FEDERAL COURT OF AUSTRALIA

Kelly v Commissioner of Taxation [2013] FCAFC 88

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The cross-appeal is dismissed.

3.    The appellant is to pay the respondent’s costs of the appeal.

4.    The cross-appellant is to pay the cross-respondent’s costs of the cross-appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

the court:

1    On 30 June 2009, Mr Sean Kelly was one of seven partners in a firm of solicitors in Townsville, Queensland. The partnership was known as the Boulton Cleary and Kern partnership (the BCK partnership).

2    Mr Kelly submitted his income tax return for the year ending 30 June 2009. On 14 May 2010, the Commissioner of Taxation (the Commissioner) issued a notice of assessment to Mr Kelly in which he assessed Mr Kelly’s income in the amount of $228,930. This assessment was made on the basis that Mr Kelly, as a partner of the firm, was liable to be assessed for a seventh of the income of the BCK partnership.

3    Mr Kelly objected to that assessment on the basis that the Commissioner had erroneously included in his assessable income, amounts which were derived by the BCK partnership but which had been assigned to two separate trusts. These trusts were the Boulton Cleary and Kern Partnership Trust (the BCK Partnership Trust) and the Sean Kelly BCK Holdings Trust.

4    Mr Kelly contended that the BCK Partnership Trust held a 20% interest in the BCK partnership and the Sean Kelly BCK Holdings Trust held a 7.857% interest in the BCK partnership. Mr Kelly contended that by failing to have regard to the interest held by each of these two trusts, the Commissioner erroneously included within his assessable income, the amount of $37,951 in relation to the interest in the BCK partnership held by the BCK Partnership Trust, and an amount of $114,328 in relation to the interest held by the Sean Kelly BCK Holdings Trust.

5    In his notice of objection, Mr Kelly relied upon a series of transactions commencing in 1999 and ending in 2006, in support of his contention that each of the two trusts held the interest in the BCK partnership which he claimed. Mr Kelly’s notice of objection relevantly read as follows:

Relevant facts

BCK Partnership Trust

18.    On 30 June 1999, the then trustees of the BCK Partnership Trust purchased a 20% interest in the BCK Partnership from Colin McFadzean for valuable consideration in an arm’s length transaction, pursuant to a Deed of Agreement dated 30 June 1999 that disclosed that those trustees to be contracting as purchasers in their capacities as trustees of the BCK Partnership Trust.

19.    On 25 June 2005, Keith Kern, Peter Logan, Paul Sterling, Jeffrey Guy, Sean Kelly, Mark Budd and Ian Conrad assigned to the then trustees of the BCK Partnership Trust in total a 30% interest in the BCK Partnership for a total consideration of $637,500.

20.    As a result, the 20% interest and the 30% interest in the BCK Partnership so purchased became property held on trust as provided for under the BCK Partnership Trust Deed and each has since continued to be held on trust subject to that Trust Deed.

21.    Income received by the BCK Partnership to the extent of the aforementioned 50% held by the trustees of the BCK Partnership Trust is income of the BCK Partnership Trust and, ultimately, its beneficiaries. To that extent, the income is not income of the Taxpayer personally.

Sean Kelly BCK Holdings Trust

22.    On 29 June 2006, the then trustees of the BCK Partnership Trust for valuable consideration assigned to Sean Kelly, to hold in his capacity as trustee of the Sean Kelly BCK Holdings Trust, a 4.734% interest in the BCK Partnership.

23.    On 29 June 2006 the Taxpayer declared himself trustee for the Sean Kelly BCK Holdings Trust of his 3.12% equitable interest in the BCK Partnership by means of an assignment of that interest to himself as trustee for valuable consideration.

Summary

24.    In summary, the following assignments have been made with the effect that the following entities (relevant to this Objection) hold the following equitable interests in the capital of the BCK Partnership and in the assets of the BCK Partnership:-

Sean Kelly:    3.571% share;

Sean Kelly atf the Sean Kelly BCK Holdings Trust:    7.857% share; and

BCK partners atf the BCK Partnership Trust:    20% share.

