs, Crowther & Osborne. On 1st July, 1966, the taxpayer, to use his words, "became a partner in that firm by purchasing a thirteen per cent interest in the partnership business and the assets, undertaking, goodwill and income thereof" from one of the existing partners (Mr. Edwards) who "continued" as a partner in the firm. Thereafter, the taxpayer and the other three solicitors carried on the practice in partnership under the same firm name. The taxpayer ceased to be paid a salary and received no remuneration for his professional work as a member of the firm additional to his contractual entitlement to share in partnership profits. Drawings against projected partnership profits were made by the partners on a monthly basis. (at p36)

2. There was no formal contract between the taxpayer and his partners containing the terms of the partnership agreement between them. At some stage, however, the four partners initialled a document which was described, and to which I shall refer, as the "heads of agreement". Mr. Edwards, in an affidavit upon which he was not cross-examined, stated that the terms of that document both "evidenced the basis of the partnership agreement between the partners" and "have regulated the association of the partners and have been complied with by the partners" during all relevant periods. (at p37)

3. The heads of agreement record that "the interests of the firm take priority over individual interests" (cl. 1), that each partner shall "use his best endeavours to promote the interests of the firm" (cl. 11) and that, in the event that a partner engages in associated remunerative activities, any "moneys received by way of trustees' commission, directors' fees etc. shall be the property of the firm" (cl. 12). They provide that "the interests of the partners in the capital and income of the firm" shall be thirteen per cent in the case of the taxpayer and twenty-nine per cent in the case of the other three partners (cl. 3) but, subject to certain provisions aimed at reducing the "percentage of goodwill" which a partner who has reached the age of sixty-five shall "hold", the partners "will progress to equality of interest within ten years" (cl. 9). A partner may retire "on six months' notice (less on grounds of ill-health)" (cl. 5) and shall retire "if so requested by all the other partners but shall be given six months' notice of such request" (cl. 7). "Death, retirement or resignation shall not dissolve the firm as to the survivors" (cl. 4). On death or retirement of a partner, "the value of his interest" (which is defined as being the total of seventy-five per cent of the average of his share in net profits during the three preceding years and the surplus of his "percentage of the general account and of the control accounts" over certain liabilities) "shall be paid pro rata by the remaining partners" over a designated period (cl. 5). A partner guilty of grave professional misconduct "may be dismissed without notice by the other partners and shall be entitled" to only one-half of "the value of his interest" less "any loss or damage suffered by the other partners". (at p37)

4. There was no express requirement in the heads of agreement that the four partners devote the whole or any specified proportion of their working time and professional activities to the affairs of the partnership. It is, however, plain that the underlying basis and an implied term of the partnership agreement between the taxpayer and his three partners, was that each of the four partners should devote, at the least, a substantial part of his working time and attention to the business and affairs of the firm. (at p37)

5. The practice of Dibbs, Crowther & Osborne was described by the taxpayer as "much the usual sort of practice". The partnership property included a leasehold interest in premises on which the practice was conducted, a law library, office furniture, fittings, fixtures, stationery, typewriters and the like. In addition to non-professional staff the partners employed a number of solicitors and articled clerks who were engaged in legal work. (at p38)

6. By deed made 7th January, 1969, the taxpayer (in the deed referred to as "the vendor"), for a consideration of $3832.50, conveyed and assigned to his wife (in the deed referred to as "the purchaser"): "Six-thirteenths of the vendor's share in the partnership . . . together with all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of s. 31 of the Partnership Act, 1892, as from the date of these presents to hold the same unto the purchaser absolutely PROVIDED HOWEVER that nothing herein contained shall entitle the purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the vendor at the date hereof has been distributed to the vendor." The deed proceeds to "declare": "That the purchaser shall not be reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the vendor would otherwise have been entitled has this assignment not been made." (at p38)

7. The deed of 9th January, 1969, ("the deed of assignment") was executed by the taxpayer and his wife with the approval of the taxpayer's three partners. Mr. Edwards, in his affidavit, swore that shortly after its execution "notice was given to the partners of the aforesaid firm of an assignment made by Peter Robert Everett, a partner of the firm, in favour of his wife, Dianne Joyce Everett of six-thirteenths of his interest in the said partnership which said assignment was accepted by the members of the firm". Mr. Edwards' affidavit continued: "Having received notice of the assignment, the partnership has since that time dealt with the income arising in respect of the six per cent assigned to Dianne Joyce Everett in accordance with her instructions, such income being paid usually to the credit of her current banking account although on occasions on her specific direction it has been paid to the credit of her husband's account." It is plain that Mr. Edwards intended to include both the proportionate share of monthly drawings against projected profits as well as the proportionate share of profits when ascertained in his reference to "such income being paid" in this extract from his affidavit. (at p39)

8. The taxpayer's "interest . . . in the capital and income of the firm" was subsequently increased from thirteen per cent to twenty-two per cent. That increase occurred, however, after the income tax year in question and it is not relevant to consider, whether, upon the proper construction of the deed of assignment, the rights of the taxpayer's wife enjoyed any resulting enhancement. (at p39)

9. The present appeal relates to the income tax year ended 30th June, 1973, ("the tax year"). In that year, the taxpayer's share in the net income (for income tax purposes) of the partnership, if the effect of the deed of assignment is ignored, was $35,418. Of this amount, $11,185 was, as a consequence of that deed, either paid to, or applied in accordance with, the specific direction of the taxpayer's wife. The taxpayer, in his taxation return for the year, excluded that amount of $11,185 from his assessable income. The commissioner assessed the taxpayer to tax on the basis that it should be included in his assessable income. The taxpayer appealed to the Supreme Court of New South Wales in its Administrative Law Division. The Supreme Court upheld his appeal and varied the assessment by excluding the amount. The issue involved in this appeal is whether that amount of $11,185 should properly be regarded as assessable income of the taxpayer of the relevant tax year. (at p39)

10. The taxpayer's primary arguments were put in the alternative. It was well established, it was said, that "part of a share in a partnership" can be assigned in equity. The deed of assignment effected an immediate equitable assignment of part of the taxpayer's "share in the partnership" of Dibbs, Crowther & Osborne including an appropriate part of his right to share in partnership profits or, for income tax purposes, his individual interest in the net income of the partnership. The effect of the assignment was that the proportionate part of what would otherwise have been the taxpayer's individual interest in the net income of the partnership was derived not by the taxpayer but by his wife whose property it was. Alternatively, it was argued, the effect of the deed of assignment was that the proportionate part of the taxpayer's "share in the partnership" was held upon trust for his wife and the appropriate part of the taxpayer's individual interest in the net income of the partnership was derived by him, in his capacity as trustee, as income of a trust estate. The assessment of these arguments involves examination of the concept of a "share in a partnership", determination of the precise effect of the deed of assignment and consideration of whether the proportionate part of the taxpayer's interest in the net income of the partnership can, in the circumstances, properly be regarded either as not having been derived by the taxpayer at all or as being income of a trust estate derived by the taxpayer in the capacity of trustee. (at p40)

11. The phrase "share in a partnership" can be used to convey a number of different meanings. It can be used to refer to the right of a partner to share in any surplus of partnership assets over partnership liabilities upon dissolution and the associated beneficial interest in the totality of partnership assets prior to dissolution (Arbuckle v. Federal Commissioner of Taxation (1964) 13 ATD 378 ; Bakewell v. Deputy Federal Commissioner of Taxation (S.A.) (1937) 58 CLR, at p 770 ). It can, in some contexts, be used to refer to the "capital" directly or indirectly contributed to the partnership and which is distinct from, and may be unrelated to, his interest in any surplus of assets on dissolution (see Lindley on Partnerships, 13th ed., p. 347). As a matter of convenience, it can be used to refer to the total aggregation of a partner's rights under a particular partnership agreement (his part "of the whole adventure": Hocking v. Western Australian Bank (1909) 9 CLR, at p 743 ). While the phrase is a useful one and is to be found in the various Partnership Acts and in judgments of the highest authority, it is important to ensure that its latent ambiguity does not conceal a need for precision and that its use does not camouflage either the true nature of the particular partnership relationship or the fact that generalizations as to the content of the rights and duties, inter socios, of the members of a partnership are liable to be misleading. (at p40)

12. As between the partners, the rights and duties of a member of a partnership are primarily contractual. They flow from the express or implied terms of the particular partnership agreement. Questions of illegality aside, any implication, by statute or rule of law, of provisions into the relationship between partners is ordinarily subject to any contrary intention appearing from the agreement between the partners. The rights of a member of a partnership will commonly (but not necessarily) include rights relating to any partnership assets which may exist. They will almost invariably (but, conceivably, not necessarily) include rights relating to any partnership profits which may be earned. (at p40)

