Jones v Federal Commissioner of Taxation [1963] HCA 17; (1963) 109 CLR 342 (17 July 1963)

HIGH COURT OF AUSTRALIA

JONES v. FEDERAL COMMISSIONER OF TAXATION [1963] HCA 17; (1963) 109 CLR 342

Income Tax (Cth)

High Court of Australia
McTiernan J.(1)

CATCHWORDS

Income Tax (Cth) - Partnership - Deed - Control of business vested in two managing partners - Profits to be divided into two parts - Parts distributed to managing partners or other partners at direction of managing partners - Whether assessable income of managing partners - Income Tax and Social Services Contribution Assessment Act 1936-1957, (Cth) ss. 19*, 92.

HEARING

Melbourne, 1963, June 13, 14, 17; July 17. 17:7:1963
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1957 (Cth).

DECISION

July 17.
McTIERNAN J. delivered the following written judgment:-
This matter is an appeal by Mr. E.C.T. Jones against an assessment under the the matter is directed to the assessment of the appellant's share of the income of a partnership. The relevant entry in the appellant's income tax return is: "Share in partnership of L.C. Stevenson, I.E. Stevenson, E.C.T. Jones and K.I. Jones trading as S.J. Motors and Dandy Sports Depot- 1st May 1958 to 30th June 1958. 236 pounds". I.E. Stevenson is the wife of L.C. Stevenson: K.I. Jones is the wife of E.C.T. Jones. In preparing the assessment the Commissioner added 731 pounds to the sum of 236 pounds in order to arrive at the amount of taxable income derived by the appellant from the business carried on by this partnership: further, the Commissioner allowed a concessional deduction of 143 pounds in respect of the appellant's wife. The assessment of tax on the income of a partner is governed by the provisions of Div. 5 of Pt III of the Income Tax and Social Services Contribution Assessment Act. In this case the material provisions are: Section 90: "In this Division-'net income' in relation to a partnership, means the assessable income of the partnership, calculated as if the partnership were a taxpayer, less all allowable deductions except the concessional deductions and losses of previous years;" The section also defines "partnership loss". Section 91: "A partnership shall furnish a return of the income of the partnership, but shall not, except as provided in this Division, be liable to pay tax thereon." Section 92: "(1) The assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income, and his individual interest in a partnership loss incurred in the year of income shall be an allowable deduction." (at p345)

2. The partnership furnished a return of its income of the period from 1st May 1958 to 30th June 1958. No assessment of tax payable by the partnership was made. Its return included a summary of the distribution of the profits of that period. According to that summary the amount payable to the appellant is 236 pounds. This amount is stated in the summary to be a fourth of one-half of the profits. The summary shows that the remaining three-fourths is payable in equal proportions to the appellant's wife and their two children. Each of the children is described as a "beneficiary partner". The share of each child is payable to the parents as trustees. There is therefore according to this summary an equal division of half the profits between the appellant, his wife and their two children, the share of each of them being 236 pounds. The summary shows an equal division of the other half of the profits among L.C. Stevenson, his wife and their three children, on the same principle; each child is again described as a "beneficiary partner"; his or her share is payable to the parents as trustees. The amount expressed to be payable to L.C. Stevenson, his wife and each of their three children is a fifth of a half of the profits-188 pounds. (at p345)

3. It is necessary to refer to the deed of partnership. L.C. Stevenson, his wife, E.C.T. Jones (appellant) and his wife are parties to the deed. None of their children is a party; all are minors. The deed purports to have been made on 1st May 1958. Until then the only members of the firms trading as S.J. Motors and Dandy Sports Depot, mentioned in the appellant's income tax return, were the appellant and L.C. Stevenson. The wives were then employees. There is no dispute that until the wives became partners, the profits of the businesses were divisible in equal shares between the appellant and L.C. Stevenson. In the appellant's return of income for the period from 1st July 1957 to 30th April 1958, his share of the profits of that period is stated to be 3,366 pounds which is half of the "net income" shown in the return. Admittedly the partnership deed of 1st May 1958 was designed to lessen the tax which the appellant and L.C. Stevenson would be liable to pay on future profits of the businesses. The partnership deed runs into thirty nine clauses. It was put by Dr. Coppel for the Commissioner that some clauses of the deed are open to criticism as being inappropriate to partnership in the usual sense. But it was not denied that the four parties to the deed were "an association of persons carrying on business as partners" within the definition of "partnership" in s. 6(1) of the Income Tax and Social Services Contribution Assessment Act. The deed provides that the parties to it shall be "general" members of the partnership and that L.C. Stevenson and the appellant shall be the first "managing partners". The general effect of the deed is to give to the managing partners complete and exclusive authority in respect of the control and management of the business, finance and affairs of the partnership. Clause 15 provides that "either L.C. Stevenson or E.C.T. Jones may from time to time admit any child of his to be a limited member of the partnership". A prior clause (11) provides for the admission by mutual consent of the managing partners of additional members to be either general or limited partners; by cl. 11 the managing partners may impose terms and conditions on the admission of any additional member. On 9th June 1958 the appellant admitted himself and his wife as limited partners in the capacity of trustees of a small fund settled by the appellant's father on each child of the appellant and his wife. These settlements were made in contemplation of the purpose of the deed of partnership. The powers of investment given to the trustees expressly include contribution to the capital of the partnership. The appellant and his wife invested substantially the whole of the fund settled on each child in the business of the partnership. There was parallel action on the side of the Stevensons. (at p346)

