Peterson v Federal Commissioner of Taxation [1960] HCA 72; (1960) 106 CLR 395 (14 October 1960)

HIGH COURT OF AUSTRALIA

PETERSON v. FEDERAL COMMISSIONER OF TAXATION [1960] HCA 72; (1960) 106 CLR 395

Income Tax (Cth)

High Court of Australia
Windeyer J.(1)

CATCHWORDS

Income Tax (Cth) - Assessable income of deceased partner's estate - Business of graziers carried on by partnership - Partnership not dissolved by death - Partnership and income tax years not coinciding - Method of determining assessable income of deceased partner's estate for period between death and end of income tax year - Whether expenses incurred by partnership prior to death deductible - Costs of producing unshorn wool - Grounds of objection - Sufficiency - Income Tax and Social Services Contribution Assessment Act 1936-1954.

HEARING

Brisbane, 1960, June 17;
Melbourne, 1960, October 14. 14:10:1960
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1954.

DECISION

October 14.
WINDEYER J. delivered the following written judgment:-
This is an appeal by Lucy Bimbah Peterson, as trustee of the estate of her Commissioner of Taxation under the Income Tax and Social Services Contribution Assessment Act 1936- 1954. Mrs Edkins died on 29th December 1954. The assessment under appeal is in respect of the income of her estate for the period 29th December 1954 to 30th June 1955. The question arises because she had a share in a partnership that carried on a pastoral business under the name of "H.G. Roberts and Company". The matter in issue concerns the amount that should be credited to the trust estate as income derived from the partnership business in the relevant period. The facts out of which the question has arisen are, however, complicated. (at p396)

2. The partnership was created by deed dated 7th February 1948. There were then four partners including Mrs Edkins. Her share was expressed to be twenty-six forty-eighths (26/48); and, by cl. 10 of the deed, she was entitled to that share of "the net profits of the said business". That clause provided that "the net profits shall be apportioned between the partners as soon after the end of each financial year of the partnership as the general annual account shall have been taken and settled as hereinafter provided". Clause 22 provided for the general account to be taken annually on 31st December. Mrs Edkins' death on 29th December 1954 thus occurred two days before the end of the financial year of the partnership. But this was never adopted pursuant to s. 18 of the Act as the accounting period for income tax. So that, for the purposes of tax, the year ended on 30th June; and on this basis the partnership returns required by s. 91 were rendered. The partnership deed provided (cl. 25) that upon the death of a partner the other partners should have an option to purchase the share of the deceased partner upon giving notice in writing within three months of the death. And it went on (cl. 26): "Notwithstanding anything hereinbefore contained in case of the death of any such partner before the termination of the partnership the surviving partner or partners may nevertheless if she or they so desires or desire carry on the partnership in accordance with the terms hereof for the benefit of the surviving partner or partners and the estate of the deceased partner". On Mrs Edkins' death the option to purchase her share was not exercised, but the partnership business was in fact continued. (at p397)

3. By her will Mrs Edkins appointed the appellant her executrix and trustee. The will empowered her trustee to carry on or join in carrying on any business or businesses, including the business of a grazier, carried on by the testatrix at the time of her death; to employ the whole or any part of her estate therein; and to advance moneys to any partnership in which she was interested for carrying on such partnership business. She left her estate beneficially as to one-half to the appellant, and as to the other half to another daughter, Edwina Rosamond Brown for her life with remainder to her children. That daughter died before the testatrix. So that on Mrs Edkins' death the appellant and one Robert Rowland Edkins Brown, a son of Edwina Rosamond Brown deceased, succeeded in equal shares to her estate, including her 26/48th interest in the partnership of H.G. Roberts and Company. It will be convenient to express this 26/48th share or interest as 13/24ths. (at p397)