13. In the absence of agreement to the contrary, a member of a partnership has no definite or separate share or interest in any particular partnership receipt or other item of partnership property. He has an undivided beneficial interest in the totality of partnership assets (including receipts and choses in action) and is entitled to insist that they be applied for legitimate purposes of the partnership. The precise content of that undivided beneficial interest will be affected by any separate right of the partner to share in any partnership profits or in any distribution of partnership assets in the sense that the distribution of partnership profits and assets, in accordance with the provisions of the partnership contract, is a legitimate purpose of the partnership. If the partnership agreement so provides or all the partners so agree, there is no general rule of law which prevents the partners dividing or applying partnership receipts and other assets at any time or in such manner as they see fit. In the absence of such provision or consensus, however, a partner's separate interest in relation to partnership assets is to share, either equally or in such other proportion as the partners may agree, in any surplus remaining, upon a dissolution, after the realization of the assets and payment of the debts and liabilities of the partnership. His separate entitlement in relation to any partnership profits is, in the absence of such provision or consensus, to share, either equally or in such other proportions as the partners may agree, in partnership profits if and when they are earned in respect of any accounting period which the partners accept (or, in the absence of agreement, the overall circumstances indicate) as appropriate or in respect of the whole or a particular part of a partnership venture. (See, generally, Livingston v. Commissioner of Stamp Duties (Q.) (1960) 107 CLR, at p 453 ; Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 131 CLR, at pp 327-328 .) (at p41)

14. In some cases, particularly where correspondence exists between proportionate contribution to capital, proportionate right to share in any surplus of partnership assets on a dissolution, and proportionate right to share in any partnership profits which may be earned, it may be legitimate to see a partner's share of profits which have been earned as flowing from the capital which he has directly or indirectly invested in the partnership or from his interest in partnership assets. It is not, however, necessary that there be any such correspondence. It is possible to have a partnership without capital or partnership assets. Where partnership assets exist and partnership capital has been contributed, one partner may have contributed all the capital and, on a dissolution, be entitled to any surplus of assets and another partner whose sole contribution is his skill and personal exertion may be entitled only to share in partnership profits (see, for example, Wiltshire v. Kuenzli (1945) 63 WN (NSW) 47 ). In such a case it would be unreal to see the right of the working partner to participate in any profits as flowing from his "capital" in the partnership or, indeed, from his "share of the partnership" in whatever sense that phrase is used. His right to participate in any partnership profits is a contractual provision of the partnership agreement under which he has agreed to devote his time and efforts to the partnership business. (at p41)

15. In Bakewell v. Deputy Federal Commissioner of Taxation (S.A.) [1937] HCA 11; (1937) 58 CLR 743 Dixon and Evatt JJ., in a judgment with which McTiernan J. expressed his agreement, referred to a partner's share in a particular partnership as constituting a "corpus" and to the partner's share in profits as representing "the income of that corpus". Their Honour's comments must, however, be read secundum subjectam materiam and, in my view, do not constitute authority for a general proposition that a partner's share in partnership profits should in all cases and for all purposes be regarded as income flowing from the corpus of his "share in the partnership". Where questions involving the derivation of income are concerned, one must look to the realities or the substance of the particular matter (Permanent Trustee Co. of New South Wales Ltd. v. Federal Commissioner of Taxation (1940) 46 ALR 291 , see also Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation [1965] HCA 58; (1965) 114 CLR 314, at pp 318-319 ). Where such questions are involved, the determination of whether the income of a partnership should be seen as flowing primarily from the assets of the partnership or from the personal exertions of the partners or of whether a particular partner's share of profits should be regarded as flowing primarily from his "share in the partnership" or from his personal exertions as a partner will properly involve consideration of the circumstances of the particular case. (at p42)

16. The partnership with which the court is primarily concerned in the present appeal is the relationship which existed, during the tax year, between four solicitors jointly carrying on their profession, with a view to mutual profit, under the firm name of Dibbs, Crowther & Osborne. As has been seen, it was a term of the partnership agreement between them, as evidenced by the heads of agreement, that the "interest of the partners in the capital and income of the firm shall be" thirteen per cent in the case of the taxpayer and twenty-nine per cent in the case of each of his three partners. I construe the reference to interest in the "capital" as being a reference to the proportionate share in surplus assets on a dissolution and the reference to interest in "income" as being a reference to a proportionate share of net income or profits if and when earned in a relevant accounting period. Apart from these separate interests in any surplus assets on a dissolution and profits if and when earned, each partner had, while the partnership continued, the ordinary undivided beneficial interest in the totality of partnership assets. The right of each of the four partners to share in any surplus of partnership assets upon a dissolution was liable to be converted into a right to receive a monetary payment from the other partners in the event that the partnership was determined by his death, retirement, resignation or dismissal. Such a conversion would involve a change of form of the relevant right but would not involve any new beneficial interest coming into existence (see Bakewell v. Deputy Federal Commissioner of Taxation (S.A.) (1937) 58 CLR, at p 770 ). While there were, in fact, capital assets of the partnership, the subsisting beneficial interest in the totality of partnership capital assets constituted, in the context of the underlying entitlement to share in any surplus of assets upon a dissolution, an existing proprietary right susceptible of immediate partial assignment in equity. While there were, in fact, partnership revenue receipts (including choses in action) pending ascertainment of profits and distribution (by payment or credit), the subsisting undivided beneficial interest in such receipts and in any work in progress likewise constituted, in the context of the underlying entitlement to share in partnership profits, an existing proprietary right. (at p43)

17. In their professional activities, the four partners used partnership assets, employed both professional and non-professional staff and enjoyed the advantages of any partnership goodwill. It is possible that, in some circumstances, the profits of a solicitor's practice should properly be seen as flowing primarily from the goodwill of the practice and the assets employed in carrying it on. Thus, for example, the profits derived from a deceased solicitor's practice carried on by an employed manager for the benefit of the estate may well, in some circumstances, properly be seen as being primarily derived from the goodwill of, and property employed in, the practice (cf. Re Lazarus deceased (1940) 11 ABC 249 ). In the present matter, however, the four partners were actively engaged in the partnership practice. The income of the partnership consisted of fees paid for professional work performed by themselves or, under their supervision, by those whom they employed in carrying on the partnership business. Neither the income nor the profits of the partnership business could, in my view, properly be seen, in so far as the partners were concerned, as being derived either from the partnership assets used in the business or, in any relevant sense, from the activities of the staff employed by the partners in the course of their carrying on the partnership business. The income and profits of the partnership were derived by the partners from their activities (including use of partnership assets and employment of partnership staff) in the carrying on of the partnership business and were the fruits of the personal exertion of the four partners. (at p43)

18. As has been said, it was implicit in the partnership agreement that each of the four partners would devote, at the least, a substantial part of his working time and attention to the business and affairs of the partnership. Substantial failure so to do would constitute a breach of an implied term of the agreement. Such failure would render the partner in default liable, upon accounts on dissolution, to make good any loss suffered by the firm by reason of his default (Dyer v. Samman (1956) VLR 49 ) or to be prejudiced by an allowance being made in favour of the other partners in respect of their services (Airey v. Borham [1861] EngR 553; (1861) 29 Beav 620; 54 ER 768 ). Even if he fulfilled the continuing obligation to devote time and attention to the partnership business, his right to participate in the profits of that business could, at any time, be terminated if he were guilty of grave professional misconduct or if it became necessary for him to retire on the grounds of ill-health and, on six months' notice, be terminated either by his three partners' forcing his retirement from the partnership or by his voluntary retirement therefrom. The partnership could be dissolved at any time by agreement between the partners. In sum, the accrual to the taxpayer of any separate proprietary right to receive a detached share in any future partnership profits was dependent upon the emergence of any such profits, upon the continuance of the partnership, upon the continuance of the taxpayer as a member of it and, for practical purposes, upon the taxpayer's continuing fulfilment of his obligation to work in the partnership business. In the event that a separate and separable right to receive a share of profits which had actually been earned did accrue to the taxpayer, that share of profits could not realistically be regarded as primarily flowing from or being "the fruit of" any contribution to partnership capital or any interest in the totality of partnership assets or in any surplus of partnership assets upon dissolution. As a matter of substance and reality, any partnership profits were primarily the result of the personal exertions of the four members of the partnership and the taxpayer's share of them was his agreed share of the fruits of those personal exertions. If attribution be necessary, any share of profits which the taxpayer became entitled to receive should be attributed primarily to his personal exertions as a member of the firm. There was correspondence, in so far as proportion is concerned, between the taxpayer's proportionate right to share in partnership profits which had been earned and his proportionate right to share in any surplus of partnership assets on a dissolution. The two rights were independent, however, and neither one could properly be seen as constituting the fruits of the other. The taxpayer's entitlement to receive (by way of payment or credit) a thirteen per cent detached share of partnership profits augmented the content (but did not change the nature of his undivided beneficial interest in partnership revenue receipts (including choses in action) and work in progress (see above). The augmentation of the content of that interest resulted from, and was not the source of, his contractual entitlement to share in profits. His right to a thirteen per cent share of profits could not properly be seen as flowing from his undivided beneficial interest in the revenue receipts, work in progress or capital assets of the partnership. (at p45)

