High Court of Australia Windeyer J. Elder's Trustee & Executor Co Ltd v Commissioner of Taxation (Cth) [1961] HCA 1 ORDER Appeal allowed with costs. Assessment set aside. Cur. adv. vult. Windeyer J delivered the following written judgment:— 1961, Jan. 12 Windeyer J This is an appeal under s. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1959 from a decision of a Board of Review. The Board disallowed the taxpayers' objection to an assessment of income tax for the year ended 30th June 1956. The appellant taxpayers are the executors of the will of the late Geralda Mary Cook Satchell, who died on 4th October 1954. They were assessed on the basis that a sum of £9,111 was income received by them to which no beneficiary was presently entitled within the meaning of s. 99 of the Act. This sum represented part of the proceeds of the sale during the year ended 30th June 1956, of livestock, assets of a farming and grazing business that Mrs. Satchell and her husband, one of the appellants, had carried on in partnership during her lifetime. The Commissioner's case is that s. 36 (1) of the Act makes the sum in question part of the assessable income of the estate of Mrs. Satchell. That sub-section provides that: "36—(1) Subject to this section, where—(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale; (b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and (c) the disposal was not in the ordinary course of carrying on that business, the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value." That applies to a sale of the livestock of a grazing business not made in the ordinary course of carrying on that business, because by definition (s. 6) "trading stock" includes such livestock. Unlike s. 26 (a)—which enunciates a general concept of income (Premier Automatic Ticket Issuers Ltd v. Federal Commissioner of Taxation [1] )—s. 36 (1) makes certain receipts that would not on general principles be treated as income part of a taxpayer's assessable income for the purposes of the Act. It was introduced to overcome the effect of decisions that moneys received when trading stock of a business is realized on a winding-up putting an end to the business are received on capital and not on income account; and to get at and bring into charge whatever element of unrealized profit forms part of the value of stock-in-trade and livestock (see Resch v. Federal Commissioner of Taxation [2] ). But, being a departure from general concepts expressed in earlier decisions, it only applies in cases that fall squarely within it. One of the elements that must exist for it to apply here is that the livestock constituted the whole or part of the assets of a business which was carried on by the appellants. Their contention is that, although the livestock sold were assets of a business, they did not carry on that business. The case really turns on that, and it is a question of fact. However, the way in which the argument was presented to the Board and the reasons that the members of the Board gave for their decision show that that decision involved questions of law. An "appeal" within the meaning of s. 196 is therefore competent; and the whole matter is thus within the original jurisdiction of this Court. 1. (1933) 50 C.L.R. 268, at p. 297. 2. (1942) 66 C.L.R. 198, at p. 226. The partnership carried on by the late Mrs. Satchell and her husband was constituted by an agreement in writing. It is dated 4th January 1935. It, however, provided for the partnership to commence on 1st July 1934, to continue for one year and thereafter during the joint lives of the partners unless determined by notice or otherwise. In fact it continued until Mrs. Satchell's death. The agreement provided that the partnership property was to belong to the partners in equal shares; and they were to share the partnership income equally and to bear losses equally. The partnership property consisted of the live and dead stock and the plant and chattels connected with the business which was carried on in the south-east of South Australia on land belonging to Mrs. Satchell near Bordertown and also upon land near Penola belonging to her husband. None of the land became partnership property: and the agreement provided that either partner might dispose of his or her land, whether freehold or leasehold, and that should the sale of any such land result in the firm being unable to carry as many livestock as theretofore, then the surplus livestock should be sold and the proceeds divided equally. The agreement contained provisions dealing with the position that would arise if a partner died and by will left his or her interest in the partnership business to someone other than the surviving partner. The surviving partner was to have an option of purchasing the interest of the deceased partner at a valuation, otherwise the donee of the deceased partner's interest, or his or her assignee if acceptable, was to be admitted to partnership with the surviving partner. That, I think, summarizes the result that those clauses, which are in somewhat involved terms, were intended to secure. It is true that, in one sense, Mrs. Satchell by her will disposed of her interest to persons other than her husband; for she left him a life interest only: but the clauses in question could operate only if during the surviving partner's lifetime someone other than he or she succeeded to the whole of the deceased partner's share. So that, in the result, they have no operation; and upon Mrs. Satchell's death the partnership was simply dissolved. The case turns, therefore, not