4. It seems that by a deed dated 22nd January 1955 the appellant and Robert Rowland Edkins Brown then sold a one third interest in certain assets of the estate, including apparently the estate's 13/24ths interest in the partnership to one Rowland Rule Edkins. That deed of 22nd January is not in evidence, but it is recited in a deed of 11th February 1955. The latter deed is expressed to be a transfer and assignment by the appellant as executrix to herself "in her personal capacity as beneficial owner absolutely" of "all that a 13/72nds share and interest in and to the partnership business of 'H.G. Roberts and Company' and the capital assets profits and goodwill thereof but excluding and reserving the following - (i) Any interest in the current account of the testatrix with the said firm as at 31st day of December 1954. (ii) Any interest in the share of the testatrix in undistributed profits of the said firm as at 31st day of December 1954 remaining in the profit and loss account of the said firm. (iii) Any interest in future distributions to be received by the said firm under the Wool Realization (Distribution of Profits) Act 1948." It was provided that the interests thus excluded and reserved should continue to be held by the executrix as trustee under the will or trust for herself and Robert Raymond Edkins Brown equally. R.R Edkins and R.R.E. Brown executed the deed by which this transaction was effected as consenting to it. The purpose of this assignment of a 13/72nds interest to the appellant in her personal capacity was expressed to be as a partial distribution of the estate, and to have been made "as at and from" 31st December 1954. The result of this transaction, stated broadly, was therefore that the 13/24ths (that is 39/72nds) interest of the estate in the partnership was as from 31st December 1954 reduced by 13/72nds which became the property of the appellant in her personal capacity. The appellant in her capacity as a trustee of the estate of Mrs Edkins deceased remained entitled to a 26/72nd interest in the assets of the partnership. The persons beneficially interested in this share are apparently R.R.E. Brown and R.R. Edkins. It has been in the present proceedings expressed as a 13/36th interest in the partnership. The partial distribution having been made as at 31st December 1954, that is only two days after the death of the deceased, the Deputy Commissioner of Taxation has, for the purpose of arriving at the taxable income of the trust estate, taken the estate to have been entitled as from the death of the testatrix to a 13/36ths interest in the profits of the partnership. It is on that basis that the matter has been dealt with in these proceedings, there having been no distribution of partnership profits in the said two days. (at p398)

5. The Deputy Commissioner of Taxation by a letter dated 24th May 1955 addressed to "The trustees Estate of Lucy E. Edkins deceased" required, inter alia, an income tax return for the deceased for period from 1st July 1954 to date of death (29th December 1954). He also required a return for the same period from the partnership of H.G. Roberts and Company. Thereafter the appellant lodged two returns on behalf of the estate. The first for the period 1st July 1954 to 28th December 1954; the second for the period 29th December 1954 to 30th June 1955. The return for the period 1st July 1954 to 28th December showed 4,326 pounds as income from the deceased's share in the partnership. The return for the period after death, namely 29th December 1954 to 30th June 1955, showed, as income of the estate of the deceased, 2,968 pounds from the estate's share in the partnership and 1,238 pounds J.O. profits. To see how these amounts were arrived at it is necessary to turn to the returns for the two periods that were lodged by the partnership pursuant to the requirement of the Deputy Commissioner. For the first period, 1st July to 28th December 1954, the partnership return showed an income on wool account of 16,080 pounds. But only 120 pounds of this represented actual proceeds of wool sold (2 bales). The balance was attributed to 12 bales wool in transit and to wool on sheep's back. It is agreed that in round figures 15,000 pounds of the so-called wool income of 16,080 pounds, is attributable to nine-months growth of wool on the sheep on 29th December. On this basis the net income of the partnership for the period was shown in the return as 7,986 pounds; of this sum 4,326 pounds (13/24ths) appears in the distribution statement as the entitlement of the estate of the deceased. This corresponds with the amount shown in the estate return for the same period. For the second period, namely from 29th December 1954 to 30th June 1955, the partnership return showed income on wool account of 16,695 pounds. This was arrived at by crediting the actual proceeds of wool sold (29,017 pounds) and the value (2,063 pounds) of 27 bales of scoured wool in transit and debiting certain charges and the sum of 15,960 pounds, being the amount credited in the account of the previous period as wool in transit and on the sheep's back. On this basis the net income of the partnership for the period was shown in the return as 8,219 pounds. Of this sum 2,968 pounds (13/36ths) appears in the distribution statement as the entitlement of the estate of the deceased, and 1,484 pounds (13/72nds) as the entitlement of the appellant personally. The said sum of 2,968 pounds corresponds with the estate return for the same period as mentioned above. These returns, two by the partnership and two by the appellant, were not sent to the Deputy Commissioner until November 1955. They were then sent with a covering solicitor's letter explaining how the appellant had acquired a 13/72nds interest in the partnership as stated above. Thereafter, and after some correspondence and discussions with representatives of the Commissioner, the surviving partners and the appellant, as executrix of Mrs Edkins deceased and also in her personal capacity, and R.R. Edkins and R.R.E. Brown, gave a notice pursuant to s. 36A(2) of the Act stating that they had agreed that that sub-section should apply in respect of the livestock of the partnership. This notice stated that the signatories were all the persons by whom the livestock were owned before the change of ownership arising from the death of Lucy Elizabeth Edkins and all the persons by whom such livestock are owned after the change. Strictly speaking R.R. Edkins' rights and interest in the matter arose not because of a change in ownership on the death of Mrs Edkins by an assignment by those beneficially interested in her estate of a fractional interest in her share in the partnership. But nothing, I think, turns on this. As I have said, the business of the partnership was in fact carried on. But what were the legal relationships involved in this is not clear. Was the partnership carried on by the surviving partners pursuant to cl. 26 of the partnership deed, that is for their own benefit and that of the estate of the deceased partner whose share of the partnership assets remained embarked in the business? Or did the trustee of the deceased partner become by agreement a partner with the surviving partners pursuant to the power to do so given by the will, so that there was a new partnership of which the appellant as a trustee was a member, as in Newbarns Syndicate v. Hay (1939) 22 Tax Cas 460 ? Those concerned seem to have regarded the appellant as having been admitted into partnership with the surviving partners in her own right in respect of a 13/72nds interest, but to have continued as a trustee to hold a 26/72nds share or interest in the partnership business. But I do not think the evidence establishes what precisely were the relationships between the parties. However, as will appear, I do not think it matters whether or not the appellant as trustee became a partner. The trust estate was clearly entitled to the benefit of a share in the partnership property and the partnership profits. (at p400)