19. The deed of assignment, in terms, effected an immediate conveyance and assignment of six-thirteenths of the taxpayer's "share in the partnership . . . together with all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of s. 31 of the Partnership Act, 1892". Since it purported to deal, by way of present assignment, with part only of the taxpayer's "share" in the partnership and the other rights to which reference is made, its operation was, of necessity, equitable (see Norman v. Federal Commissioner of Taxation (1963) 109 CLR, at pp 29-30 ). Even in equity, its effectiveness as an immediate assignment falls to be determined by reference to the nature of the property which it purportedly assigned. That property did not include the taxpayer's interest in any already accrued profits which were held pending distribution. The taxpayer's wife was expressly excluded from any entitlement "to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof until such time as the share therein" of the taxpayer at the date of the deed had been distributed to the taxpayer. In so far as future profits were concerned, the deed purported to deal only with "the right to receive" a part of the profits of the partner (i.e. the taxpayer) and expressly declared that the taxpayer's wife was "only . . . entitled . . . to receive the portion of the share of profits" to which the taxpayer "would otherwise have been entitled" (italics added). It contained no provisions designed to ensure that there would, in fact, be any future profits of the partnership in which the taxpayer "would otherwise have been entitled" to share. It contained no express or implied term requiring the taxpayer to continue to devote his time and efforts to the partnership practice for any particular period or precluding him, for any particular period, from either retiring from the firm (whether on the grounds of ill-health or otherwise) or, by agreement with the other partners, dissolving the partnership. (at p45)

20. The provisions of s. 31 of the Partnership Act, 1892, are, subject to a possible qualification in the case of the right to accounts on a dissolution contained in s. 31(2) (see Lindley on Partnership, 13th ed., p. 385), primarily intended for the protection of the partners of an assignor (Dodson v. Downey (1901) 2 Ch, at p 622 ). In so far as the right to accounts is concerned, the deed could not, as against the taxpayer's partners who were not parties to it, confer upon an assignee of part only of the taxpayer's share in the partnership, the right of an assignee of the whole of a partner's share contained in s. 31(2) (see, for example, Bergmann v. Macmillan (1881) 17 Ch D 423 ). The reference to the section in the operative part of the deed may be inappropriately worded. Be that as it may, the intent of the reference is clear enough. The "right to receive an appropriate share of the profits of the partner" which is purportedly assigned is intended to correspond to the entitlement referred to in s. 31. That entitlement is stated, in the section, in words corresponding to the words used in the subsequent declaratory part of the deed of assignment itself. The right or entitlement of the assignee was "only to receive the share of profits to which the assigning partner would otherwise be entitled". Both the words in the declaratory part of the deed and the reference to s. 31 serve to underline what the operative words of the deed had in any event made clear, namely, that, in so far as profits were concerned, the deed was only purporting to deal with the entitlement to receive an appropriate part "of the profits of the partner", that is to say, an appropriate part of the share in partnership profits which, in the event that they were earned, the taxpayer was himself entitled to receive. In so far as the quantum of any entitlement was concerned, it would seem that the taxpayer's wife would, in the absence of fraud, be bound by the accounts between the partners (Re Slyth; Ex parte Barrow (1815) 2 Rose 252 ; Partnership Act, 1892 (N.S.W.), s. 31(1)). (at p46)

21. As a matter of construction, I would read the reference to the taxpayer's "share in the partnership" in the operative part of the deed of assignment as being a reference to his interest in partnership assets. It is, however, unimportant for present purposes whether the phrase is so construed or whether it is construed as including not only the taxpayer's interest in partnership assets but also any entitlement to participate in partnership profits. In either case, the taxpayer, by the deed, purportedly assigned to his wife the right to receive an appropriate part of the profits to which he would otherwise be entitled. In either case, the conclusion that the taxpayer's entitlement to share in any partnership profits could not properly be seen as flowing from his interest in partnership assets or from any capital contribution to the partnership has the consequence that the effectiveness of the purported partial assignment, in so far as entitlement to receive a share of future profits is concerned, will fall to be determined by reference to its effectiveness as a partial assignment of that entitlement as distinct from by reference to the effectiveness of any assignment or partial assignment of some other interest from which the entitlement to share in future partnership profits could properly be said to flow. The question arises whether that entitlement was an existing right or interest susceptible of immediate effective assignment in equity or a future right or expectancy not susceptible of such effective immediate assignment (see, per Younger L.J., in Performing Right Society v. London Theatre of Varieties (1922) 2 KB 433, at p 454 and Salmond and Williams on Contract, 1945, p. 463). That question must be answered in the light of the decisions of the High Court of Australia in Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9 and Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965) 113 CLR 385 . (at p47)

22. In Norman's case the intending assignor had purported voluntarily to transfer and assign to his wife "all his right, title and interest in and to" certain interest to accrue (during a period including the relevant year) on a loan repayable by the borrower at will and dividends which might be declared (during the relevant year) on certain shares. It was held, unanimously, that the relevant indenture was not an effective assignment of the dividends since there was no right to receive dividends unless and until they were declared. The dividends constituted a mere expectancy or possibility which was not susceptible of separate voluntary assignment in equity. The decision of the court as to dividends was influenced by the special provisions of the Act relating to income from dividends and by the fact that the shares themselves were not held by the intending assignor at the time of assignment. The reasoning of the members of the court in relation to dividends (see, for example, per Windeyer J. (1963) 109 CLR, at p 40 ) does, however, lend some support for the view that the entitlement to receive a share in any future partnership profits in the present matter is, if viewed independently of any proprietary interest in partnership assets, likewise an expectancy. (at p47)

23. A majority of the members of the court (Dixon C.J., Menzies and Owen JJ., McTiernan and Windeyer JJ. dissenting) in Norman's case reached the conclusion that the object of the purported assignment relating to interest on the loan was likewise an expectancy or possibility which was not susceptible of such voluntary assignment. The critical difference between the members of the court was not, however, the result of any basic disagreement as to the principles governing the effectiveness of a purported equitable assignment of an expectancy. The difference between the members of the court was confined to two comparatively narrow questions. The first of those questions was whether, as a matter of construction, the relevant assignment should be seen, as Menzies and Owen JJ. (1963) 109 CLR, at p 22 and, possibly, Dixon C.J. (1963) 109 CLR, at p 16 saw it, as a purported assignment of future interest itself or, as McTiernan J. (1963) 109 CLR, at p 18 and Windeyer J. (1963) 109 CLR, at p 38 saw it, as a purported assignment of the right to be paid interest at a future date. The second question was whether, notwithstanding the borrower's entitlement at any time to repay the capital and thereby to extinguish the liability to pay interest, the taxpayer's right to be paid interest if the loan continued was an existing chose in action susceptible of immediate effective voluntary assignment or merely a future right or expectancy. On that second question, McTiernan and Windeyer JJ. (1963) 109 CLR, at pp 18, 38 were of the view that the relevant right was a present right, Dixon C.J., was of the view that it was no more than an "expected right" (1963) 109 CLR, at p 16 and Menzies and Owen JJ. found it unnecessary to indicate any view at all (1963) 109 CLR, at p 22 . (at p48)

24. The purported voluntary assignment in Shepherd's case [1965] HCA 70; (1965) 113 CLR 385 was to five persons in specified proportions and was of the assignor's "right, title and interest in and to an amount equal to ninety per cent of the income which may accrue during a period of three years from the date of this assignment" under a royalty agreement by which the assignor, who was the grantee of certain letters patent relating to castors, had granted a licence to manufacture castors according to the relevant specifications. The amount of royalties payable during any period depended upon the quantity of castors made and sold by the licensee who was under no obligation to make and sell any minimum quantity. Owen J., who dissented, was of the view that the appellant had not purported to assign part of an existing contractual right to receive royalties. The other members of the court (Barwick C.J., and Kitto J.) held that he had purported to assign such a contractual right. Barwick C.J. and Kitto J. also held that, in the circumstances, the contractual right to receive royalties was an existing right susceptible of partial immediate voluntary assignment in equity. The future royalties, being future property or an expectancy, were not in themselves susceptible of such independent voluntary assignment. When such royalties became in fact payable however, they flowed from, or represented "the fruit" of "the tree" which had been effectively assigned (per Kitto J. (1965) 113 CLR, at p 396 ). In the course of his judgment, the Chief Justice referred to Norman's case [1963] HCA 21; (1963) 109 CLR 9 and commented that in so far as that case "dealt with the attempted assignment of the promise to pay interest, it must . . . depend upon the view that the promise to pay interest . . . inhered in the existence of a principal sum upon which the interest was to be calculated and payable. Consequently, there was no promise to pay interest, if no principal remained due" (1965) 113 CLR, at p 393 . Kitto J., in the course of his judgment, said that to understand the grounds of decision in Norman's case "it is necessary to remember that in respect of the future year the loan agreement recorded the terms which should apply to the relationship of borrower and lender so long as such a relationship should exist, but it left the borrower free to decide whether such a relation should exist in the relevant year. It gave the lender no right in any possible event to insist upon there being a loan in existence in that year" (1965) 113 CLR, at p 396 (at p49)

25. As has been said, Norman's case [1963] HCA 21; (1963) 109 CLR 9 did not decide whether, in so far as the interest was concerned, there was an existing proprietary right in the sense of a present entitlement to receive any interest which might in fact accrue due in the relevant future period. Two of the three justices who expressed an opinion on that question were of the view that there was. The above comments of Barwick C.J. and Kitto J. in Shepherd's case (1965) 113 CLR, at pp 393, 396 were, therefore, hypothetical. They do, however, underline the importance, in determining whether or not there is an existing proprietary right susceptible of immediate assignment, of the consideration that it is a matter of speculation whether the substratum of the entitlement will exist at the time when the relevant future benefit may accrue. (at p49)

