aeons INCOME TAX -~- Assessable income G3 CATCHWORODS - Assignment of portion of taxpayer's share in partnership to trustee of family trust - Whether the consequence of assignment was to vest in trust relevant share of partnership profits for the whole year - Whether Commissioner of Taxation. can nominate when partnership accounts can be taken - Delivéry of deed in escrow - Creation of - trust - Commercial reality - Equity and good conscience. INCOME TAX ASSESSMENT ACT 1936 ss,92, 102(1), 102B, 161, 168. THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Vv MICHAEL BERNARD GALLAND Bowen C.d., Fisher and Beaumont JJ. BY lk December, 1984. Sydney. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NO.G75 of 1984 ~www we GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant - and - MICHAEL BERNARD GALLAND Respondent ORDER JUDGES MAKING ORDER Bowen C.J. Fisher & Beaumont JJ. DATE OF ORDER I§ December 1984 oo WHERE MADE : Sydney THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant, the Commissioner of Taxation of the Commonwealth of Australia pay to the respondent his costs of this appeal. "IN THE FEDERAL COURT OF AUSTRALIA } ) NEW SOUTH WALES DISTRICT REGISTRY ) NO.G75 of 1984 ) ) GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant - and - MICHAEL BERNARD GALLAND Respondent CORAM: Bowen C.J., Fisher and Beaumont JJ. +18 December, 1984 REASONS FOR JUDGMENT BOWEN C.3. & FISHER J.: This 1s an appeal brought by the Commissioner of Taxation ("the Commissioner") against a decision of the Supreme Court of New South Wales. That Court allowed the appeal of Michael Bernard Galland ("the. taxpayer") against the assessment of income tax issued against him by the Commissioner in respect of the year of income ended 30 June 1980. The 2. taxpayer was at the relevant time a solicitor practising in partnership with his father. In his return the taxpayer disclosed the amount of his share in the net income of the partnership of Bernard L. Galland & Co, Solicitors, as $36,070. This disclosure was accompanied by the following notation; "(Note 48% of the taxpayer's income shown in Partnership return assigned to Galland Services Pty. Limited pursuant to Deed 27/6/80)". The Commissioner in making his assessment on 30 March 1981 increased the taxpayer's taxable income by an amount of $34,371 which he described in the adjustment sheet as "Partnership Distribution" and which he explained as "Adjusted as a result of variation in partnership distribution". It was common ground that this amount of $34,371 represented 49% of the taxpayer's share of the partnership income for the year ending 30 June 1980 which he had purported to assign pursuant to the Deed of 27 June 1980 referred to in his return. The consequence of this adjustment by the Commissioner was to increase the taxable income of the taxpayer to $70,933 upon which Bum, after crediting provisional tax paid and charging provisional tax payable, income tax assessed was $16,646.82. The taxpayer objected on various grounds contending that his taxable income for the year of income should he reduced by the amount of $34,371. This amount was in the objection 3. described as the share of the net income of the partnership for the period 1 July 1979 to 30 June 1980 "attributable to and flowing from that portion of" his share in the income of the partnership which was assigned to Galland Services Pty. Limited in its "capacity as trustee of the trust known as the M.B. Galland Trust 1980 on the 27th June 1980". On 20 November 1981 the Commissioner disallowed the objection. The taxpayer subsequently requested that his objection be treated as an appeal and forwarded to the Supreme Court of New South Wales. That Court gave judgment on 9 February 1984 allowing the appeal and ordering the Commissioner to pay to the taxpayer his costs. By his notice of appeal the Commissioner contended, in substance, that the assignment by the taxpayer was ineffective or if effective operated only upon that portion of the taxpayer's share of partnership profits "referable to the period following the effective date of the assignment whether 27th June or 30th June (as the case may be)". The principal question for determination on this appeal was whether, as a consequence of the assignment, Galland Services Pty. Limited ("Galland Services") derived 49% of the taxpayer's share of partnership profits for the full year ending 30 June 1980 or alternatively 49% of his share of profits for the last 3 days of that year. Essentially the resolution of this question depends upon principles of partnership law. 4. Neither here nor in the Court below did the Commissioner contend that the transaction was a sham and there was no suggestion in the Supreme Court that it was void by virtue of the application of s.260 of the Income Tax Assessment Act ("the Act"). The question of the application of that section by the Commissioner was specifically raised by the taxpayer in a letter prior to the hearing. At the commencement of that hearing he expressly answered "No", The Commissioner sought for the first time to introduce the possible impact of this section when he applied to amend his notice of appeal to raise this contention. The application was refused. A submission that the transaction was illegal was raised in the Supreme Court and dismissed by the trial judge. This submission, although referred to in the notice of appeal, was abandoned on the hearing of the appeal. The taxpayer is a solicitor being at all relevant times in partnership with his father in the firm of Bernard L. Galland & Co. practising in Goulburn, New South Wales. The taxpayer and his father were each entitled to. 50% of the capital of the Partnership and in like manner shared profits and losses. Neither partner was entitled without the consent of the other to assign his share in capital or profits. Paragraph 5 of the partnership