6. The Deputy Commissioner, having received the returns for which he had asked, proceeded to assessment. He did not accept the view that the 15,000 pounds attributable to nine-months growth of wool on the sheep as at 29th December could be brought in as income of the partnership. By deleting this, making some other adjustments, but taking into account the outgoings, he said that the partnership had in fact made a loss of 7,267 pounds, not a profit of 7,986 pounds as shown. The result of this was that, instead of the deceased having had a taxable income of 4,219 pounds in the period 1st July 1954 to the date of her death, as her return had shown, she had, it was said, suffered a loss in that period of 4,053 pounds. But that loss the Deputy Commissioner ruled could not be brought forward into the first assessment of the income of her estate, that for the period from her death until 30th June 1955. For that period he treated the whole of the proceeds of wool sold as income of the partnership, and disallowed the debit of 15,000 pounds claimed for the nine-months growth of wool on the sheep when the period began. The result, after making adjustments in respect of other items (including the Joint Organization proceeds), was to increase the income of the partnership from 8,219 pounds to 25,314 pounds for the period. The result, as reflected in adjustments that the Deputy Commissioner made to the return of the income of the estate of Mrs Edkins for the period, was that the taxable income of the estate was increased from 4,074 pounds to 9, 422. On this sum the appellant as trustee was assessed under s. 99 of the Act for the year ended 30th June 1955. And it is this assessment that is in question in this appeal. (at p401)

7. The appellant filed a notice of objection. The objection was disallowed. The appellant thereupon requested, pursuant to s. 187, that her objection be treated as an appeal and forwarded to this Court. The evidence tendered before me consisted of the file of documents forwarded by the Commissioner, the balance sheets and profit and loss accounts of the partnership as at 31st December 1954 and 31st December 1955, and a statement of agreed facts as follows: "1. At all material times the partnership brought its sheep into account at cost price for income tax purposes. 2. At 1st July 1954 the partnership by its return brought its sheep into account at cost price. 3. At 28th December 1954 the sheep of the partnership were carrying nine months' wool. Such wool had not been sold and was not the subject of any contract of sale. 4. Between 28th December 1954 and 30th June 1955 the said sheep were shorn and the wool sold. 5. The taxable income of the partnership H.G. Roberts & Co. for the year ending 30th June 1955 was 18,047 pounds (including 2,285 pounds for J.O. Wool profits) and the continuing partners Pamela Elizabeth Edkins Pixley, Katie Wedgwood Deane and Lucy Beryl Logan were assessed to their respective proportions of this total figure." In the grounds of objection there is a reference to the sum of 1,238 pounds, part of the Joint Organization proceeds. This was included in the assessable income of the estate of the deceased. It may be that the Commissioner ought not to have brought it into account for the period and in the manner in which he did. But, as nothing was made of this in argument and it does not affect the main question argued, I shall leave it aside. (at p401)