26. The "right to receive" part of the taxpayer's share of any future partnership profits which was purportedly assigned by the deed of assignment in the present matter was quite different to part of the benefit of the promise to pay royalties which was assigned in Shepherd's case. The promise in Shepherd's case was a promise by a third party (the licensee) to pay royalties to the assignor. The benefit of that promise was, during the joint currency of the letters patent and the licence agreement, an existing proprietary right which was independent of any future activities of the assignor and which had arisen under a "contractual relationship" between the assignor and the licensee "which by its terms must continue throughout the ensuing three years" regardless of whether the licensee should wish it to continue or not (1965) 113 CLR, at p 396 . The "right to receive" an appropriate part of the taxpayer's share of future profits which was purportedly assigned in the present matter was expressly stated to be exclusive of any share of prospective profits accumulated but not distributed at the time of the assignment. It was dependent not only upon such profits being, in the future, earned in respect of a completed period (ordinarily a period of twelve months ending on 30th June of the particular year) but upon the continuance of the partnership between the taxpayer and his three partners and, for practical purposes, the continued devotion, by the taxpayer, of a substantial part of his time and attention to the affairs of the partnership. The taxpayer's entitlement to share in any profits which he and his partners might earn in the future cannot properly be seen as flowing from a promise by any one or more of his three partners to pay him money. His entitlement was the result of mutual promises between the four partners relating not to a present chose in action but to the future division of partnership profits if and when they jointly earned them. The "right to receive" an appropriate part of the taxpayer's share of any such future profits which the deed purportedly assigned was no more than a prospective entitlement to receive a part of a share of future profits which may or may not be earned by professional activities which may or may not be carried on by a partnership which may or may not exist. The interest in such future profits of the partnership, if and when earned, was a future interest (compare Horwood v. Millar's Timber and Trading Company Ltd. (1917) 1 KB 305, at pp 314-315 cited in Norman's case [1963] HCA 21; (1963) 109 CLR 9 ). It was an expectancy or possibility which was not, in itself, capable of effective immediate assignment either at law or in equity and which could not properly be seen either as flowing from, or as the fruits of, an existing proprietary right or interest which was capable of such immediate effective assignment. (at p50)

27. The effect of a purported immediate assignment of an expectancy or possibility was concisely stated in Jordan's Chapters on Equity in New South Wales (6th ed., at pp. 51-52) in words which warrant repetition: ". . . a purported assignment of a mere expectancy (in the sense of the chance of becoming entitled under the will or intestacy of a person who is still living), or of property to be acquired in the future, is inoperative as an assignment, and has no effect unless made for valuable consideration. If there be consideration, it will operate as an agreement to assign the property when acquired, or to hold it in trust (the latter if the whole of the consideration has been satisfied) and this agreement will be binding on the parties as from its date and binding on the property in equity (although not at common law), if and when it is acquired by the assignor, if it is of such a nature and so described as to be capable of being identified. In the interval between the making of the agreement and the acquisition of the property by the assignor, the interest of the assignee is not contractual merely, but he has, as between himself and the assignor, a prospective interest in the property to be acquired which has some of the incidents of a proprietary right." (References to authority have been omitted.) (at p50)

28. The nature of the intended assignee's interest pending acquisition by the intending assignor of future property the subject of a purported immediate assignment for valuable consideration which has been fully satisfied is of some importance in the present matter. Even pending acquisition by the intending assignor, the intended assignee enjoys more than the traditional concept of an equitable right in personam against the assignor. The relevant equitable principle does not depend upon the possibility of a court of equity decreeing specific performance with the consequence that the assignee's beneficial interest could not arise until after acquisition by the assignor. The relevant principle is that equity considers as done that which ought to be done. The consequence is that the beneficial interest in the property the subject of the assignment never vests in the assignor when the property is acquired by him. He holds it immediately in trust for the assignee. (See, generally, Collyer v. Isaacs (1881) 19 Ch D 432, at p 351 ; Re Lind; Industrials Finance Syndicate Ltd. v. Lind (1915) 2 Ch 345, at p 360 ; Palette Shoes Pty. Ltd. v. Krohn (1937) 58 CLR, at pp 16-17, 27 ; Bakewell v. Deputy Federal Commissioner of Taxation (S.A.) (1937) 58 CLR, at pp 760-761, 768 and Visbord v. Federal Commissioner of Taxation [1943] HCA 4; (1943) 68 CLR 354, at p 383 .) (at p51)

29. The purported immediate assignment of the "right to receive" part of the taxpayer's share of future partnership profits had the effect that immediately a right to receive any share of particular earned partnership profits accrued to the taxpayer he held a proportionate part of that right in trust for his wife. The beneficial interest in the proportionate part of the right to receive the share of such profits never accrued to the taxpayer. It accrued to his wife. Actual receipt by the wife could, no doubt, properly be seen as flowing from her prior beneficial ownership of a proportionate part of the accrued right to receive. It may be assumed that the taxpayer held his undivided beneficial interest in the totality of partnership assets (including receipts and choses in action) partly upon trust for his wife. The taxpayer's right to receive a share of profits could not, however, for the reasons which have already been given, properly be regarded as flowing from that undivided beneficial interest in partnership assets. His wife's right to receive a proportionate part of the taxpayer's share of partnership profits likewise could not properly be regarded as flowing from any prior beneficial interest in the totality of partnership assets. What then was the effect of the deed of assignment on the taxpayer's liability to income tax in respect of the relevant part of his interest in the net income of the partnership for the tax year? (at p51)

30. Section 6 of the Act defines a partnership, for the purposes of the Act, as meaning "an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company". The section defines "business" as including any profession. The taxpayer's wife was not one of the partners carrying on the practice of Dibbs, Crowther & Osborne. The deed of assignment could not have made her a partner in that firm (Hocking v. Western Australian Bank (1909) 9 CLR, at p 749 ). It expressly stated that it did not have that effect. Nor was she jointly, with the four partners who carried on that practice, in receipt of the income of that firm. Her entitlement (her "only" entitlement) was to receive a part of one of the partner's share of any profits which the firm might earn. The four members of the firm were jointly in receipt of the partnership income. The fact that one or more of their number may hold part of his ultimate share in any partnership profit upon trust for a third person does not mean that that third person is in receipt of income jointly with his trustee and the other partners (and other beneficiaries if any) or that that third person is, for the purposes of the Act, a partner in the relevant partnership (see, generally, Tindal v. Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608, at pp 620-621, 628, 632 and Federal Commissioner of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199, at pp 204, 214 ). The relevant primary partnership, in so far as the income of Dibbs, Crowther & Osborne was concerned, was, for the purposes of the Act, the partnership which existed as a matter of law, namely, the partnership which existed between the four partners who carried on the practice in partnership. It was not suggested, either in the taxpayer's grounds of objection or the argument advanced on his behalf, that there was any relevant sub-partnership between the taxpayer and his wife arising from some joint receipt of his share of partnership profits (cf. Hocking v. Western Australian Bank (1909) 9 CLR, at p 749 ). (at p52)

31. Section 92 of the Act 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". The phrase "net income" in relation to a partnership is defined, by s. 90 of the Act, as meaning "the assessable income of the partnership, calculated as if the partnership were a taxpayer, less all allowable deductions except the concessional deductions" and certain other specified deductions. (at p52)

32. Section 92 appears in divn 5 of Pt III of the Act. The division provides for the apportionment among the members of a partnership of "the net income" of the partnership. It brings to the prima facie assessable income of each partner, his individual share in that "net income". In adopting this approach, the division departs from the ordinary approach which the Act adopts of bringing gross income or receipts to assessable income. This departure is not however unique to divn 5: it is to be found elsewhere in the Act (see, e.g., s. 26(a)). Nor does the approach adopted by divn 5 involve any attribution of distinct legal entity to the partnership or any basic inconsistency with conceptions of a partnership adopted by the general law (see Rose v. Commissioner of Taxation [1951] HCA 68; (1951) 84 CLR 118, at p 124 ). Indeed, there is a general consistency between the approach which the Act adopts and the legal position that, while a partner has an undivided beneficial interest in the gross income or receipts of a partnership, his individual or separate entitlement is, in the ordinary case, only to share in profits. The "net income" which is apportioned among "the partners" by s. 92 can readily be seen as a convenient parallel, for the purposes of the Act, to the "profits" in which the partners are entitled to participate. Plainly the two will not necessarily correspond. Exempt income of a partnership will be relevant to the determination, as between the partners, of partnership profits but will be irrelevant to the determination of "net income" of the partnership for the purposes of s. 92. Outgoings of a partnership which can properly be taken into account in determining, as between the partners, partnership profits may be irrelevant for the purposes of ascertaining the "net income" of the partnership for the purposes of s. 92 for the reason that they are not properly allowable as deductions under the Act. (at p53)