6    The Commissioner, by reason of the operation of s 14ZYA(3) of the Taxation Administration Act 1953 (Cth), disallowed the objection.

7    Mr Kelly appealed against the decision of the Commissioner by bringing an application in this Court.

8    The primary judge observed that the issues that arose on the appeal application were whether Mr Kelly had established that in the year of income ended 30 June 2009, the BCK Partnership Trust held a 20% interest in the BCK partnership and the Sean Kelly BCK Holdings Trust held a 7.857% interest.

9    Mr Kelly was partially successful in his appeal before the primary judge. More specifically, the primary judge found that the transaction in 1999 did not effectively assign a 20% interest in the BCK partnership to the BCK Partnership Trust. However, the primary judge found that the transactions in mid-2005 and mid-2006 resulted in an assignment of a 7.857 % interest in the BCK partnership to the Sean Kelly BCK Holdings Trust.

10    Mr Kelly also made an alternative contention before the primary judge to the effect that the interests in the BCK partnership held by the respective trusts arose by reason of two transactions which occurred in October 2008. This alternative contention had not been included in the notice of objection. The primary judge declined to give Mr Kelly leave to make this alternative contention. However, the primary judge found that, in any event, the alternative contention did not support Mr Kelly’s claim that the two trusts held the interests in the BCK partnership for which Mr Kelly contended.

11    Mr Kelly has appealed to this Court in respect of that part of the primary judge’s decision in which he was unsuccessful. The Commissioner has cross-appealed against that part of the primary judge’s decision in respect of which he was unsuccessful.

background

12    The composition of the BCK partnership changed during the period relevant to this case. Prior to 30 June 1999, the partners in the partnership were Messrs Keith Kern, Peter Logan, Paul Sterling, Jeffrey Guy and Reginald McFadzean. Mr McFadzean retired from the partnership on 30 June 1999.

13    On 1 July 2002, Mr Kelly, who had previously been a solicitor employed by the firm, became a partner. He became the fifth partner.

14    On 5 July 2004, Mr Mark Budd and Mr Ian Conrad became partners. There were then seven partners. In June 2007, Mr Kern retired from the partnership and he was replaced by Mr Paul Hick. On 15 October 2008, Mr Sterling retired from the partnership and on the same date Ms Julia Bligh was admitted to the partnership. It followed that during the financial year ending 30 June 2009, there were seven partners.

15    On 30 June 1999, Messrs Kern, Logan, Sterling and Guy, established the BCK Partnership Trust. They became the initial trustees of the trust. This trust is important because Mr Kelly, in para 20 and para 24 of his notice of objection, alleged that on 30 June 1999 the BCK Partnership Trust acquired a 20% interest in the BCK partnership, which it continued to hold at all relevant times thereafter, including during the financial year ending on 30 June 2009.

16    On 6 June 2006, Mr Kelly established his own trust called the Sean Kelly BCK Holdings Trust. This trust is a discretionary trust, and Mr Kelly is the trustee of the trust. This trust is important because Mr Kelly alleged that during the financial year ending 30 June 2009, this trust held a 7.857% interest in the BCK partnership. Also, on 6 June 2006, each of the other six partners in the BCK partnership also established a discretionary trust similar to that established by Mr Kelly. Like Mr Kelly’s trust, each trust bore the name of each of the partners (being Messrs Kern, Logan, Sterling, Guy, Budd and Conrad), followed by the words “BCK Holdings Trust”. On 22 May 2007, Mr Hick established the Paul Hick BCK Holdings trust. On 29 September 2008, Ms Bligh established the Julia Bligh BCK Holdings Trust.