agreement provided for the taking of annual accounts in the following terms: 5. BALANCE SHEET "5. In July in each year an account shall be taken and a balance sheet prepared showing the assets and liabilities of the partnership and the amount owing to each partner in respect of profits and as soon as possible thereafter the net profits (if any) shall be divided in the proportions hereinbefore stated". A subsequent clause entitled each partner to draw during the year against anticipated profits of that year but with an obligation to refund drawings in excess of his share of net profits as subsequently ascertained. During the year of income ending 30 June 1980 the taxpayer resolved to effect an assignment of a portion of his professional income in accordance with the decision of the High Court and this Court in Federal Commissioner of Taxation v Everett (1980) 143 C.L.R. 440. He obtained the consent of his father during the month of June 1980 to assign 49% of his share ef partnership capital and profits toa trust which it was proposed be set up in favour of his family. Such a sharing was in the ordinary course prohibited by sub-s.40F(1) of the Legal Practitioners Act 1898 (N.S.W.). It was necessary therefore that he obtain the approval of the Law Society of New South Wales to such an assignment pursuant to Regulation 25(4) of the Solicitors (General) Regulations before he could share profits with unqualified persons. On 25 June 1980 the taxpayer's solicitors in Sydney forwarded to the Law Society of New South Wales an application for this approval siqned hy the taxpayer. 6. On 27 June 1980 the taxpayer executed a deed whereby he assigned to Galland Services as trustee of certain trusts 49% of the share which he at the time held in the partnership. It was expressly provided that such share would, in respect of the year ending 30 June 1980, include the share of the partnership profits for the whole year, without any apportionment. Earlier on the same day a brother of the taxpayer had executed a deed of trust whereunder he settled a sum of money upon the trusts therein provided. He nominated Galland Services, an existing company incorporated on 18 May 1979, as trustee of the trust fund. The taxpayer and his father were directors of the company, the father being also both chairman and secretary. The trust deed contained discretionary trusts of both capital and income, The taxpayer was entitled to participate in the distribution of income to the extent to which the trustee might in its discretion determine and in the capital if at the date of distribution his wife and children had predeceased him. The Commissioner attached significance to these facts as well as to the provisions in the deed which enabled the taxpayer to remove the trustee and appoint new trustees. In addition the trustee had power, with the taxpayer's consent, to vary the trusts set out in the deed. The deed of assignment recited that Galland Services was the trustee of a trust estate and that it was to ait in this Capacity that the assignment was made. The deed was executed and 7. delivered in escrow, conditional upon the Law Society grantang approval to the assignment. At a special meeting of the Council of the Law Society held on 30 June 1980 approval was given to the assignment by the taxpayer of the specified share of his interest in the partnership. On 30 June 1980 Galland Services as .trustee of the family trust resolved that the income thereof for the year ending on that date should be distributed as to 58% thereof to Judith Lynne Galland the wife of the taxpayer and 42% to Phillipa Jean Galland, the infant daughter of the taxpayer. By the time that the income tax return of the trust was lodged it had been ascertained that the wife's share of income was $20,100 and the daughter's share was $14,555. The Commissioner issued an assessment against the wife in respect of assessable income which included this amount and an assessment was issued to Galland Services in accordance with s.98 of the Act in respect of the infant daughter's share of trust income. There is no need to deal in detail with the general law relating to assignments, as this has been extensively covered by the High Court and this Court in Everett's case. It 1s sufficient to note that the taxpayer purported to assign 49% of his interest in the partnership and the capital thereof. He did not restrict the assignment to his share of the partnership profits but-dealt with the capital assets which produced the profits. There is no doubt that he has thus assigned an 8. immediate proprietary interest and not a mere expectancy or future property. Moreover the deed of assignment operated as an immediate transfer and not an agreement. It was however an assignment by way of gift and not for value. In this respect it differed from the assignment in Everett's case. The Commissioner attached no signifiance to this fact and in no way sought to rely upon it. The subject matter of the assignment was a portion of the taxpayer's interest in the partnership and not the totality of his interest. The taxpayer's interest in the partnership was an equitable chose in action enforceable only in a court of -equity. It was however only portion of this chose in action which the taxpayer assigned, and being only part of a chose in action it was not assignable-under 5.12 of the Conveyancing Act 1919 (N.S.W.) (Re Steel Wing Company £19213 1 Ch.349 at p. 354) but only in equity. There was no suggestion that the gift was in any way incomplete. - The assignment without doubt had the effect intended, namely to vest in Galland Services 49% of the taxpayer's 50% share in the partnership with all the rights and benefits attaching to that share including the right to receive that percentage of the partnership profits. It is axiomatic to state that Galland Services did not in consequence become a partner in the partnership and that its rights were limited in the manner provided by s.31 of the Partnership Act 1892 (N.S.W.). Furthermore the taxpayer became in consequence of the assignment a trustee of the assigned share for Galland Services. 