33. It was argued, on behalf of the taxpayer, that the prima facie operation of s. 92 of the Act is to include in the assessable income of a partner only so much of his "individual interest in the net income of the partnership" as he is entitled beneficially to receive. The result, it was argued, was that the taxpayer's individual interest in partnership income did not, for the purposes of s. 92 of the Act, include the relevant part of his share of partnership profits. The argument encounters some difficulties by reason of the theoretical difference between the individual interest in partnership income to which s. 92 refers and the proportionate part of the taxpayer's share of partnership profits which the taxpayer's wife was entitled to receive. It also encounters some difficulty arising from the existence of independent subsisting rights of the partners (see, for example, Re Garwood's Trusts; Garwood v. Paynter (1903) 1 Ch 236 ). If any of such difficulties were otherwise insurmountable, it may well be that the taxpayer would be entitled to call in aid the principle, to which reference has already been made, that in matters involving questions of derivation of income tax one should look to the reality and the substance. It is unnecessary that I express any view in that regard, however, for the reason that I am unable to accept the taxpayer's basic proposition as to the prima facie operation of the provisions of s. 92 of the Act. The "individual interest" of a partner to which s. 92 of the Act refers is, in my view, the interest to which a partner is separately entitled as contrasted with his joint interest in the whole. The fact that one of the partners will receive the whole or any part of his share in partnership profits in trust for a third party does not affect his individual interest in the net income of the partnership for the purposes of s. 92. The question whether he is exempt from liability to income tax in respect of the appropriate part of his individual interest in the net income of the partnership will fall to be determined by reference to the provisions of the Act (ss. 95-102) dealing with trustees (see, generally, the comments of Rich J. in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR, at p 204 ). Rich J.'s comments as regards the effect of s. 92 of the Act were not subjected to criticism in the subsequent judgments of the Full Court on appeal. In my view, s. 92 apportions the whole of the net income of a partnership among the partners leaving it to be determined, by reference to considerations relevant to a particular partner, whether the particular partner should be exempt from income tax as regards so much of his individual interest in the net income as may represent income to which he is not beneficially entitled. (at p54)

34. The net income of Dibbs, Crowther & Osborne which fell to be apportioned "among the partners" pursuant to s. 92 of the Act was the whole of the "net income" of the firm. For the purposes of s. 92 of the Act, the respective individual interests were twenty-nine per cent of that overall net income in the case of each of the taxpayer's three partners and thirteen per cent of that net income in the case of the taxpayer. Prima facie, s. 92 of the Act included the whole of the taxpayer's thirteen per cent "individual interest" in that net income in his assessable income. (at p54)

35. Section 96 of the Act provides that, except as provided in the Act, a trustee shall not be liable as trustee to pay income tax upon the income of a trust estate. The deed of assignment resulted in the establishment of a trust relationship between the taxpayer and his wife. In a context where there were partnership assets, the taxpayer's interest in them was, as has been said, an existing proprietary right. The taxpayer held an appropriate part of that proprietary right upon trust for his wife. In the event that partnership profits were earned, the taxpayer would hold an appropriate part of any accrued right to receive his share of such profits upon trust for his wife. For the purposes of the Act, there was a trust estate of which the taxpayer was trustee, his wife was beneficiary and any property or present interest held by the taxpayer in trust for his wife was the trust property. The question which arises is whether any part of the taxpayer's individual interest in the net income of the partnership of the year of income which was, prima facie, included in his assessable income by reason of the provisions of s. 92 of the Act can properly be regarded as being income of that trust estate. The resolution of that question has caused me more than ordinary difficulty. (at p54)

36. Section 96 does not refer to all income received by a person upon trust for another. It refers to "income of the trust estate" that is to say income derived by a trustee from property under his control as trustee (Howey v. Federal Commissioner of Taxation [1930] HCA 45; (1930) 44 CLR 289, at p 293 ). It does not encompass income, derived by a person from his own property or by means of his own exertion, in respect to which a trust arises at the moment of derivation (Stewart Dawson Holdings Pty. Ltd. v. Commissioner of Taxation (1965) 39 ALJR 300, at p 301 ). If the partnership profits could, in the present case, properly be seen as flowing from partnership assets, there would be much to be said for the view that the appropriate part of the taxpayer's share of partnership profits flowed from that part of his interest in partnership assets which he held in trust for his wife and therefore constituted income of the trust estate. Alternatively, if the taxpayer's entitlement to share in any partnership profits which might be earned could properly be seen as flowing either from his interest in partnership assets or from a capital investment in the partnership, a proportionate part of the taxpayer's share of profits could likewise possibly be seen as flowing from trust property and as income of the trust estate notwithstanding the fact that the taxpayer was actively concerned in the partnership business (see, for example, Federal Commissioner of Taxation v. Whiting [1943] HCA 45; (1943) 68 CLR 199 and Tindal v. Federal Commissioner of Taxation [1946] HCA 26; (1946) 72 CLR 608 ). For the reasons which I have given, however, I am unable to see either the profits which the partners might earn as flowing from partnership assets or the taxpayer's right to receive a share of any such profits as flowing either from his interest in partnership property or from any capital contribution to the partnership. If the Act included in the assessable income of a partner only the share of partnership profits which he actually received, it would be arguable that receipt must ordinarily follow, and flow from, a prior right to receive which had arisen immediately the profits had been earned and which was held, in part, upon trust for the taxpayer's wife with the consequence that the receipt itself could be regarded as the fruits of that trust property (Shepherd v. Federal Commissioner of Taxation (1965) 113 CLR, at p 396 ). The individual interest in the net income of the partnership which the Act includes in assessable income is, however, quite independent of actual receipt. The derivation of that individual interest can, if discrepancies which do not assist the taxpayer in the present matter be ignored, be equated with the coming into existence of the separate right of a partner to share in particular profits which have been earned and not with the actual receipt of the whole or any part of that share of profits (see Rose v. Commissioner of Taxation (1951) 84 CLR, at p 124 and Federal Commissioner of Taxation v. Happ (1952) 9 ATD 447 ). (at p55)

37. Any profits of the partnership in which the taxpayer was, under the partnership agreement, entitled to share were the joint professional earnings of the four partners. Those earnings were not derived by an interposed legal entity. They were derived by the taxpayer and his three partners themselves. The taxpayer's share in those joint earnings, determined by mutual agreement between the four partners, represented his earnings from his own professional activities. The deed of assignment did not preclude the taxpayer from terminating or forfeiting his entitlement to receive any share of those earnings or, after dissolution of the partnership or his "retirement", "resignation" or "dismissal", restoring to himself the full benefit of his professional earnings by carrying on his profession as a sole practitioner or as a member of an unrelated partnership. The reality and the substance of the matter was that, notwithstanding the effect of the deed of assignment, the relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion, being part of his earnings derived from his professional activities and did not constitute the income of income-producing property or income of a trust estate (see Arbuckle v. Federal Commissioner of Taxation (1964) 13 ATD 378 ; Stewart Dawson Holdings Pty. Ltd. v. Commissioner of Taxation (1965) 39 ALJR 300 ; Arcus v. Commissioner of Inland Revenue (N.Z.) (1963) NZLR 324, at pp 327-331 ; Hollyock v. Federal Commissioner of Taxation [1971] HCA 43; (1971) 125 CLR 647, at p 658 ). The consequence is that the provisions of s. 96 of the Act did not, in my view, exempt the taxpayer from liability to pay income tax in respect of any part of the net income of the partnership which was, prima facie, included in his assessable income by virtue of the provisions of s. 92 of the Act. I would note that my conclusion in that regard does not involve necessary acceptance of the broad statements which are found in some judgments to the effect that it is impossible, for income tax purposes, effectively to assign the whole or part of what are in truth earnings from personal activities (see, for example, Spratt v. Commissioner of Inland Revenue (N.Z.) (1964) NZLR 272, at p 277 ; Johnstone v. Commissioner of Inland Revenue (N.Z.) (1966) NZLR 833 ; Kelly v. Commissioner of Inland Revenue (N.Z.) (1970) NZLR 161 ; and note the comments of Menzies J., in Peate v. Federal Commissioner of Taxation [1964] HCA 84; (1964) 111 CLR 443 ). (at p56)

38. The appeal should be allowed with costs. The orders of the Supreme Court of New South Wales in its Administrative Law Division should be set aside and in lieu thereof it should be ordered that the appeal to that court should be dismissed with costs and the assessment the subject of the appeal be confirmed. (at p57)

FISHER J. This is an appeal brought by the Commissioner of Taxation against a decision of the Supreme Court of New South Wales in its Administrative Law Division. That court allowed the appeal of Peter Robert Everett (hereinafter called "the taxpayer") against the assessment of income tax issued against him by the Commissioner of Taxation in respect of the year of income ended 30th June, 1973. (at p57)

2. In his return the taxpayer disclosed the amount of his share in the partnership income of Dibbs, Crowther & Osborne, solicitors, as $35,418 from which he deducted the sum of $11,185 which deduction was entitled "assignment to D.J. Everett". The commissioner in making his assessment added back this amount of $11,185, describing the adjustment as follows: "Deduction of $11,815 for remuneration paid to your wife disallowed." It is common ground that the deduction of $11,815 claimed by the taxpayer was not claimed or properly described as "remuneration" but represented that portion of his professional income which the taxpayer claimed to have effectively assigned to D.J. Everett, his wife. (at p57)