on the provisions of the partnership agreement, but on what after Mrs. Satchell's death was agreed upon between her executors and the surviving partner and what they in fact did about the business of the former partnership. In considering this the provisions of Mrs. Satchell's will are relevant. Turning then to the will. It was executed on 23rd November 1951. By it the testatrix appointed the present appellants Elder's Trustee and Executor Company Limited and her husband, Edward Jesse Satchell, as her executors and trustees. After two gifts of specific legacies the will continued:—"As to the remainder of my estate I direct my trustees to pay thereout my debts and funeral and testamentary expenses and to stand possessed of the balance then remaining (hereinafter referred to as my residuary estate) to permit my husband the said Edward Jesse Satchell to have the use and enjoyment thereof during his lifetime subject to the following obligations on the part of my said husband namely to his paying all rents rates taxes fire insurance premiums and other outgoings payable in respect thereof and observing and performing all covenants and conditions on the part of the lessee to be observed and performed in respect of any leasehold lands held by me and to his keeping all improvements on any freehold and leasehold lands held by me in good tenantable repair and condition and insured against loss or damage by fire and subject also to his keeping my livestock up to the same numbers and classes as nearly as may be as at my decease and my working plant in the like order and condition as at my decease (reasonable wear and tear excepted) and I declare that my trustee the said Elder's Trustee and Executor Company Limited shall not be bound to make any muster or take any inventory of the livestock or plant as the case may be nor to see to or enforce the performance of the said obligations on the part of my said husband or any of them and I also declare that my trustee the said Elder's Trustee and Executor Company Limited shall not be answerable for any loss or diminution which may be occasioned to my estate by reason of any matter or thing done or omitted to be done by my said husband during his use and enjoyment of my residuary estate but my trustee the said Elder's Trustee and Executor Company Limited shall be entitled to the fullest indemnity out of my estate in respect thereof". Subject to these trusts in favour of the husband of the testatrix for his life, the trustees were to realize the residuary estate and out of the proceeds of realization to make certain pecuniary gifts and hold the balance for the children of a nephew. The testatrix empowered the trustees at any time during the lifetime of her husband to realize her estate if so requested by him in writing, and to hold the proceeds upon the trusts declared of her unconverted residuary estate. And she empowered the trustees, pending realization, to continue to carry on any business or businesses in which she was engaged at her death whether solely or in conjunction with any other person or persons. And she gave them "the fullest powers and discretions as to the mode of conducting such business or businesses and otherwise in relation thereto as if they were absolute owners thereof". Mrs. Satchell had been in ill-health for some time before her death, and she and her husband had left the country to live in Glenelg. The country property was in the charge of a manager. Mr. Satchell controlled all the affairs of the partnership in the conduct of which his wife took little or no part. Within a few days of her death he saw Mr. H. Vincent, a trust officer of Elder's Trustee and Executor Company Limited, and a discussion took place about the administration of the estate. Both Satchell and Vincent gave evidence before the Board. The parties agreed that I should treat this evidence as if it had been given before me. Both witnesses also gave evidence before me. There are some differences between the four accounts of what took place. But, in my view, there are no serious discrepancies or departures. Such differences as there are occur, I think, because Satchell's recollection of the details of the conversation is somewhat less precise than his understanding of its practical result and because he was concerned more with business arrangements than with legal relationships. Vincent on the other hand seemed aware, at all events before me, of the legal implications of his statements. I have had an advantage over the Board in that, the witnesses having been recalled before me, some matters were made clearer than they had been. At the time of the first interview that Satchell had with Vincent, no one in the trustee company had more than a very general knowledge of the nature of the testatrix's estate. The company had some knowledge of what property Mrs. Satchell had had; but it did not know what liabilities there were. It had, however, good reason to believe the estate was solvent and of considerable value, as was the fact: it knew too that a main asset was the pastoral business in which Mrs. Satchell and her husband had been partners: and it knew the terms of her will. Satchell says that he suggested to Vincent that, as he had managed the business for a long time, he should carry it on, that Vincent agreed and said "do so for the time being until we have time to discuss it". There were further discussions later; and Vincent in his evidence agreed that Satchell, with the assent of the trustee company, was permitted to carry on the business without any