9. The essential question was, as earlier stated, whether the consequence in law of the execution of the deed of assignment on 27 June 1980 was to vest in Galland Services the relevant interest in partnership profits for the whole of the year ending 30 June 1980 or merely that portion referable to the days subsequent to the date of the assignment. In contending that the assignment carried the share of profits for the full year the taxpayer relied upon the principle that a partner's right to a share of profits crystallizes at the conclusion of the accounting period, generally at the end of the year of income. When subsequently accounts are taken the actual amount of profits is quantified. (Federal Commissioner of Taxation v Everett (1978) 21 A.L.R. 625 at pp. 629 and 655; Federal Commissioner of Taxation v Happ (1952) 9 A.T.D. 447 at p.451). The trial judge accepted this submission, heing of opinion that it accorded with the reasoning of the Full Court of this Court and the decision of the High Court in Everett's case. The Commissioner challenged this approach, contending that the reasoning of the Full Court was obiter and that the High Court did not rule on the argument. His counsel arqued that although partnership profits were generally ascertained at the end of a financial year, it was open to the Commissioner to require that accounts be taken at some earlier point of time should it be appropriate. He contended that the Commissioner had power to require that this be done if some event or occurrence 10. necessitated it, notwithstanding that the partnership agreement expressly specified some other date. Reliance was placed upon the Commissioner's powers under sub-s.168(1) of the Act, which provides: "(1) The Commissioner may at any time during any year, or after its expiration, make an assessment cf the taxable income derived in that year or any part of it by any taxpayer and of the tax payable thereon." The Commissioner's submission was that in this matter this section enabled him to require partnership accounts to be taken at the date of the assignment for the purpose of determining partnership profits and the taxpayer's share of them for the year of income up to that time. In our opinion this contention must be rejected as must submissions based upon 5.59AA and 5.36A. A taxpayer assessed under sub-s.168(1) cannot be required to return as asessable income income which has not been, in the words of that sub-section "derived by him" in the specified part of the year. CORRIGENDUM ee] Amendment to the Reasons for Judgment of Bowen C.J. and Fisher J. delivered 18 December 1984; Page 10 line 16 for "asessable" read "assessable", Page 10 lines 17 and 18 substitute 'that Sub-section derived in that year or any part of it" by the taxpayer. ' ll. pp. 404-5; Rowe v Federal Commissioner of Taxation (1982) 82 A.T.C. 4243 at p.4244). The Commissioner may be entitled to require a return to be lodged in respect of a period other than a year of income (i.e. a financial year - see definition s.5) or an approved substituted accounting period, but he cannot require an accounting for partnership purposes to take place at this date. It follows that assessable income cannot be deemed to have been derived at that date when in fact it has not been so derived. For partnership purposes the Commissioner has no right to attempt to crystallize the net income of a partnership at a time other than that provided for either in the agreement or by law (i.e. dissolution, death or bankruptcy). Counsel could only point to the above sections as authority for his contention that the Commissioner can select any point of time he considers appropriate for the taking of partnership accounts. He submitted that the purpose of the Act allowed the Commissioner to ignore dates specified in partnership agreements. He did not expand on these general contentions and we would not hesitate to reject them. The reasoning in Rowe's case does not support the Commissioner's argument in this regard. The Commissioner then contended that the deed, having been executed and delivered in escrow, was ineffective until the Law Society had given its approval. For the reasons given by the trial judge and on the basis of the authorities cited by him we would reject this submission. It is clear that as between the 12. parties a deed delivered in escrow operates, once the conditions of the escrow have been satisfied, as from the date of delivery: Alan Estates Ltd v _W.T. Stores Ltd. £19823 Ch 511. At p. 528 Sir Denys Buckley said: "When the conditions of an escrow are fully satisfied, so that it becomes an immediately operative deed, that effect related back to the date of its -delivery in escrow, but not for all purposes - only for such purposes as are necessary to give effect to the transaction (Security Trust Co v _Royal Bank of Canada (19763 A.C. 503, 517 per Lord Cross of Chelsea) which I take to mean all the terms and conditions of the instrument which remain capable of being given effect to implement the bargain between the parties". The point is however in this matter of mere academic interest, as the consent of the Law Society was given prior to the expiration of the year of income. It follows that if the Commissioner is wrong on his primary contention, he cannot succeed on 'this point to restrict Galland Services' entitlement to a share of the profits of the last three days, or alternatively the last day, of the year in question. The Commissioner's final submission was that whilst the assignment might be effective under the general law it was ineffective for tax purposes. It was said that because of the powers