3. The consequence of this adjustment by the commissioner (and two other small adjustments not relevant to this appeal) was to increase the taxable income of the taxpayer to $25,953 upon which sum, after crediting provisional tax paid and charging provisional tax, tax assessed was $15,767. (at p57)

4. The taxpayer objected on various grounds contending, inter alia, that the sum of $11,815 was the subject of a valid and effective deed of assignment and thus neither that sum, nor any part of it, represented income derived by the taxpayer during the year of income. Additionally, the taxpayer denied that either s. 19 or s. 260 had the effect of requiring him to include the said sum as part of his assessable income. The commissioner on 3rd September, 1974, disallowed the objection and the taxpayer subsequently requested that his objection be treated as an appeal and forwarded to the Supreme Court of New South Wales. (at p57)

5. The taxpayer's appeal was heard by that court and judgment was given on 1st November, 1977, allowing the appeal and awarding the appellant his costs. The commissioner lodged a notice of appeal to this Court contending, in substance, that the trial judge was in error in holding that there had been an effective assignment by the taxpayer to his wife of any part of his beneficial interest in partnership income. (at p57)

6. The question thus to be determined on this appeal is whether the consequence of the assignment is that what would otherwise have constituted part of the taxpayer's professional earnings no longer formed part of his assessable income but comprised assessable income derived by his wife. Essentially the resolution of the question depends upon the construction of the deed of assignment. Neither here nor in the court below did the commissioner contend that the transaction was a sham or illegal, nor was it suggested that it was void by virtue of the application of s. 260 of the Income Tax Assessment Act 1936 (hereinafter called "the Act"). (at p58)

7. The taxpayer is a solicitor being at all relevant times a partner in the firm of Dibbs, Crowther & Osborne practising in Sydney. His wife is also a solicitor, holding a practising certificate and she has from time to time been employed as a case reporter, as a locum tenens and as a university lecturer. At the time of deposing to an affidavit sworn for the purpose of the proceedings in the Supreme Court, Mrs. Everett was a full-time tutor in the Faculty of Law, Macquarie University. At no time has she worked in any professional capacity in the firm of Dibbs, Crowther & Osborne. On 1st July, 1966, the taxpayer became a partner in that firm, acquiring from one of the existing partners a thirteen per cent share in the partnership business and assets which share carried an entitlement to thirteen per cent of the profits of the partnership. The thirteen per cent share was purchased for consideration, which consideration was payable by half-yearly instalments over ten years with interest. The partnership business is long established and its assets comprised leasehold premises, office furniture, fittings and equipment, law library, sundry debtors, work in progress and the goodwill of the practice. In addition to the partners, employed solicitors and articled clerks were engaged in the business. It was in these circumstances that the taxpayer purported to dispossess himself (to use a neutral expression) of portion of his professional income and to vest that portion in his wife. (at p58)

8. The means that the taxpayer used to achieve this end was to have prepared and executed by himself and his wife a deed which bears the date 7th January, 1969. As the meaning and effect as a matter of law of this deed is crucial, it is desirable to set the relevant parts out in full: (at p58)

9. "THIS DEED made 7th January, 1969, BETWEEN PETER ROBERT EVERETT of Sydney, solicitor, (hereinafter called "the vendor") on the one part AND DIANNE JOYCE EVERETT, solicitor, wife of the said Peter Robert Everett (hereinafter called "the purchaser") of the other part WHEREAS the vendor with DAVID RONALD OSBORNE, MAXWELL SUTHERLAND EDWARDS and JAMES BERKELEY FITZHARDINGE carries on the practice of solicitors under the firm name of Dibbs, Crowther & Osborne AND in terms of the partnership arrangements the vendor is entitled to thirteen per cent of the assets and income of the partnership and bears a similar percentage of the liabilities and losses of the partnership AND WHEREAS the vendor is indebted to the aforesaid Maxwell Sutherland Edwards in respect of the purchase of his said interest and has been and is in the future obliged to make the remaining payments as appear from the figures set out in the schedule hereto AND WHEREAS the vendor is experiencing difficulty in meeting such repayments and is therefore desirous of selling to the purchaser six-thirteenths of his share in the partnership on the terms as hereinafter appearing NOW THIS DEED WITNESSETH that in consideration of the sum of $3,832.50 to be paid to the vendor by the purchaser as she doth hereby covenant and agree by instalments bearing as nearly as possible the relationship of six-thirteenths of the instalments as set forth in the aforesaid schedule as they fall due to be paid to the vendor by the purchaser at the times specified in that schedule any balance remaining thereafter to be paid on or before the 1st January, 1977, and the capital sum to bear interest at seven per cent per annum on a reducing balance: the vendor as beneficial owner DOTH HEREBY CONVEY AND ASSIGN to the purchaser six-thirteenths of the vendor's share in the partnership as aforesaid together with all those rights including the right to receive an appropriate share of the profits of the partner to which an assignee of a share in a partnership is entitled by virtue of s. 31 of the Partnership Act, 1892, as from the date of these presents to hold the same unto the purchaser absolutely PROVIDED HOWEVER that nothing herein contained shall entitle the purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the vendor at the date hereof has been distributed to the vendor AND IT IS HEREBY DECLARED that the purchaser shall not by reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the vendor would otherwise have been entitled had this assignment not been made. IN WITNESS whereof the parties hereto have hereunto set their hands and seals the day and year first hereinbefore mentioned." (at p59)

10. As I have already said, the deed has to be construed for the purpose of determining whether the taxpayer has thereby achieved an effective divesting of a portion of his share in the partnership and consequentially of a portion of his right to participate in the partnership income. Has he effectively alienated this right, so that the income it produces is in consequence derived by his wife and not by him? The success or otherwise of his efforts to this end will to a substantial extent be determined upon consideration of the following questions: (a) What is the nature of the property which he purports to deal with under the deed, i.e. is it an existing proprietary right or a mere expectancy? (b) Is this property capable of assignment at law? (c) Does the deed purport to effect an immediate transfer or does it amount merely to an agreement to transfer? (d) Is the transaction evidenced by the deed a voluntary disposition, a disposition under seal or a disposition for valuable consideration? (at p60)

11. The significance attaching to the nature of the property in question can be gauged by the fact that assignments in equity, if voluntary, are only effective if limited to existing rights and interests (Tailby v. Official Receiver (1988) 13 AC 523 and Re McArdle (1951) 1 Ch 669 as followed by Menzies J. in Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9, at p 21 ). Thus the voluntary assignments in Norman's case were ineffective both in law and in equity in that the subject matter thereof was held (by a majority in respect of interest on loan moneys) to comprise future property, i.e. a mere expectancy, whereas the voluntary assignment in Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965) 113 CLR 385 was effective in that what was assigned was a existing right. By way of contrast, the subject matter under consideration in Olsson v. Dyson [1969] HCA 3; (1969) 120 CLR 365 was an existing right, a legal chose in action and thus capable of assignment at law but not so assigned. It followed that, being voluntary, the purported disposition was not effective either in law or in equity. In law it was not effective because there was no compliance with the statute, and it was not enforceable in equity because there is no equity to perfect an imperfect gift. (at p60)

12. Turning to the deed here under consideration and bearing in mind criteria which have in other cases been crucial, one's first impression is that the taxpayer's case is in equity arguably as strong as it could be. He has, by way of immediate transfer (and not by way of agreement to transfer) purported to assign for valuable consideration (and not by way of gift or deed alone), an existing proprietary interest (and not a mere expectancy or future property) which proprietary interest is not capable of assignment in law (being part only of a chose in action). (at p60)

13. At the time he entered into the deed the taxpayer had, as above mentioned, a thirteen per cent interest in the partnership business, which interest carried with it the right to thirteen per cent of the profits of the firm. These profits were composite earnings produced by the exertions of the partners and their employees, whether professionally qualified, articled clerks or otherwise, using the assets, including the goodwill, of the firm's business. It is common ground that there was no formal partnership agreement but that the partners signed certain heads of agreement which are of little relevance to the questions here in issue. (at p60)

14. Under the deed, after recitals, the taxpayer purported "as beneficial owner" to convey and assign to the purchaser six-thirteenths of his share in the partnership. The document provides that the conveyance of the share is "together with" certain rights. As I see it, the rights specified are merely some of the rights which go with the ownership of the share and the reference to these rights neither expands nor restricts the subject matter of the assignment. It is clear beyond argument, from the language used, that the taxpayer intended an alienation and an alienation of portion of his share in the partnership. In no way could the disposition be construed as an agreement to alienate at some future date. Rather it is a present conveyance, not an agreement to do something in the future, and this present conveyance is of a proprietary right. The undoubted intention is to alienate portion of the taxpayer's interest in the partnership and to do so absolutely. The alienation goes well beyond his entitlement to participate in distribution of partnership profits and indeed beyond his right to profits. It is an attempt to alienate the property interest which produces the profits and not merely the profits or the right to the profits. To adopt the analogy used by Kitto J. in Shepherd v. Federal Commissioner of Taxation (1965) 113 CLR, at p 396 the proprietary interest in the partnership existed at the date of the assignment as the tree which produced the fruit, and as such was capable of assignment. The taxpayer assigned portion of the tree. (at p61)