direction or interference by the company. The only thing that the company required was that he should keep a separate bank account for the business; and one was opened for that purpose in November 1954. To it was transferred the balance to the credit of the old partnership bank account. This new account was in the name of Satchell; and he alone could operate upon it. The business affairs were thus kept separate from Satchell's personal affairs, for which he maintained another account. The arrangement under which Satchell conducted the business as if it were his own, using for that purpose the land that had belonged to his wife, continued for about nine months. He then became desirous of winding it up and accounting to his wife's estate for her share in the partnership assets. He proposed to continue in business solely on his own account on his land at Penola for a time. He made his wishes known to the trustee company; and on 15th August 1955 he wrote a letter, addressed to "The Trustees Estate of Mrs. G. M. C. Satchell", formally requesting them in accordance with the will to realize the testatrix's land both leasehold and freehold. Thereafter, and commencing apparently in October 1955 the land was sold in separate parcels. It was all sold by February 1956. The proceeds went into the estate account kept by the trustee company. The livestock and plant were also progressively realized. The greater part was disposed of at a clearing sale held in March 1956. The rest were sold separately later: some livestock were taken over by Satchell at a valuation for his property at Penola. The proceeds of the disposals of the stock and plant went into the bank account of the business. By April 1956 the realization of the whole undertaking was complete. In his own income tax returns Satchell treated the profits made during the period he was in control of the business as his income. This his legal advisers explained was on the basis that one-half the income of the business was his as the surviving partner entitled to an undivided half interest in the assets, and the other half of the income was his as the life tenant of his wife's residuary estate. On this basis his tax for the year ended 30th June 1955 was, it seems, assessed. But after the business had been realized the Income Tax Commissioner took another view. He treated the business as having been carried on after Mrs. Satchell's death by a new partnership consisting of Satchell as the surviving partner and the executors of his wife's estate. On this basis he prepared a partnership distribution statement in respect of the proceeds of realization bringing the estate's share of the proceeds into account as assessable income of the trustees. It is not necessary to analyse precisely how, on this basis, the Commissioner arrived at the sum in question, £9,111 as income of the estate. In support of the Commissioner's contention that the trustees had become members of a new partnership, reliance was placed on the power given them by the will to carry on the business of the testatrix. The argument emphasized two matters: First it was said that Satchell could not be regarded as in enjoyment of a life estate, because his life estate was in the residue of the testatrix's estate and that had not been ascertained until at the earliest January 1956. In April 1955 Satchell had paid £10,000 from the business account to the estate account with the trustee company to be applied towards testamentary expenses and duties. This was shown in the estate accounts as received "on account realisation of share in partnership of E. & G. Satchell": and in the trustees' distribution statement upon winding up this payment was taken into account. But this transaction does not, I think, really support the Commissioner's contention. It does not show that the estate was carrying on the business. It shows only that it had an interest in the assets and thus in the proceeds of the business; and that, as the business was being carried on upon land belonging to the estate, a convenient way in which to obtain money required to meet duties, without at that stage selling or mortgaging the land, was, by arrangement with Satchell, to use moneys standing to the credit of the business account. The second occurrence, to which the Commissioner rightly attaches importance, was that on 15th March 1955 a notice was given to the Commissioner purporting to be under s. 36A of the Act. It was signed by Satchell as surviving partner, the Public Officer of the Trustee Company, as trustee of Mrs. Satchell's will, and again by Satchell as "life tenant under the will of G. M. C. Satchell deceased." It read: "We, the undersigned, being the members of the late partnership of E. & G. Satchell, hereby give you notice pursuant to section 36A of the above Act that we have agreed that sub-section (2) of the said section shall apply in respect of all trading stock concerning which a change of ownership has occurred by reason of the dissolution of the said partnership in consequence of the death of Geralda Mary Cook Satchell, one of the partners thereof". It is not easy to say what, in the circumstances, is the effect of this document. Its language is contradictory. It asserts that the signatories are members "of the late partnership", although the trustee company was never a member of the late partnership. It goes on to assert that that partnership was dissolved by death—as in fact it was. Section 36A displaces the effect of the decision of this Court in Rose v. Federal Commissioner of Taxation, [1] . Here the circumstances brought s. 36A (1) into operation. A notice under s. 36A (2) could only be given if the property to which it referred, namely the trading stock of the partnership, was an asset of a business that was in fact carried on by Satchell and the executors of the estate of Mrs. Satchell, they being the persons by whom such property was owned after the change of ownership resulting from Mrs. Satchell's death. The notice thus supports the Commissioner's case under s. 36. Nevertheless, its language is ill-considered and it seems to have been given under a misapprehension. I do not think that in the peculiar circumstances of this case it should be treated as conclusive that the trustees of Mrs. Satchell's will had entered into a partnership with Satchell. 