the taxpayer retained and the possibility that he could himself become a beneficiary, the assignment was ineffective for income tax purposes. Counsel for the Commissioner relied upon the decision of Hardie Boys J. in Arcus v Inland Revenue Commissioner (N.Z.) 13 A.T.D. 101 and sought to distinguish 13. Purcell v Federal Commissioner of Taxation (1920) 28 C.L.R. 77, Tunley v Federal Commissioner of Taxation (1927) 39 C.L.R. 528 and Commissioner of Taxes v Hodges (1935) 3 A.T.D. 255. He aiso endeavoured to support this contention by arguing that in truth the taxpayer was the settlor of the partnership share upon his wife and children, he having expressly assigned that share to Galland Services in its capacity as a trustee. There are a number of grounds which deny validity to these submissions. In the first instance it is clear that, with the exception of s.260, there is no provision of the Act which enables the Commissioner to treat as void an assignment which is valid under the general law. There are of course sections of the Act which empower the Commissioner to assess the assignee or beneficiary to tax at the rate applicable to the donor or assignor (cf sub-s.102(2) and s.102B) but these provisions do not advance the contentions of the Commissioner. Likewise he gains no assistance from the reasoning of Hardie Boys J. in Arcus's case, where his Honour had before him a voluntary assignment of future property, a transaction ineffective in this country by virtue of the decision in Norman v Federal Commissioner of Taxation (1963) 109 C.L.R.9. In our opinion the Commissioner's attempt to distinguish the cases of Purcell, Tunley and Commissioner of Taxes v Hodges cannot succeed. 14, The Commissioner also contended that the taxpayer was, for the purposes of sub-s.102(1), the creator of the family trust of which Galland Services was the trustee. He based this submission on the fact that, having assigned a portion of his share in the partnership to Galland Services, the taxpayer held that portion as a bare trustee for Galland Services as the assignment only took effect in equity. Thereafter Galland Services held, as the assignment contemplated it would hold, the chose in equity upon specified trusts. However, those trusts are not the trust created asa result of the assignment, but the trusts of the settlement already created by the taxpayer's brother. Since this settlement had already been effected when the taxpayer assigned property to Galland Services to be held on the trusts of the Settlement, the taxpayer is not the settlor for the purposes of sub-s.102(1) of the Act: Truesdale v Federal Commissioner of Taxation (1970) 120 C.L.R. 353, At p.363 Menzies J. said: "Upon the whole I have come to the conclusion that I should not expand the meaning of the words 'created a trust' to cover the making of contributions to a trust already created". The two -facts, firstly that the deed of settlement had been delivered prior to the delivery in escrow of the deed of assignment, and secondly that the condition of the escrow was satisfied before the end of the tax year by the obtaining of the Law Society's consent, make it unnecessary to decide whether the 15. assignment took effect only as from the moment of consent, or retrospectively as from the time of delivery of the deed in escrow, The delivery of the deed of assignment became unconditional on 30 June 1980 when the Law Society approved the assignment. The property subject to the assignment vested unconditionally in Galland Services on that date. The making of an unconditional contribution was "to a trust already created". Counsel for the Commissioner attempted to distinguish Truesdale's case on the ground that in this matter the taxpayer did "create" atrust by assigning in equity portion of his interest in the partnership. However it is clear that the trusts and provisions which might attract the application of sub-s.102(1) are to be found in the trust created by the taxpayer's brother and not in the trust "created" by him. The Commissioner cannot succeed on this ground. The Commissioner moreover did not purport to assess the trustee or the taxpayer to tax pursuant to sub-s. 102(1) upon the whole of the income of the trust estate. We are of opinion that if he had, the assessment would correctly be set aside upon the authority of Truesdale's case. 16. We agree with Beaumont J. that the submissions of counsel for the Commissioner based on the contention that the court should consider the facts in the light of commercial and economic realities rather than according to the technicalities of real or personal property law must be rejected. In our opinion the appeal should be dismissed with costs. Ww ESS Leertify thet this end tne 7 *f precedsns pares ale 2 Bune cor7 of the n ACA .Clie Lot the Chief Jus.ge. oir unygel vs a -aa OO » Sd f ete nee fssocrate if] THE FEDERAG COURT OF AUSTRALIA NEW S0UTH HaLES DISTRICT REGISTRY or ae GENERAL DIVISION No. 675 of 1984 ON APPEAL from the Supreme Court ot New South Nales BETHEEN : THE COMMISSIONER OF TAXATION oF THE COMMONWEALTH oF AUSTRALIA Appellant AND: MICHABL BERNARD GALLAND Respondent SUBAaM: Bowen. C.J.. Pisher and Beaumont. JJ. DATED: 13 December 1384. RESSONS FOR JUDGMENT BEAUMONT. J: I have had the advantage or reading the reasons ror judgment ot Sowen. «.J. and Fisher. J. and I need not repeat what they have said in relation to this appeal. The galient facts are as trollows,. The deed of assignment dated 27 June i960 purported to assign to valland Services Pty. Limited. as trustee of a trust state. "the Property". as therein detined. absolutely. "(The Property" was defined to mean +7 per centum of the share then held by the taxpayer in the partnership practising under the name "Bernard £. Galland « UCo.". It 15 common ground that the execution and delivery of the deed were intended to be conditional upon the