8. Put very broadly, the appellant's contention was that the Commissioner was not justified in treating as the estate's share of the partnership profits the proceeds of wool sold after the death of the deceased without any deduction for the outgoings that had been incurred by the partnership during the lifetime of the deceased to earn those profits. It was urged that this was unsound in principle. And its unsoundness was, it was said, demonstrated because, for the purpose of assessing tax payable by the surviving partners, the taxable income of the partnership for the year ended 30th June 1955 was arrived at by taking into consideration all the outgoings for the year. And the continuing partners were assessed on their proportionate shares of that sum. How, it was said, could the amount attributable to the share of profits of the deceased partner's estate be disproportionate to that of the surviving partners for the same period. The result would be to treat the sum of the parts as greater than the whole. The Commissioner's answer to this was, first, that the contention was not open to the appellant as she must be confined to the grounds of her objection; and secondly, that despite any logical inconsistencies, the assessment was the result of applying the provisions of the Act. The first matter was raised as a preliminary question. The Act requires (s. 185) that an objection to an assessment shall state "fully and in detail the grounds" on which the taxpayer relies. And s. 190 provides that on an appeal such as this "the taxpayer shall be limited to the grounds stated in his objection". Because of the view I took of the matter I need not set out the grounds. Mr Gibbs, for the Commissioner, submitted that, in substance, they were that the partnership accounts could be taken and had been taken for the two periods that the Deputy Commissioner had insisted upon, and that in doing so the partnership profit at the end of the first period had been arrived at by taking into consideration the nine-months' wool the sheep were then carrying and attributing to it the figure of 15,000 pounds. This contention, however, the taxpayer was proposing to abandon in favour of a wholly different argument. That was that a share of the profits of the partnership business was not properly ascertainable in respect of separate and insulated periods differing from the normal accounting periods; that if nothing was to be credited to the wool account until after the wool was shorn and sold, then against the proceeds of the wool clip must be set the annual cost of producing it. There is, I think, no doubt that the grounds of objection were based on the view that the two returns that the Commissioner required were properly compiled. Yet before me no attempt was made to support the taxpayer's case on this basis. Nevertheless I considered that, read as a whole, the grounds of objection did show that the taxpayer's case was, in essence, that the income from the interest in the partnership had been brought in by the Deputy Commissioner at too high a figure; that this was the result of his decision that in respect of the period up to her death the interest of the deceased in the partnership had resulted in a loss to her; and that, in respect of the period after her death, he had mistakenly considered that her estate had derived an income from her share in the partnership that could be arrived at without regarding the outgoings of the first half of the year in respect of which partnership profit was ascertained. That this was the substance of the objection was, I think, sufficiently conveyed to the Commissioner by the grounds given. This objection, if sound, was not, in my view, vitiated because the taxpayer had argumentatively indicated a particular alternative method by which she said the computation should have been made,which method she no longer relied on. The case may be near the border line. Nevertheless I decided that, within the principles laid down by the decisions to which I was referred, the appeal was competent. So I turn now to the arguments adduced in support of it. (at p403)

9. The difficulties that have arisen are, I think, largely the product of misapprehensions arising from the Deputy Commissioner's requirement that the partnership should furnish a return of partnership income for the period 1st July 1954 to 28th December 1954; from the manner in which the partnership complied with this request; and from the use the Deputy Commissioner made of the material furnished. (at p403)