1. (1951) 84 C.L.R. 118. I turn therefore to the oral evidence on the matter. The Board inferred from the evidence as a whole and the testimony of Vincent in particular that the estate had become a partner in the business. But I do not think this was really the effect of what Vincent said. It is true that before the Board he spoke of Satchell being allowed by the trustee company to have "the complete running of the partnership arrangement" and of the bank account as opened in his name "to record all matters dealing with the operation of the partnership." But, when read in their context and with the aid of the further evidence given before me, these expressions referred to the business that had been conducted by Satchell and his wife in partnership, and not as the Board thought to a new partnership between Satchell and the trustees of Mrs. Satchell's estate. Satchell and the trustee company may not have been very clear in what capacity Satchell was in fact controlling the business. He commenced to do so as an interim arrangement pending a final decision as to the administration of the estate; and this interim arrangement seems to have simply gone on up to the commencement of realization. It seems to have been thought that he was let into possession by virtue of the life interest in his wife's residuary estate given him by her will, and because the trustee company was expressly exonerated by the will from responsibility for anything done or omitted by him during his enjoyment of that residuary estate. It was on this basis that his own income tax return was prepared and his tax was, I understand, assessed as if the whole of the profits of the business were directly his. But I do not think it is really correct to say that he was let into possession of the assets of the partnership business in the capacity of tenant for life. It is true that, subject to the claims of creditors of the testatrix and to the payment of the testamentary expenses and duties, he was entitled to have the whole income of the testatrix's estate, including its share of the profits of the business in which he and the testatrix had been partners. It was no doubt convenient to allow him, subject to a liability to account, to carry on the business pending the ascertainment and discharge of the duties and liabilities of the estate. But this was a matter of convenience. I agree with the view, which was accepted by the Board of Review, that, as the estate had not been fully administered and the residue ascertained until at the earliest January 1956 Satchell was not entitled to the income as life tenant. He was a life tenant of the residue and it had not been ascertained. During the period of administration the income of the assets of the testatrix, including her half share of the partnership property, was the income of the executors, not of the life tenant; and it should have been treated as such. Although there are some passages in Lord Sudeley v. Attorney-General [1] and some later authorities that taken out of their context can be pushed too far (See In re Cunliffe-Owen; Mountain v. Inland Revenue Commissioners [2] ), nevertheless there is no doubt of the general principle that, as stated by Starke J. in Federal Commissioner of Taxation v. Whiting [3] : "the beneficiaries are not entitled to obtain payment of any income from the executors and trustees until such time as the estate is cleared of debts and liabilities or at least cleared sufficiently to establish a present right in the beneficiaries to obtain payment of some ascertainable sum of income from the trustees in a due course of administration" [1] . But it does not really avail the Commissioner to show that the appellants put their case too high in so far as they contended that Satchell, and not the trustees, was to be regarded as having derived the estate's share of the profits from the carrying on of the business. It may well be that Mrs. Satchell's estate should have been assessed for the year 1955 in respect of its share of the ascertained profits of the business, as being income to which no beneficiary was then presently entitled, instead of Satchell having been assessed in respect of the whole of the profits. That, however, is beside the question here, which is not concerned with the distributable profits earned in the business before winding up, but with the proceeds of realization. 1. (1897) A.C. 11. 2. (1953) 1 Ch. 545. 3. (1943) 68 C.L.R. 199. 