approval of the Law Society of New south Wales. That approval was qiven on 30 June 1280. In his agsessment., the commissioner assessed the taxpaver upon the rooting that in respect of the income derived by the partnership in the year ended 30 June 1980. the purported assiagnment had no erfect upon the liability to tax of the taxpayer which otherwise would have existed. By way ot justification of the assessment. it 1s first submitted on behalf or the commissioner that. although a contract may be deemed. by express provision. to have a retrospective operation inter partes (see Newlands v. arayll General Insurance Uo. Ltd. £19591 5.R. (N.S.W.) 130), sucha provision dces not bind the Commissioner. In short. the argument proceeds. since such a provision cannot bind third Parties. ait 1s not ertective tor taxation purposes. For this purpose, reliance 1s placed by the Commissioner upon the reasoning of the Full vourt or this Court in kowe v. Federal Commigsioner of Taxation 42 A.T.C. 4.243. 3. In Rowe s Case, the taxpayers, a husband and wire. were equai partners 1n a farming and gracing business. The terms or the partnership provided that accounts were to be taken on 30 June in each year and that net prorits were to be divided immediately therearter. In April 1975. Rowe Holdings Ftv. Limited was incorporated to act as trustee of a Tamily trust. By deed dated lo May 1975. the taxpayers each purported to assign to the company "as at and from" i July 1974, one-half of their respective shares in the partnership. It was held that for the purposes orf tazaticn law. it was not possible for the taxpayers to terminate retrospectively the partnership which they had carried on since 1 July 1974. In the result. the net income of the business up to the execution or the deed of assignment was treated as the net income of the partnership between the taxpayers. Deane. Fisher and Davies. JJ. said tat p.4.245): "The Deed of Assiaqnment plainly proceeded on the basis that the relevant property was effectively assianed as at and from 1 July 1374 and that the previously existing partnership between the taxpayers had come to an end on 30 June 1974. Whatever may have been the consequences as between the parties. this was a position which could not retrospectively be brought about either as regards third parties or tor the purposes of taxation law." 4. Assuming, then. that for f1scal purposes. the present assignment cannot operate retrospectively. a question nonetheless remains as to its etfect in the events which happened. That is to say. even 1m the deed of assiaqn- ment were not operative until 3 June 1380. does it still Tolliow that the income for the vear ended 3 June 1250 was capable or effective assiaqnment to Galland Services Pty. Limited? « In Rowe s Case, supra, the Court referred tat p.4,244) to the circumstance that particular provisions of a partnership agreement or principles of partnership law may deprive a partner of any entitlement to call for a distribution of profits or net income until after accounts have been drawn up. Sut they also said 'ibid.): "such provisions do not however produce the consequence that the partner. ror income tax purposes. has no individual interest in the net income ot the partnership until the precise quantum of that net income has been determined by the preparation of accounts in respect of the relevant pericd (see, Rose v. F.C. of T. (1951) 84 C.L.R. 118 at p. 124). If they did. the partners would delay their liability to tax in respect of a tax year if they retrained from drawing up accounts in regpect or the whole or any part ct that vear until arter the 30th June. Net income must ordinarily be related to a period. For taxation purposes. in the case of a partnership. that period is the relevant taz vear. That does not. however. necessarily mean that that is the only. or the critical. relevant period tor taxation purposes." Their Honours gave the example or a partnership buginegz carried on by one partnership for part or a tax year and by a different partnership for the residue or the tax year. In such acase. there will. for taxation purposes, be two periods in respect of which net income will be required to be ascertained so as to divide overall income between the two' partnerships. The Court proceeded (ibid.): "The fact that the accounts in relation to the first period are not drawn up until arter the period has expired. will not alter the prima Tacie position that the persons who. as partners. derive the income during that period will be the persons in whose assessable incomes the net income or that period talis to be included. according to their respective interests. pursuant to sec.92(l) ot the Act." 'The reference made to Rose 5s. UCase wag presumably intended to pick up the e2tatement made by Dixon. Fullaqar and Kitto. JJ. 'at p.lid) that "Division 5 of Part III. which deals -with partnerships. 1s based upon the view that the collective income earned by the partnership belongs according to their shares to the partners reaqardless of its Liberation from the funds of the partnership. that is. its actual distribution".: The Commissioner rurther relies, in the development or thi3 ardument. upon the provisions of. first. s.1lé6l of the Income Tax Assessment Act, 1936 ("the Act") which prescribes the furnishing by every person of a return settanag forth. inter alia. a statement of income derived during the year or income; and. secondly. s.168(1) whach empowers the Commissioner to make at any time during any year. or after its expiration. an assessment of the taxable income derived in that vear or any part of 1t by any taxpayer. In my opinion. the individual partners did not achieve any entitlement to the collective net income or net prorits of their partnership tor the year now in question until after the expiration of the financial year ending on 29 June 1580, that ig. at the earliest. 