15. The question arises whether there is anything exceptional about or peculiar to a share in a partnership which prevents its alienation, or precludes the alienation from producing normal consequences. (at p61)

16. There is ample authority for the proposition that a partner has a beneficial interest in the assets of the partnership, and in fact in each of the assets (Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. [1974] HCA 22; (1974) 131 CLR 321 ; Livingston v. Commissioner of Stamp Duties (Q.) per Kitto J. [1960] HCA 94; (1960) 107 CLR 411, at p 453 ). However, the partner has no title to any specific asset, and his interest can only be quantified as a share of the surplus after realization of assets and payment of liabilities (Arbuckle v. Federal Commissioner of Taxation per Windeyer J. (1964) 13 ATD 378 ). As to the interest of a partner in the partnership, as distinct from the assets comprising the partnership property, it is a chose in action (Re Bainbridge; Ex parte Fletcher per Bacon C.J. (1878) 8 Ch D 218, at p 223 ). Doubtless it is by its nature an equitable chose in action in that originally it was enforceable only by a suit in equity. As an equitable chose in action there is authority for the proposition that it is assignable under the statute (see Halsbury's Laws of England, 4th ed., vol. 6, par. 15)) but it is unnecessary in the present instance to consider this point further as the taxpayer purported to deal only with portion of his share in the partnership. An assignment of part of a chose in action does not come within the statute (Re Steel Wing Company Ltd. (1921) 1 Ch 349, at p 354 and it follows that its assignment can only operate in equity. (at p62)

17. Moreover, even if it was possible to assign under the statute, the matter would be taken no further because as a matter of law the assignee can never become a partner of the existing partnership. If with the consent of the partners she does become a partner, it is as a partner in a new partnership, in consequence of novation and not assignment. (at p62)

18. An interest in a partnership, be it the whole or portion of a partner's share, is without doubt assignable as a matter of law. Hocking v. Western Australian Bank (1909) 9 CLR 739, at p 743 clearly proceeds upon the basis that it is perfectly in order as a matter of law for a partner to assign, whether by way of sale or otherwise, the whole or portion of his interest in the partnership. The consequence of the assignment is not that the assignee becomes a partner, rather that the vendor remains a partner, but as trustee for the assignee of the portion subject to the assignment. (at p62)

19. In this matter the intention of the taxpayer was to dispossess himself of portion of his interest in the partnership. He chose the tool of an assignment to achieve this end. The assignment being for valuable consideration binds the conscience of the assignor and he is trustee of this interest for the assignee. The same result could have been achieved if he had declared himself a trustee (after reciting the terms of the sale and purchase) by executing a declaration of trust. Whatever be the form of the disposition, its effect is the same (G. E. Crane Sales Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 75; (1971) 126 CLR 177, at p 183 ). However, it must be acknowledged that for a sale and purchase transaction the present form of inter partes deed is the more appropriate. (at p62)

20. In these circumstances the deed has the effect which was intended, namely to vest in the assignee as against the assignor all the rights of the assignor in a six per cent share of the partnership, together with all the benefits attaching to such share, including in particular the right to this percentage of the partnership profits. There are however two qualifications to be mentioned, both of which arise by virtue of the subject matter of the assignment. The assignee does not, as already mentioned, become a partner, and her rights as against the partners (other than the assignor) are limited as set out in s. 31 of the Partnership Act, 1892 (N.S.W.). (at p62)

21. The question which now arises is as to the consequences of such assignment under the Act, it having under the general law the intended consequence of divesting the assignor of the assigned property and vesting it in the assignee. Two aspects of the Act fall for consideration. "Partnership" is defined by s. 6 as "an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company", and defined in this way the word would appear to cover persons who are not in partnership under the general law. It was argued that in the present matter the assignee was for the purpose of the Act a partner, being in receipt jointly with the partners of a share in the partnership income. My tentative view is that there is considerable force in this argument, in the particular circumstances of this matter, where as I see it, the trustee of the six per cent share is a bare trustee without any duties to perform. The assignee, it could be said, is entitled to the receipt of a share of partnership profits conjointly with the other partners and not merely to the income of a trust estate, an asset of which is a share in a partnership. However, it is not necessary to reach a final conclusion on this point here, and the arguments which are available in respect of a bare trustee situation will not necessarily be as persuasive in circumstances where the beneficiary is entitled to something other than a direct interest in the net income of the partnership, or, to use the terminology of s. 31 of the Partnership Act something other than "the share of the partnership profits to which the assignor is otherwise entitled". (at p63)

22. Division 5 of Pt III of the Act has particular reference to partnerships and its consequence is to place a taxpayer who is in partnership in an exceptional situation qua his partnership income. Whereas under s. 25 of the Act it is provided that his assessable income includes his gross income derived directly or indirectly from all sources, yet by virtue of divn 5, his assessable income is directed to include his individual interest not in the gross income but in the net income of the partnership. (at p63)

23. In other words, in this instance the allowable deductions of the partnership are deducted prior to arriving at the assessable income of the partner and not subsequently as under the ordinary scheme of the legislation and in particular under s. 48. Thus it is not until the net income of the partnership and the taxpayer's individual interest therein is ascertained that the taxpayer derives any assessable income from his activities as a partner. (at p63)

24. It was in this general area that the commissioner launched his primary assault on the decision of the trial judge. His contention was founded on the premise that if income is the result of a man's personal exertion, it is his, and incapable of assignment or alienation. Thus, the argument runs, at the date memoranda of fees were rendered by or on behalf of the partners, they individually derived assessable income and it was not until the end of the year of income that the profits in which the assignee participated were ascertained. It followed that the assignment only took effect upon ascertained profits, and this taking of effect occurred subsequent to the derivation of assessable income by the taxpayer. Thus he had not achieved an alienation of his share of profits, but rather he bound himself to apply portion of his share as and when ascertained. (at p64)

25. In my opinion there is a fallacy in this argument. It is based on two assumptions, firstly that a taxpayer partner derives assessable income upon the rendering of memoranda of fees and secondly that the assignee of a share has no proprietary interest in the gross income of the partnership as it is acquired from time to time consequent upon the rendering of fees. (at p64)

26. As I have said earlier, in my opinion a taxpayer solicitor who carries on a business in partnership determines and quantifies his assessable income for tax purposes in a manner which differs fundamentally from a sole practitioner. As a sole practitioner his assessable income comprises the totality of his fees rendered (assuming he operated on a profits earned rather than a cash receipts basis) and he deducts pursuant to s. 48 his business expenses. Moreover in so far as it is of any relevance, he derives each item of gross income which goes to make up his assessable income at the moment of rendering the account for fees earned. (at p64)

27. Division 5 of Pt III of the Act directs a different approach for adoption by a taxpayer in partnership. Under s. 92 his assessable income includes his individual interest in the net income of the partnership of the year of income. Thus his assessable income is not his share of the fees rendered by the partnership, i.e. his share of its gross income, but his share of the net income of the partnership. Net income is defined by s. 90 as meaning "the assessable income of the partnership calculated as if the partnership were a taxpayer, less all allowable deductions except . . .". Thus the assessable income i.e. gross fees of the partnership are brought to account by the partnership calculated "as if the partnership were a taxpayer" and likewise the business expenses of the partnership are in similar manner deducted by the partnership. The consequent result would, in the ordinary course, produce a taxable income but for the fact that by s. 91 the partnership is not "liable to pay tax thereon". It follows that a taxpayer partner does not derive assessable income at the moment of the rendering of fees or at the time of distribution of partnership profits by way of partners' drawings. Rather he derives assessable income upon the ascertainment of the net income of the partnership for the year of income. Such net income will crystallize at the end of the year of income when all fees have been rendered and all expenses incurred. There is thus no support the partner derives assessable income prior to the time when his assignee becomes entitled to a share of profits. Admittedly, however, there may not always be exact coincidence between the profits of the partnership as determined by the partners and the net income of the partnership as calculated for tax purposes, but such a problem does not arise here. There is, however, always certain to be a difference between the profits which the partners determine to be available for distribution and the net income for tax purposes of the partnership, a situation which causes difficulties if assignee/beneficiaries have limited interests. Again this is not the case under consideration. (at p65)

28. The other essential element in the commissioner's submission that there was a hiatus between the time when the partners derived assessable income and the time when the assignee's entitlement arose, was his contention that the assignee had no proprietory interest in the assessable income derived by the partnership at the time of rendering of accounts. It seems however that this can not be so, for not only is the assignee entitled to a beneficial interest in the assets of the partnership generally, but in particular has an interest in the work in progress which produces the fees for which the account is rendered. Such an interest must remain when the work in progress is transmutted into a book debt on the completion of the work and rendering of an account therefor. It can be strongly argued that support for this continuing interest of the assignee in the assessable income of the partnership is to be found in the deed of assignment. The first proviso which now falls for consideration acknowledges that the assignee has an interest in the prospective profits of the partnership currently undrawn by the partnerships but held "subject only to distribution". On the commissioner's argument the assignee would have no interest in the prospective profits, but only in the profits for the year when ascertained. (at p65)