17    As mentioned, Mr Kelly contended in his notice of objection that the extent to which his interest in the BCK partnership had been assigned to the BCK Partnership Trust and the Sean Kelly BCK Holdings Trust was the consequence of a series of four successive transactions.

18    The appeal to this Court by Mr Kelly is concerned with one of those transactions and the cross-appeal by the Commissioner is concerned with another of those transactions. We deal with each of those transactions below.

19    In ground 12 of his grounds of appeal, Mr Kelly also complained about the primary judge’s finding in respect of a separate issue relating to a superannuation deduction made by the Kelly Family Trust in respect of Mr Kelly and his wife, in the income year. A company, 351 Pty Ltd, of which Mr Kelly and his wife are directors, was the trustee of the Kelly Family Trust. We deal with that issue, after we have considered the matters arising in the appeal and cross-appeal which relate to the BCK partnership.

mr kelly’s appeal

20    Mr Kelly’s appeal in relation to the BCK partnership issues gives rise to the need to consider the transaction of 30 June 1999.

The transaction of 30 June 1999

21    Mr Kelly contended that by reason of the transaction that occurred on 30 June 1999, the BCK Partnership Trust acquired a 20% interest in the BCK partnership. On that day, the retiring partner, Mr McFadzean, entered into a deed referred to as the McFadzean Retirement Deed. Mr McFadzean’s last day as a partner of the BCK partnership as it was then comprised was 30 June 1999.

22    The primary judge observed that this part of the case stood or fell on the effectiveness of the McFadzean Retirement Deed in achieving the objective contended for by Mr Kelly. The primary judge observed that if the transaction did not have the effect for which Mr Kelly contended, his case failed so far as he alleged that as at 30 June 2009, the BCK Partnership Trust held a 20% interest in the BCK partnership, with the consequence that the extent to which his interest in the BCK partnership was held on trust was proportionately diminished.

23    The parties to the McFadzean Retirement Deed were Messrs Kern, Logan, Sterling and Guy as “trustees for the Bolton Cleary and Kern Partnership Trust” and described as the “the Purchasers”; Messrs Kern, Logan, Sterling and Guy in their personal capacities and described as the “the Remaining Partners”; Mr McFadzean described as the “the Vendor” and Marumba Developments Pty Ltd, being a company associated with Mr McFadzean, described as the “the company”.

24    The McFadzean Retirement Deed dealt at some length with the relationship between Mr McFadzean and the remaining partners. The deed relevantly provided:

1.    SETTLEMENT

The Vendor and the Company shall sell, transfer and assign their respective interests in the Partnership effective 30th June 1999 (hereinafter referred to as the “Date of Settlement”).

2.    CONSIDERATION

2.1    The amount payable to the Vendor and the Company for and in full satisfaction of their share and interest in the Partnership is the sum of ONE HUNDRED AND FORTY THOUSAND DOLLARS ($140,000.00) hereinafter referred to as the “Purchase Price”.

2.2    The Purchase Price will be paid to the Vendor on the 30th day of June 1999.

3.    APPORTIONMENT OF PURCHASE PRICE

The parties agree to apportion the Purchase Price as follows:

25    Also, cl 7 of the deed gave the purchasers a power to get in the assets of the partnership and to give receipts and discharges for debts. Further, the deed provided for mutual releases and a restraint of trade clause affecting Mr McFadzean.

26    The primary judge was not satisfied that the McFadzean Retirement Deed was effective to confer on the trustees of the BCK Partnership Trust, an ongoing 20% interest in the BCK partnership as reconstituted following the retirement of Mr McFadzean.

27    The primary judge said at [174] of his reasons for decision:

Prior to 30 June 1999, Mr McFadzean had, amongst other things, a chose in action in entitling him to share in the profits of the BCK partnership and the net assets on dissolution and winding up of the partnership. He could assign that chose in action or declare himself a trustee of the chose in action. In either case, he would remain the trustee of the chose in action. Plainly, Mr McFadzean was not doing either of these things when he retired because he was retiring from the partnership, not remaining a partner of it as a trustee.