1 July 1980. This waz subsequent to the operative date of the assianment to Galland Services Pty. Limited. Thus. even if the assiqnment were not operative until 39 June 1380, it came into erfect at a point ofr time before the date at which the right of a partner to participate in the profits or income of the partnership for the financial year ended 30 June 1580 crvstallised. There was no need, thererore. for the Uaxpayer to seek to attribute to the deed of assiaqnment any retroactive operation. This conciusion follows. I think, trom the rundamental consideration that no entitlement to an individual share of the collective prorits or the partnership could accrue to anv rartner until the partnership net income or net prorit for that year. if any. wag ascertained and declared. And 1t was not possible that accounts tor that purpose could be taken before the expiration of the period ending on midnight of 30 June 1380, since in any continuing business. income 1s ascertained periodically over accounting periods, and the various items or expenditure in any accounting period that are directly connected with qaining the amounts received. or expected to be received. trom the ordinary conduct of the business must be taken anto account 'Peterson v. Federal Commissioner of Taxation (1960)' 106 C.L.R. 395 per Wandeyer. J. at p.40d). At Leas in the case of a partnership carrying on a proressional practice. net prorit or net income is not, unlike interest. earned from day to dav tsee Federal Commissioner ot Tayation v. Everett 11978) 21 A.L.R. 625 at ep.629, 655 Full Federal Court): Ibbotson v. Elam £1665] L.k. L Eq. 188 at p.is3: Browne v. Collins (16713 L.R. 12 Ea. 586 at p.593: Hughes v. (1922) 30 C.L.R. 508 at : ss et pp.S2u-l). Except where. in the interim. the partnership 15 dissolved by the death or bankruptcy of a partner or otherwise. until the expiration of the stipulated accounting period. no occagion arises ror the taking of the accounts necessary to determine the existence and amount or the net 3. protit or loss. as the case may be. The date at which the protits of a partnership business are to be taken to have accrued depends upon the date at which they were ascertained or declared. or ought according to the partnership agreement or course or business to have been ascertained 'see a Feterson Ss Case, supra, at p.-405: Lindley on Partnership, léth Ed. at p.514: Halsbury s Laws of England, 4th Ed. Yol.35 paras. 123, 141). Urdinarily. an accounting period or a gingle financial year is presumed by the Partnership Acts. but. of course. 1t is open to the parties to extend or shorten this period either expressly or by a course of conduct ict. Public Trustee v. Shults (1964) 11 C.L.R. 482). No variation of the period of the financial vear occurred here. The partnership commenced:'on 1 July 1971 and could only be determined by the giving of not less than three months notice (cl.2),. No such notice had been given as at 3u June 1980 and no other ground for dissolution of the partnership existed at that date. An annual accounting period expiring on 30 June in each year 15 contemplated: by cl.5, in July each year, an account 1s to be taken anda balance sheet prepared showing, inter alia, the amount owing to each partner 1n respect of profits. and as soon as possible therearter the net profits (if any) are to be divided in the aqreed proportions. The possibility of an assignment of a partner's ghare in the assets or profits of the partnership 1s at least touched on by cl.7tb): it 3. provides that neither partner can. without the consent of the other. assign. mortgage or charge his share in these assetz or prorits. Hence. ag at 30 June 138v. the individual entitlement of the partners in the collective net prorits or net income of the partnership for the financial year ended 30 June of the vear had not then accrued. It would not do so until the accounts were taken in the following month. True itis that. as kowe's Vase establishes. if delay beyond the month of July had occurred in the taking of accounts, then, for tazation purposes at least. the partner would have been deemed by the end of July to have earned a share of the net prorit of the partnership. A fortiori. the postponement or the date or actual distribution or "laberation" otf the partnership profits could not achieve any deferment of the partners' entitlement to share in the collective income of the partnership for taxation purposes. But. in the present case. the critical date 1s the operative date or the assignment. that is. 30 June 12980. and in the absence of any obligation or reason to take accounts by that date «wand none existed). the profits of the partnership cannot be treated as having by then accrued. Specifically, the yeasoning in Rowe's Case 15 not authority for the proposition that. for taxation purposes. the date at which a partner 13 to be deemed to derive income out of the profits earned by the partnership is accelerated to a point of time io. earlier than any such entitlement would have arisen under the general law. In this respect. the Act takes the partnership as it finds it under the general law. What the Court was concerned to emphasise in Rowe s Vase was the unability of the parties, by their failure to draw up accounts by the due date, to defer their liability to tax. Acceleration of such liability was not suggested. The Commissioner relies in this connection upen the decision of a Full Court of the Supreme vourt of Western Australia (McMillan. C.d.. Burnside and Northmore. JJ.) in Commissioner of Taxation v. Melrose 11923) 26 W.A.L.R. 22. approved by Williams, J. in Federal Commissioner or Taxation v. Happ (1952) A.L.R. 382 at p. 38s. There. as in the present case. a partner assiaqned his interest in the prorits. capital and assets or the partnership shortiv berore the end or the financial year in question. It was held that the assiqnment did not relieve him from liability to ancome tax under the Land and Income Taz Assessment Act, lg? 