29. The deed contains this proviso and a further provision to which I should refer. The first proviso is as follows: "PROVIDED HOWEVER that nothing herein contained shall entitle the purchaser to any share of the prospective profits accumulated in the books of the partnership and held subject only to distribution thereof (as reflected in the figures of costs and disbursements of the control accounts in the partnership books) until such time as the share therein of the vendor at the date hereof has been distributed to the vendor." It was suggested by counsel for the commissioner, but somewhat faintly, that this proviso had the effect of reducing the ambit of the earlier conveyance of portion of a share in the partnership. However, subject to the qualification that there is no evidence as to the significance attaching to the expression "control accounts", I see this as a transitional provision dealing with the funds which at the date of the assignment were available for distribution by way of drawings on account of profits ultimately to be ascertained, but not in fact distributed at that date. It deals not with the right or entitlement of the assignee to ownership of portion of these funds (which is acknowledged) but rather with the timing of distribution thereof. The assignee could not call for distribution prior to the date when a distribution was in fact made to the vendor. But I do see this proviso as acknowledging the right of the assignee to funds accruing from time to time as presumptive profits, i.e. throughout the year of income and as denying the validity of the commissioner's contention that her right to profits accrued only at the end of the year when the net income of the partnership (as defined for income tax purposes pursuant to s. 90) was ascertained. (at p66)

30. The second provision is as follows: "And it is hereby declared that the purchaser shall not by reason of these presents or otherwise become a member of or a partner in the said partnership or be entitled to interfere in its business or affairs or to require any account of the partnership transactions or to inspect the partnership books but she shall only be entitled (subject as aforesaid as to prospective accumulated profits) to receive the portion of the share of profits and other moneys or property referable hereto as and from the date of these presents to which the vendor would otherwise have been entitled had this assignment not been made." As I see this provision it has direct reference to s. 31 of the Partnership Act, which section is primarily intended for the protection of the taxpayer's partners (Dodson v. Downey per Farwell J. (1901) 2 Ch, at p 622 ). The section has no direct impact on the rights and obligations of the assignor and assignee inter se, which are regulated by the deed of assignment. However, in so far as s. 31(1) (and the general law) restricts the right of the assignee in certain specified respects as against the partners, such restrictions have been inserted in the deed so as to apply as a matter of contract between the assignee and the assignor. The provision goes beyond the specific provisions of s. 31 in two respects. It states the general law to the effect that the assignee does not by virtue of the assignment become a partner. It provides that the assignee is entitled not only "to the portion of the share of profits to which the vendor would otherwise have been entitled", but also to "other moneys or property referable hereto . . . to which the vendor would otherwise have been entitled". The additional entitlement specified is express acknowledgment that the assignee is not only entitled to moneys in the nature of firm profits, but any other moneys, doubtless capital in nature, to which the vendor would be entitled either during the currency of the partnership or upon its dissolution (s. 31(2) of the Partnership Act). (at p66)

31. It is my opinion that nowhere in the deed is there to be found anything which cuts down or indicates any intention to cut down the primary disposition by the taxpayer of portion of his share in the partnership. (at p67)

32. As to the effect of s. 92 of the Act in the present situation, two comments can be made. If the argument prevailed that in the circumstances of this matter the assignee is a partner within the expanded definition, then she has an individual interest in the net income of the partnership which she is by that section required to include in her assessable income. (at p67)

33. However, as I am considering this appeal on the assumption that she is not a partner, it follows that the taxpayer is prima facie required to include the whole of his interest as a partner in the net income as part of his assessable income unless there is some specific direction in the Act to the contrary. In this regard he is in a somewhat similar situation to that of a shareholder under s. 44 of the Act. It seems to me that divn 6 of Pt III applies as a specific direction in the present circumstances where I see the taxpayer as a bare trustee of portion of his share in the partnership. This portion of his share is the trust estate which produces the income. Thus the taxpayer as a bare trustee is obliged to account to the assignee for the full amount of the share of profits whether distributable or not which the partnership share produces and without any deduction therefrom by him in his capacity as trustee and is not liable himself to pay tax thereon unless specifically directed (s. 98). This situation is analogous to that of the shareholder trustee who is exempted by s. 96 from his prima facie obligation under s. 44, to the extent that the shares (and not merely the dividends) are assets of the trust estate (Norman v. Federal Commissioner of Taxation per Dixon C.J. and Menzies J. (1963) 109 CLR, at pp 16, 23 ). (at p67)

34. I can acknowledge that the matter is more complex if the assignee's entitlement was to something other than the full share of partnership profits as such, and the trustee had positive duties and obligations to perform. However, such is not the case here. (at p67)

35. Before I come to deal with three authorities which could appear to have application, there is one final matter which was much discussed before us, to which I should shortly refer. It concerns the rights of the assignee to challenge or to restrain the partners (other than the taxpayer) if they acted or sought to act in a manner prejudicial to her interests. Admittedly, under s. 31 of the Partnership Act she has no right to interfere in the administration or management of the partnership or to require any accounting and is positively obliged to accept the account of profits agreed to by the partners. However, I am of opinion that this restriction operates on the assumption that the partners are acting bona fide in the administration or management of the partnership affairs and with proper regard to the interests of all parties. The partners have actual notice of the interest of the assignee in the partnership property which is in their hands, and to this extent they are constructive trustees of this property for, and in a fiduciary relationship with, the assignee. To the extent that they act in a manner detrimental to her interests, except to the extent bona fide necessary in matters of administration or management, their fiduciary obligations as such constructive trustees would be subject to the supervision and direction of a court of equity. Thus I conceive the assignee could herself take action against the partners (and not only the assignor) to restrain improper dealings with her beneficial interest. (at p68)

36. The three authorities to which particular reference should shortly be made are Arbuckle v. Federal Commissioner of Taxation (1964) 13 ATD 378 a decision of Windeyer J. in the High Court; Johnstone v. Commissioner of Inland Revenue (N.Z.) (1966) NZLR 833 and Kelly v. Commissioner of Inland Revenue (N.Z.) (1970) NZLR 161 . In the two New Zealand cases the importance attached by the court to the nature of the property interest under consideration is noteworthy. (at p68)

37. In Arbuckle's case each of four accountants who were in partnership purported to assign to himself or to another partner in each instance as trustee, fractional interests in the partnership. The assignments purported to be for value but this was not accepted by Windeyer J. who dealt with them on the basis that they were voluntary transactions. Moreover, the assignments as mentioned were not to third parties but either by the assignor to himself in the capacity as a trustee or to another partner in such capacity. In so far as two of the arrangements were in favour of another partner the assignor in one transaction was assignee in the other and vice versa. Moreover, these two assignments were each of a like interest in the partnership, namely, seventeen per cent. It was thus open to Windeyer J. to find as he did, that the assignments achieved nothing and no transfers of shares in the partnership took place and there was no immediate variation in the beneficial interests of the partners in the capital and income of the partnership. Thus by way of contrast with the present matter the transactions were at law nugatory and achieved nothing. The taxpayer therefore failed on the threshold argument, namely, as to what was achieved in law on the true construction of the documents. There was little if any consideration necessary to be given to the tax implications. Certainly no consideration was necessary of the crucial point here, namely, the consequences under the Act of an effective assignment for consideration. (at p68)

38. In Johnstone's case (1966) NZLR 833 the taxpayer was a member of a firm of solicitors and he purported to assign not his share in his partnership (or a portion thereof) but his fixed capital invested at interest in the partnership. It was a voluntary assignment. The court accepted that it was possible for a partner to assign the share in the partnership to which he is entitled but denied his ability to assign, at least by way of gift, his interest in fixed capital. This was because his interest in fixed capital was not a debt due by the partnership, but an amount payable on dissolution to which the assignor had no present right. (at p69)

39. Nor, was there an effective assignment of the interest payable on the fixed capital, on the ground that there was no present obligation to pay interest, but only an agreement to apply the first 700 pounds of profits as interest on fixed capital. Thus the property interest was in the nature of future property, a mere expectancy, an equitable assignment of which, without consideration, was ineffective. In this regard Johnstone's case has much similarity to the interest on loan account problem in Norman's case [1963] HCA 21; (1963) 109 CLR 9 . (at p69)

40. The second New Zealand decision is Kelly's case (1970) NZLR 161 . The taxpayers who were in partnership sought to divest themselves by way of gift of their respective interests in partnership profits. The means used in each instance was that of a declaration of trust. However, the subject matter of each of the declarations was "his interest in the said business as to such income as aforesaid from time to time earned thereby". In the circumstance that the transactions were voluntary, the nature of the interest sought to be alienated was crucial. It was very obvious that there was no attempt or indeed intention to dispose of a share in the partnership but only in the partnership income. The court was of opinion that the property interest to be assigned was only a share in prospective partnership income and thus future property. There was thus nothing in the ratio of the case which impinges on the determination of a very different question here. There were, however, certain dicta to the effect that no taxpayer can by way of assignment escape assessment of tax on income resulting from his personal activities. I agree with the opinion of the trial judge in the present case that, stated thus widely, the proposition is unacceptable. (at p69)

41. In my opinion the appeal should be dismissed with costs. (at p69)

ORDER

Order accordingly.