28    The primary judge said that Mr McFadzean could, in a practical sense, on retirement, have sold his share in the BCK partnership to a new partner where all the existing partners agreed to the admission of a new partner. The primary judge referred to that as being a sale in a “practical sense” because the proper analysis would be that the existing partnership would have been dissolved and the retiring partner would have accepted a sum of money by way of an accord of satisfaction for his interest in the net assets of the BCK partnership. The primary judge went on to say that a new partnership would have been formed with the partners’ interests reconstituted on the basis that the new partner would have provided consideration to the continuing partners for new interests he or she may have obtained in the partnership. The primary judge found that Mr McFadzean had not sold his interest to a new partner.

29    The primary judge went on to find that it followed that if the BCK Partnership Trust was to have acquired a 20% interest in the BCK partnership as a result of a transaction on 30 June 1999, it would have to be because “a continuing partner assigned an interest to it, or declared himself a trustee of an interest”. However, the primary judge found that the McFadzean Retirement Deed did not have that effect.

30    The primary judge said that the most obvious observation to make about the McFadzean Retirement Deed was that it was not in the form of an assignment or declaration of trust by Messrs Kern, Logan, Sterling and Guy. Also, said the primary judge, there was no other evidence, which supported the contention that in entering the McFadzean Retirement Deed, Messrs, Kern, Logan, Sterling and Guy were individually declaring trusts or assigning interests in the continuing partnership. The primary judge referred to the fact that although duty was paid, it was not paid on the basis of individual assignments by each of the continuing partners to the BCK Partnership Trust.

31    Further, the primary judge observed that even if it were permissible to have regard to the evidence of the continuing partners as to what they thought they were doing in entering into the McFadzean Retirement Deed, the evidence would not assist Mr Kelly, because each of Messrs Kern, Logan and Guy gave evidence that the BCK Partnership Trust acquired its 20% interest from Mr McFadzean.

32    The primary judge also found that there was insufficient evidence for him to find, on the balance of probabilities, that the BCK Partnership Trust actually paid any amount in connection with the acquisition of Mr McFadzean’s interest pursuant to the McFadzean Retirement Deed. Rather, the evidence supported the conclusion that the payment was made by the BCK Secretarial Unit Trust. Therefore, said the primary judge, there was no basis upon which to apply equitable principles to give effect to the transaction in favour of the BCK Partnership Trust on the basis that equity would consider as done what ought to be done.

33    The contention advanced by Mr Kelly was that by reason of Mr McFadzean having assigned his interest in the BCK partnership, pursuant to the McFadzean Retirement Deed, to it, the BCK Partnership Trust had acquired an ongoing entitlement to 20% of the profits earned by the partners comprising the BCK partnership. Accordingly, said Mr Kelly, the primary judge had erred in failing so to find.

34    In our view, Mr Kelly’s contention fails to have regard to the nature of Mr McFadzean’s interest in the BCK partnership on 30 June 1999. Mr McFadzean was entitled to assign his partnership interest to a third party (Commissioner of Taxation v Everett (1980) 143 CLR 440 (Everett)). By reason of his partnership interest Mr McFadzean was entitled to a proportionate share of the net assets of the partnership on dissolution and also a proportionate share of the profits made by the partnership whilst he remained a partner. This temporal limitation upon the right to participate in the profits of the partnership as an incident of his partnership interest, is not controversial. At 454 in Everett, Barwick CJ, Stephen, Mason and Wilson JJ observed as follows:

The respondent’s entitlement under the partnership agreement was to a proportionate share of the partnership profits as disclosed by the partnership accounts. The relevant proportion of the partnership profits was payable to the respondent because he was a partner and the owner of a share in the partnership. The respondent was entitled before the assignment to his proportionate share of the partnership profits, however much or however little energy he devoted to the practice, so long as the partnership remained on foot. (Emphasis added.)