'W.A.) in respect of the prorits made before the date of the assignment. McMillan, ct.J.. Burnside and Northmore. JJ. concurring:, said (at p.26): "It seems to me that if profits have once accrued, as they did in this case, although the actual amount of them had not been ascertained. there is taxable income upon which the Commissioner is entitled to require the usual amount to be paid. It seems to me that once prorits have been made. 1t makes no il. difference to the Commissioner what the person entitled to them may have done with them. I think that as soon as this new arrangement had been entered into there wast a dissolution of the old partnership. and that was the proper time to take accounts. Looking at the case as a whole. it seems to me clearly one in which profits have been made which were handed over to another person, but the person who made the prorit 15 the one that the Commissioner 1s entitled to deal with for taxation. and 1t makes no dirtrerence that the people who received the money may also have to pay 'sc. tax: on their income, whatever 1t may be." "Since the notional dissolution of the partnership in Melrose's Case was a rundamental consideration. it may. I think. be distinauished for present purposes. Williams. J. in Happ': vaze certainly thought that this circumstance was determinative 'see (1952) A.L.R. at p.380). As has been gaid. as at 30 June 1380. no ground for dissolution of the partnership existed in the present case. To the contrary, the partnership was then a continuing one and the assianment, far from being a ground for dissolution, was permissible. qiven the consent of the other partner. Although a partner has a beneficial interest in each or the partnership assets, this interest is of a "special and non-specific kind" (see United Surlders Pty. Limited v. Mutual Acceptance Limited (1980) 144 C.L.R. 673 per Mason. J. at p.687). In order to find out what 1s due to him. a partner must obtain a partnership account and this will only be available at the prescribed periodic interval es) lc. or on dissolution 'ibid.). The point of principle which denies a partner s entitlement to speciric net income ona daily basis is underpinned by the cogent practical consideration that. given the ordinary contingencies of any commercial operation. it would be impracticable. if not impossible. even with the aid of computer technology, to ascertain the exact financial position of a continuing partnership on a day by day basis. Nor. in my view. can the Commissioner derive any comrort trom either s.l6l or s.168(1) of the Act in the present context. These are no more than machinerv provisions which cannot detract trom the substantive entitlement of valland Services Pty. Limited to the income assiagned to it from a particular point of time. As has been said, the Act in this respect takes the partnership as it finds 1t under the qeneral law. Machinery provisions such as 55.161-168 cannot detract from the substantive entitlements or the partners inter se upon which the Act then operates. In my opinion. the Commisioner s first argument should be rejected. It ig nex submitted on behalf of the Commissioner that the purported assignment by the taxpaver of 49 per centum ot his share in the partnership was ineffective to make the income referable to that share income of the agsignee. In support of the submission, the Commissioner 13. points to the dearee of control over the subject matter or the assiaqnment retained by the taxpayer throuch the discretionary trust. It is said that the taxpayer could at any time davert the income back to himself as one of the eligible beneficiaries. kererence is made to the taxpayer s power to appoint and remove trustees icl.17) and to the power conrerred upon trustees, with the consent of the taxpayer. to revoke. add to or vary the trusts (cl.23). The submission is that if a taxpayer can assiaqn income in a form or manner which enables him to retrieve it. the assianment should. aS a matter of public policy, be treated as unetrective since. as it was put. todo otherwise would "make a mockery" of the Act. The decision of Hardie Boys. J. in Arcus v. Commissioner of Inland Revenue (N.&.) (1962) 13 &.T.D. Lol wae pressed upon us but. in my view. the case provides no analogy for present purposes. Central to the reasoning of Hardie Sovs, J. were the circumstances that there was no tranester or trust of the income-producing property, no trustee was interposed between the settlor and the sources or his income and there was no covenant tor payment made either with the donees or any trustee for them. For these reasons. it was held that it was always within the settior's power to render the erfect of the deeds "nugatory" ('at ld. p.107). It is significant. in this reqard, that Hardie Bovs. J. iat p.1vuS) was careful to distinguish Commissioners ot Inland fevenue v. Allan (1925) 9 Tax Cas. 234 where it was held that. until the actual transrer, the income was not alienated despite a declaration of trust as to its destination. but that. once the actual transfer took place. the alienation was qood. On the whole. it seems that Arcus falls into the category of cases such as Norman v. Federal Commissioner of Taxation (1963) 109 C.L.R. 9 where all that was purportedly assigned was the mere expectancy or possibility of ruture income. In the present case. as in Everett s Case, a portion of the tazpayer''s share in the partnership itself was assigned and the deed was effective in equity to assiaqn the income now in question. The existence or the various powers and entitlement of the taxpayer under the. trust instrument already mentioned cannot detract from the erricacy of such an assignment 'see McLeay v. Inland Revenue Commissioner 4N.3.) £19631 N.Z.L.K. 711). The considerations now urged by the Commissioner may well be relevant to the application of s.260 but this 1s not a matter open on this appeal ict. Deputy Federal Commissioner or Taxation v. Purcell (1921) 29 C.L.R. 464). 