10. As a general principle, when a distinction has to be made between capital and income, the proceeds of wool shorn belong to the person entitled to income at the date of shearing, irrespective of when that wool grew on the sheep, and these proceeds are not apportionable (Bradley v. Denne (1911) 29 WN (NSW) 2 ; Re Angas (1906) SALR 140 ; Re Macpherson (1913) SALR 207 ). In the absence of any special contract or statutory provision, the same considerations apply, for income tax purposes, when sheep are bought in the wool (Webster v. Deputy Federal Commissioner of Taxation (W.A.) [1926] HCA 52; (1926) 39 CLR 130 ). The taxpayer's case, therefore, could not be supported so far as it was based upon the manner in which the partnership return sought - by valuing wool on the sheep's back - to arrive at the partnership income for the period 1st July 1954 to 29th December 1954. And it was not argued that it could be. The issue debated was whether the way that the Deputy Commissioner used the partnership returns in assessing the appellant's income as a trustee was justified. (at p403)

11. Two different questions arise. The first is to what sum, if any, by way of income the deceased had become entitled at the date of her death by reason of her having been a partner. The second is what income the appellant as trustee of the estate of the deceased received in the period ended 30th June 1955 from the partnership. As to the first, s. 92 provides that the assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income. And net income in relation to a partnership is defined by s. 90. In my view, the Commissioner was right in holding that, as the outgoings of the business had in the period 1st July 1954 to 29th December 1954 exceeded the receipts in the same period, no income had in that period been derived by the deceased as a partner. It was not said that any payment had been made to her by way of distribution of profits, or that there were any undrawn profits that had become distributable in that period. The profits of the partnership business for the current accounting period for income tax purposes had not been ascertained and were not ascertainable at the date of death. Therefore, there was no income that the deceased had derived from the partnership on which at the date of her death tax had not been assessed or paid (s. 217). But, in my view, the Commissioner was wrong in saying that the deceased had made a loss from her interest in the partnership in the six months preceding her death. The amount of expenses and outgoings that would be deductible in ascertaining the profits of the continuing business for the year when the wool was sold could not properly be called a loss. (at p404)

12. It is, however, in relation to the second question, the income of the trustee in the six months after death, that this appeal is brought. The partnership was not dissolved by death and the income derived by the trustee consisted of a share in the profits of a continuing business. In any continuing business, income is ascertained periodically over accounting periods, and the various items of expenditure in any accounting period that are directly connected with gaining the amounts received, or expected to be received, from the ordinary conduct of the business must be taken into account. It is only the "net balance ascertained according to the usual and recognized principles of accounting" that is income (see Bartlam v. Union Trustee Co. [1946] HCA 1; (1946) 72 CLR 549; (1948) 76 CLR 492 (PC) , especially per Starke J. (1946) 72 CLR, at p 564 and Dixon J. (1946) 72 CLR, at pp 570, 571 ). If what had to be ascertained here was the income derived from carrying on the business of a sheep station for an annual accounting period ended on 30th June 1955, expenditure in the first half of that annual period would obviously have to be deducted in arriving at the assessable income (see Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295, at pp 309, 310 ). In my view the same considerations apply here. If the trustee is to be regarded as carrying on in partnership with the surviving partners the business in which the deceased was a partner at her death, that is so. If, on the other hand, the trustee is regarded as simply entitled to a share in the profits of a business carried on by others the result is the same. The date at which the profits of a partnership business are to be taken to have accrued depends upon the date at which they were ascertained and declared, or ought according to the partnership agreement or course of business to have been ascertained (Hughes v. Fripp [1922] HCA 26; (1922) 30 CLR 508, at pp 520, 521 ). The business profit can only be ascertained after deducting from gross proceeds the expenses incurred in their production in the accounting period. It is immaterial that these expenses were incurred before the trustee became entitled to the income of the trust estate (cf. Shaw v. Federal Commissioner of Taxation (1920) 27 CLR 340 ). This view of the effect of income accruing in respect of the share of a deceased partner when the partnership is not dissolved by death accords, I think, with the decisions in Ibbotson v. Elan (1865) LR 1 Eq 188 , and Browne v. Collins (1871) LR 12 Eq 586 : cf. Hughes v. Fripp [1922] HCA 26; (1922) 30 CLR 508 . The appeal will therefore be allowed and the matter remitted to the Commissioner to amend the assessment accordingly. (at p405)

ORDER

Appeal allowed with costs. Assessment appealed from set aside. Matter remitted to the Commissioner to issue an amended assessment to give effect to this decision.