35    It follows that in taking an assignment of Mr McFadzean’s partnership interest, the BCK Partnership Trust was only acquiring a right to share in the partnership profits as were attributable to Mr McFadzean’s partnership interest for the period up to and including 30 June 1999, being the date upon which he ceased to be a partner. In practical terms, the BCK Partnership Trust acquired Mr McFadzean’s right to participate in the partnership assets on dissolution, and, perhaps, although this was not debated before us, Mr McFadzean’s proportional share of the profit insofar as the profit had not by then been distributed for the financial year ending 30 June 1999.

36    The purchase by the BCK Partnership Trust of Mr McFadzean’s partnership interest was not capable of giving the BCK Partnership Trust any greater right to participate in the BCK partnership profits than the rights which were incidental to Mr McFadzean’s interest as a partner. More specifically, the acquisition by the BCK Partnership Trust of Mr McFadzean’s partnership interest did not afford the BCK Partnership Trust an interest in any new partnership which may subsequently be formed by one or more of the former partners of Mr McFadzean.

37    Accordingly, the primary judge did not err in finding that the McFadzean Retirement Deed did not confer upon the BCK Partnership Trust a 20% interest in the partnership which was subsequently formed by Messrs Kern, Logan, Sterling and Guy.

38    Further, Mr Kelly contended that because the McFadzean Retirement Deed described one of the contracting parties, namely, “the Purchasers”, as Messrs Kern, Logan, Sterling and Guy “as trustees of the BCK Partnership Trust”, the deed was to be construed as a declaration of trust in favour of the BCK Partnership Trust by each of those persons of their individual interests in the partnership to be formed after the retirement of Mr McFadzean.

39    We do not accept that contention. The McFadzean Retirement Deed describes the trustees of the BCK Partnership Trust as having entered into the deed as “the Purchasers” of Mr McFadzean’s partnership interest. This description accurately describes the purpose of the partners, in their capacity as trustees, in entering into the deed. In doing so, they acquired, as trustees for the BCK Partnership Trust, an interest of some value. As the primary judge held, there was no foundation upon which to treat the purpose for which Messrs Kern, Logan, Sterling and Guy, acting as trustees for the BCK Partnership Trust, entered into the deed, other than as they described it themselves, namely, as the purchasers of Mr McFadzean’s partnership interest.

40    Accordingly, save for ground 12 of his grounds of appeal, which we deal with below, we dismiss Mr Kelly’s appeal.

the commissioner’s cross-appeal

41    The Commissioner’s cross-appeal gives rise to the need to consider the transaction of 29 June 2005.

The transaction of 29 June 2005

42    By this transaction, Mr Kelly contended that the partners sold or assigned interests totalling 30% in the BCK partnership to the BCK Partnership Trust.

43    The primary judge found that there was a transaction which occurred on 29 June 2005 whereby the then existing partners in the BCK partnership assigned a 30% interest in the BCK partnership to the BCK Partnership Trust. This is one of the transactions which Mr Kelly relied upon as ultimately leading to the position whereby he held 7.857% of his partnership interest on trust for the Sean Kelly BCK Holdings Trust.

44    It is the findings of the primary judge in relation to this transaction which are the subject of the Commissioner’s cross-appeal.

45    The primary judge made the following findings.

46    By a letter dated 10 June 2005, the partners of the BCK partnership wrote to the Law Society of Queensland advising that they were proposing a transaction which would result in the BCK Partnership Trust holding approximately 50% of the total partnership interest. Subsequently, by a letter, dated 16 June 2005, the partners wrote to the Law Society, seeking approval for the BCK Partnership Trust to hold up to a 99% interest in the BCK partnership or if the Law Society was not comfortable with the trust holding a controlling interest, then a 49% interest in the partnership. The letter asked that the matter be considered at the Law Society’s meeting of 23 June 2005 “so that the new structure can be put in place by 30 June 2005”.