15. The Commissioner further sought to support this branch of his argument by reference to a line of authority in the Courts of the United States originating trom a4 decision of Holmes. J. delivering the opinion of the Second Circu1lt Court of Appeals in Corliss v. Bowers 281 U.5. 376 o (1330). There, Holmes, J., in holding that s.219 of th Revenue Act or 1924 could be applied constitutionally to the Tacts of the case said tat r.372): "But taxation is not so much concerned with the refinements ot title as it 15 with actual command over the property taxed - the actual benerit for which the tax is paid. If a man directed his bank to pay over income as received to a servant or friend. until Turther orders. no one would doubt that he could be taxed upon the amounts so paid. It 1s answered that in that case he would have a title. whereas here he did not. But rrom the point or view ot taxation there would be no difference. The title would merely mean a right to stop the payment before it took place. The same right existed here although it is not called a title but is called a power. The acquisition by the wife of the income became complete only when the plaintirf failed to exercise the power that he reserved. eee Stall speaking with reterence to taxation, 1r a man disposes of a fund in such a way that another 15 allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is qiven by assent or by frailure to express dissent. The income that 15 subject to a man's untettered command and that he is free to enioy at his ow option may be taxed to him as his income, whether he sees fit to enjoy it or not. We consider the case too clear to need help from the local law of New York or from arguments based on the power of Congress to prevent escape rrom taxes or surtaxes by devices that easily might be applied to that end." le. Although this reasoning has been applied in a number of decisions in that country (see Burnett v. Leininger 285 0.53. 36 (1932); Helvering v. Clifford 309 U.S. 331 (1940); Helverinag v. Horst 311 U.S. 112 (1940); Commissioner of Internal Revenue v. Sunnen 333 U.S. 591 (1948); Gyman A. Stanton v. Commissioner or Internal Revenue l4 T.c. 317 ¢(1950)), it is by no means obvious how such principles. whatever their precise limits. could be translated and applied to the construction or the (Australian) Act. For one thing, there 1s no doctrine of economic equivalence in the income tax law or this country vsee Mullens v. Federal Commissioner of Taxation (1976) 135 C.L.R. 290 at p.301). For another. the observations of Holmes. J. appear to be closely aligned to the doctrine of "fiscal nullity" rejected as inappropriate in this country in Oakey Abattoir Pty. Limited v. Federal Commissioner of Taxation (1984) I15 A.T.R. 1059. Even more important. the different structure and content of the relevant United States legislation mean that pronouncements upon its construction can be of little assistance as a quide to the meaning or the local Act. In my opinion. in accordance with the decision and reasoning in Everett's Case, the deed of assignment was 17. erfrective in accordance with its tenor. Moreover. no independent basis for denying its erticacy has been demonstrated. I would resect the Commissioner's second argument accordingly. The Commissioner also put an alternative submission that the assignment should be ianored as ineffective because statutes imposing tamation should not be construed according to the "technicalities" of real or personal property; rather, they should be applied "in the light of the commercial and economic realities" (Everett s Case, supra. per Murphy. J.. at p.455). The suggestion is that the taxpayer had no realistic intention of divesting himself of his anterest in the profits of the partnership. There are a number of difficulties in accepting this submission. In the first place. the argument closely resembles, aif not adopts, the reasoning of Holmes. J. already dealt with. Further. the remarks ot Murphy, J. in Everett's Case were made in dissent and it must be assumed that hig Honour s views of the "reality" of the situation. at least in any. legal sense. were not shared by the Justices in the majority in that case. Since no sham is indicated and since the Commigsioner did not seek to ground his assessment on the application of s.260. the so-called "commercial and economic realities" are not easily distinguished from an attempt to introduce. by the back door 18. ag it were. a doctrine of economic equivalence. Whatever merit such an approach may have in the Commissioner's eves, on the existing state of authority binding on this Court. its introduction is simply not open. Finally. the Commissioner contends that s.102(1l) of the Act should be applied. I agree with Bowen, C.J. and Fisher. J.. for the reasons they give. that this provision can have no application here. I would dismiss the appeal with costs. | certify that this and the /7 preceding pages Gre a true copy of the reasons for judgment herein of The Hcnourable Mr Justice Beaumont. Ane er Associate Dated a eel. aoe 4.24 wt IN_THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G75 of 1984 ) ) ., GENERAL DIVISION ON_APPEAL FROM THE SUPREME: COURT OF NEW SOUTH WALES BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND: MICHAEL BERNARD GALLAND Respondent CORRIGENDUM a , Amendment to the Reasons for Judgment of Bowen C.J. and 'Fisher J. delivered 18 December 1984: DATE: Page 10 line 16 for "asessable" read "assessable", Page 10 lines 17 and 18 substitute 'fhat sub-section, "derived in that year or any part of it" by the taxpayer.' AIG D Ahh Associate to Sir Nigel Bowen Chief Judge 10 January 1985