4. Clause 4 of the partnership deed says: "The initial capital of the partnership shall be provided in such shares and proportions as shall be determined by the managing partners and shall be credited to the partners in the shares and proportions in which they have respectively contributed the same." There is no evidence of any action taken by the managing partners in respect of contribution by their wives to capital. (at p346)

5. Clause 14 says: "The losses of the partnership shall be borne by the members of the partnership in the shares and proportions in which they are for the time being entitled to the profits therefrom." (at p347)

6. The crucial clauses for present purposes are 13 and 16. These are as follows: "13. The profits of the partnership shall be divided into two equal parts or shares and one of such parts or shares shall be paid to the said Lindsay Charles Stevenson or distributed between such members of the partnership as he shall from time to time direct and the other of such parts or shares shall be paid to the said Eric Charles Thomas Jones or distributed between such members of the partnership as he shall from time to time direct." "16. No limited member of the partnership shall be entitled to interfere in the management or control of the partnership business and a limited member shall have no interest in the partnership business or the assets or profits thereof other than the right from time to time to receive or be credited with such share of the profits of the partnership as the person who so admitted him or the managing partners may from time to time direct or require pursuant to the provisions of cl. 13 hereof." (at p347)

7. The summary of the distribution of profits mentioned above is based upon directions of the appellant and L.C. Stevenson respectively recorded in the books of the partnership and dated 20th June 1958. It is clear that if no distribution had been directed under cl.13 the assessable income of the appellant and L.C. Stevenson would include half of the "net income" of the partnership derived in the period 1st May 1958 to 30th June 1958. Mr. O'Driscoll did not argue contrary to this. He based his argument on the fact that both these partners directed how his share of the profits under cl. 13 should be distributed. The argument was to the effect that the direction which each partner made under cl. 13 was binding on him as from the time it was made in relation to every other member of the partnership. It was conceded that either the appellant or L.C. Stevenson was entitled under cl. 13 to revoke or alter the direction but as neither did so the question is whether the quantum of the "individual interest" of the appellant is governed by the direction. It seems to me that this argument makes the directions for the period in question terms of the partnership agreement as to the division of profits. That could not be the intention of cl. 13. The view I take of cl. 13 is that it gives to C.L. Stevenson and E.C.T. Jones respectively a right to a half share of the net profits which accrues when the accounts of the partnership for any period are taken and the net profits ascertained. See Federal Commissioner of Taxation v. Happ (1952) ALR 382, at pp 385, 386; (1952) 9 ATD 447, at pp 450-452 . I do not think that a direction under cl. 13 is of the nature of an assignment of a future interest. In my opinion a direction under the clause is something different from that. It is rather a mandate to the partnership to distribute net profits in respect of which the partner has accrued rights. The direction is merely the medium by which a share of profits, in truth the income of the partner giving the direction, passes to another member of the partnership. I think that the direction is within the operation of s. 19 of the Income Tax and Social Services Contribution Assessment Act: "Income shall be deemed to have been derived by a person although it is not actually paid over to him but is . . . otherwise dealt with on his behalf or as he directs." I therefore hold that 731 pounds, the disputed amount of income, was, in addition to the amount of 236 pounds, assessable income of the appellant. (at p348)

8. Dr. Coppel advanced the argument that the Commissioner of Taxation was on all the evidence and documents in the case entitled to apply s. 260 to the deed. In my view it is not necessary to decide whether or not the argument is right. (at p348)

9. The appeal should be dismissed and the assessment confirmed: the appellant should pay the Commissioner's costs of the appeal. (at p348)