47    The Law Society granted approval for the application at its meeting on 23 June 2005.

48    The BCK partnership borrowed $637,500 from the National Australia Bank. The partnership records show that this money was advanced by the BCK partnership to each of the partners in proportion to the interests held by each of the partners in the BCK partnership. Each of the partners then, in turn, advanced those monies to their respective family trusts, which then advanced the monies to the trustees of the BCK Finance Trust. The BCK Finance Trust then advanced the sum of $637,500 to the BCK Partnership Trust. The BCK Partnership Trust then used the funds to pay each of the partners for their respective portion of the 30% interest in the BCK partnership which was being transferred to the BCK Partnership Trust. Each of the partners then repaid their respective loans which had been made to him, to the BCK partnership. The BCK partnership then repaid the National Australia Bank the loan funds of $637,500. This series of transactions occurred in one day, namely, 29 June 2005.

49    There was no sale agreement or assignment agreement between Mr Kelly or any of the other parties, on the one hand, and the BCK Partnership Trust, on the other. There were, also, no minutes of a partners’ meeting or trustees’ meeting where the sale or assignment of each of the partnership interests to the BCK Partnership Trust was authorised.

50    There was an assessment notice issued under the Duties Act 2001 (Qld) which shows that there was a transfer of dutiable property for a consideration of $637,500. The parties to the assessment notice were said to be “K Kern, P Logan and others” on the one part and “K Kern, P Logan and others” on the other part. The assessment notice refers to the date of the transaction as 28 September 2005. The primary judge observed that neither Mr Kelly nor any of the witnesses he called, was able to explain why that date appeared on the assessment notice if the transaction occurred in June 2005.

51    The primary judge observed that Mr Kelly and his witnesses were cross-examined about this and that during his cross-examination Mr Kelly frankly admitted that there were a “lot of errors and inconsistencies in the documents”. However, the primary judge went on to say that despite that fact, he accepted Mr Kelly’s evidence as truthful.

52    The primary judge stated at [112] of his reasons for decision:

The partners, as partners and as trustees, agreed to the transfer of a 30% interest in the BCK Partnership to the BCK Partnership Trust in June 2005 and a transaction was carried out in accordance with the eight steps (previously referred to) in late June, or by no later than late September 2005. The National Bank statements suggest that the transaction was carried out on 29 June 2005. With some hesitation, I find that the transaction was effected on 29 June 2005.

53    Later at [119], the primary judge stated:

The documentation does not identify particular interests of individual partners being transferred, although the amounts paid to particular partners are identified (an amount of $112,500 to each of Messrs Kern, Loan (sic), Sterling, Guy and Kelly and an amount of $37,500 to each of Messrs Budd and Conrad) and one can extrapolate percentages from those figures (5.295% and 1.773% respectively).

54    The primary judge rejected the Commissioner’s contention that there had not been an assignment by each of the partners of a portion of their interest in the BCK partnership to the BCK Partnership Trust. The primary judge said that there were two matters that were clear from the objective evidence, namely, that the partners had intended to transfer a total 30% interest in the BCK partnership to the BCK Partnership Trust in June 2005 and that consideration had been paid by the partnership trust. In further response to the Commissioner’s contention, the primary judge also observed at [192]:

Had the BCK Partnership Trust brought a suit against the partners in 2005 seeking to enforce the transaction, I think any difficulty with the identification of the subject matter of the assignment would have been overcome, bearing in mind that there was consideration for the transaction, by the Court inferring that each partner assigned 30% of his individual interest, or by extrapolating from the total purchase price and the consideration paid to each partner as revealed in the internal records of the BCK partnership group the relevant interests transferred (see [119] above).