4. (1943) 68 C.L.R., at pp. 219, 220. It does not follow that because the appellants sought to make too much of the fact that the profits of the business were treated as if they belonged to Satchell that the Commissioner is entitled to succeed. The question is still, were the executors carrying on the business. There is, I think, no real ground for inferring, as the Board of Review did, that a new partnership came into existence. Whether or not a partnership exists depends upon the intention of the parties to be ascertained from all relevant circumstances (Badeley v. Consolidated Bank [2] ). It is of course, possible for an executor and trustee of a deceased partner who has power to carry on a partnership business, to become by agreement a member of a new partnership with a surviving partner, as, for example, in Newbarn's Syndicate v. The Inspector of Taxes [3] . The primary rule is, however, that upon dissolution the partnership is to be wound up. There was nothing in the partnership agreement here that, in the events which happened, displaced this rule. A surviving partner who carries on a partnership business after dissolution must account for the profits attributable to the share of a deceased partner up to the time of realization of the assets. Moreover, if a surviving partner carries on the business without any final settlement of accounts with the estate of the deceased partner and using the deceased's share of the partnership property, the representatives of the deceased partner may become entitled either to interest on the value of such share or to so much of the profits as are attributable to its use in the business: see Partnership Act 1891-1935 (S.A.), ss. 29 (2), 33, 39, 42 (1); Hugh Stevenson and Sons v. Aktiengesellschaft für Carton-Nagen-Industrie [4] ; Powell v. Powell [5] ; O'Connell v. Kennare [6] . It is appropriate to quote here two passages from the judgment of Romer J. in Manley v. Sartori [1] : "the rights of the deceased partner or his legal personal representatives are rights over all the assets of the partnership. He has an unascertained interest in every single asset of the partnership, and it is not right to regard him as being merely entitled to a particular sum of cash ascertained from the balance-sheet of the partnership as drawn up at the date of his death" [2] . And "where surviving partners continue to carry on the business, prima facie they are carrying it on by reason of their possession of the assets of the partnership; and the executors of the deceased partner are prima facie entitled to a share of the profits proportionate to his share in the assets of the partnership" [3] . But the representatives of a deceased partner who allow his assets to remain for a time in the business, and who thereby become entitled to a share of the profits of the business carried on by the surviving partner do not themselves become partners if they never interfere in the conduct of the business (Holme v. Hammond [4] ; Brown v. Fletcher [5] ). 1. (1888) 38 Ch. D. 238. 2. (1939) 22 Tax. Cas. 461. 3. (1918) A.C. 239, at p. 251. 4. (1932) 32 S.R. (N.S.W.) 407; 49 W.N. 113. 5. (1943) 60 W.N. (N.S.W.) 152. 6. (1927) 1 Ch. 157. 7. (1927) 1 Ch., at pp. 163, 164. 8. (1927) 1 Ch., at pp. 165, 166. 9. (1872) L.R. 7 Ex. 218. 10. (1884) 5 N.S.W. L.R. 393; 1 W.N. 66. It is in the light of these principles that the present case must be viewed. Satchell was permitted to continue the business pending a final decision as to realization and a settlement of accounts. The accounts of the business were kept in such a way that the share of the profits to which Mrs. Satchell's estate was entitled was ascertainable. But the fact that Mrs. Satchell's representatives were entitled to participate in the profits of the business carried on by the surviving partner does not mean that they were themselves carrying on that business so as to make s. 36 applicable to the proceeds of the realization when it was discontinued. They were, in my view, entitled to a share in the profits not because the estate and Satchell were carrying on business together, but because Satchell as surviving partner was carrying on the business using therein the testatrix's undivided share in the assets. I have not overlooked the alternative arguments advanced for the Commissioner; but I can deal with them briefly. The definition of "partnership", as including an association of persons in receipt of income jointly was referred to. But this case does not depend upon the meaning of the word "partnership" in the Act. The word is not used in s. 36. It was also suggested that s. 36 might be brought into operation by, as I understood the argument, treating the executors as carrying on a business in conjunction with a business carried on by Satchell, the assets of each business being the undivided shares in the assets of which Satchell and his wife had as partners been co-owners. But there was in fact one business. And, as the decision in Rose's Case [1] , makes clear, s. 36 is directed to a disposal of property, being an asset or assets of a business, as an entirety not to the disposal of an undivided fractional share in such property. Whether the notice purporting to be given under s. 36A (2) was, in the circumstances, ineffective and whether a liability therefore occurred under s. 36A (1) as at the date of Mrs. Satchell's death is beside the question that is before me on this appeal. 1. (1951) 84 C.L.R. 118. In my opinion no part of the proceeds of the realization of the land, plant and stock used in the business that up to the testatrix's death had been carried on by her and her husband in partnership was assessable income of her estate. The appeal will therefore be allowed, and the assessment set aside so that the Commissioner may, so far as it is now open to him to do so, make such new assessment or assessments as he may think proper in conformity with this decision.