55    The primary judge also rejected the Commissioner’s argument that there had not been compliance with the requirement for writing under s 11(1)(c) of the Property Law Act 1974 (Qld). The primary judge said that, on the basis that a court would overcome any difficulty in identifying the subject-matter of the assignment in the manner mentioned, the requirement of writing under s 11(1)(c) of the Property Law Act would be satisfied by the statements made in the affidavits filed in the preceding by Mr Kelly and the other witnesses called by him.

56    Section 11(1)(c) of the Property Law Act provides, relevantly, that an assignment of an equitable interest “must be manifested and proved by some writing signed by the person disposing of the same, or by the person’s agent lawfully authorised in writing, or by will”.

57    Earlier in his reasons for decision, the primary judge had observed that under s 11(1)(c), the assignment or declaration of trust itself need not be the subject of writing to satisfy the writing requirement. The writing should be signed by the party assigning the interest but the writing did not need to be contemporaneous with the assignment. The date of the writing was immaterial and a statement in an affidavit was sufficient writing for the purposes of this section. The primary judge referred to the decision of Secretary, Department of Social Security v James (1990) 95 ALR 615 at 622.

58    On the cross-appeal, the Commissioner contended, as he had contended before the primary judge, that the documents, and the evidence given, in relation to this transaction were so unsatisfactory that the primary judge could not have been satisfied that the assignment alleged by Mr Kelly occurred in late June 2005.

59    Further, the Commissioner contended, as he had contended before the primary judge, that the alleged assignment by Mr Kelly of his partnership interest, was not effective because there were no assignments by each of the individual partners of a particular interest which each held. Rather, said the Commissioner, there had been an ineffective “collective” assignment of a 30% interest.

60    In our view, it was open to the primary judge to find that Mr Kelly assigned a portion of his partnership interest to the BCK Partnership Trust on 29 June 2005. We agree with the primary judge that there was objective evidence which supported this finding. That evidence comprised the entries in the general ledger of the BCK partnership, the entries in the records of the National Australia Bank and the assessment form which was lodged under the Duties Act. These objective acts demonstrated an intention to transfer a total of 30% interest in the BCK partnership and the fact that the intention was effected. Further, the consideration provided by the BCK Partnership Trust and received by Mr Kelly is recorded in the BCK partnership general ledger.

61    It is the case that not all the documentary evidence points in the same direction on the question of when the transfer of the respective interests by the partners was effected. However, the primary judge was aware of this circumstance, and, in our view, correctly found that when the evidence was viewed as a whole, there was objective evidence which supported a finding that the partners intended to, and did, effect a transfer of a total 30% interest to the BCK Partnership Trust.

62    We agree with the primary judge that were the BCK Partnership Trust to have brought a suit against each of the partners seeking to enforce the transaction, the evidence referred to by the primary judge would have provided a sufficient basis for a court to infer that each of the then current partners of the BCK partnership assigned a proportion of his partnership interest; and that the extent of the portion assigned could be extrapolated from the total price and the consideration paid to each partner, as revealed in the BCK partnership general ledger.

63    As to the Commissioner’s contention that there was not compliance with s 11(1)(c) of the Property Law Act, there is, for reasons mentioned above, an element of unreality associated with this question. Ultimately, in the hearing, the point was not strongly pressed by the Commissioner.

64    Mr Kelly, of course, does not seek to contend that the portion of his partnership interest which was the subject of the 2005 transaction is not affected by a trust in favour of the BCK Partnership Trust. Accordingly, the reference by the primary judge to Mr Kelly’s affidavit as constituting sufficient evidence in writing of the disposition of a portion of his partnership interest to the BCK Partnership Trust is presumably to be construed as referring to evidence that would be available to the BCK Partnership Trust in any hypothetical dispute between it and Mr Kelly wherein Mr Kelly seeks to deny that portion of his partnership interest is bound by a trust in favour of the BCK Partnership Trust.

65    In any event, in any such hypothetical controversy between Mr Kelly and the BCK Partnership Trust, given Mr Kelly’s strongly asserted position that he has assigned a portion of his partnership interest to the BCK Partnership Trust for consideration, Mr Kelly would not be able to rely upon the statutory provision to deny the effectiveness of the assignment of his interest, on the principle that the Statute of Frauds 1677 (Imp) (or its derivatives, of which s 11(1)(c) of the Property Law Act is one) cannot be used as a cloak for fraud (Rochefoucauld v Boustad [1897] 1 Ch 196).

66    In our view, the cross-appeal should be dismissed.

the transaction of 15 october 2008

67    Mr Kelly also advanced an argument before the primary judge that the equitable interests which he said were held by the respective trusts arose by reason of his entry into the Sterling Retirement Deed and the Bligh Nomination Deed.

68    On 15 October 2008, Mr Sterling on his own behalf and as trustee for the Paul Sterling BCK Holdings Trust (described as the “Retiring Partners”) entered into a deed of retirement with Messrs Logan, Guy, Kelly, Budd, Conrad and Hick in their personal capacities and in their capacities as trustee of their respective holdings trusts. The deed describes them as the “Continuing Partners”. Also included within that definition is: “The Boulton, Cleary and Kern Partnership Trust”. The deed is also executed by Messrs Logan, Guy, Kelly, Budd, Conrad and Hick in their own capacities, as trustee for their respective holdings trusts, and “for and on behalf of” the BCK Partnership Trust.

69    The primary judge referred to this deed as the “Sterling Retirement Deed”. The deed provided for the Retiring Partners to convey or transfer to nominees of the Continuing Partners all their right, title and interest in the firm, the firm entities and the business carried on by the firm and the firm entities.

70    The Continuing Partners agreed to pay the Retiring Partners a total of $450,000, being $187,500 to Mr Sterling and $262,500 to the Paul Sterling BCK Holdings Trust. It is of significance to note that the deed does not recognise that any portion of Mr Sterling’s partnership interest is held by him on trust for the BCK Partnership Trust.

71    Ms Bligh was admitted to the BCK partnership on 15 October 2008. As mentioned, Ms Bligh had by then already established a holdings trust.

72    The primary judge found that Ms Bligh’s admission to the partnership was governed by a Deed of Nomination dated 15 October 2008. The primary judge referred to this as the “Bligh Nomination Deed”. The deed was executed by Messrs Logan, Guy, Kelly, Budd, Conrad and Hick, in their own capacities, in their capacities as trustees of their respective holdings trusts, and “for and on behalf of” the BCK Partnership Trust. The deed refers to them in these various capacities as the “Continuing Partners”. Ms Bligh entered into the deed in her own capacity and her capacity as trustee for the Julie Bligh BCK Holdings Trust.

73    The document recited that Ms Bligh was to be the nominee of the Continuing Partners for the purposes of directing to whom Mr Sterling, in his own right and as trustee of his holdings trust, should transfer their respective interests.

74    The Bligh Nomination Deed provided:

A nomination

The Continuing Partners hereby nominate the Acquiring Partners to acquire the interest in the Partnership of the Retiring Partners pursuant to the Deed, as follows:

Julie Anita Bligh shall acquire the 4.762% interest of Paul David Sterling in the Partnership, as provided for in the Deed; and

Julie Anita Bligh as trustee for the Julie Blight BCK Holdings Trust is to acquire the 6.667% interest of Paul David Sterling as Trustee for the Paul Sterling BCK Holdings Trust in the Partnership, as provided for in the Deed.

Acceptance of nomination

Julie Anita Bligh, in her personal capacity and in her capacity as trustee for the Julie Bligh BCK Holdings Trust, as applicable, hereby accepts the nomination provided for herein and hereby agrees to acquire the said interest in the Partnership of the Retiring Partners for a total sum of $350,000.00.

75    Mr Kelly argued before the primary judge that by entering into these two deeds, Mr Kelly had declared a trust over a portion of his BCK partnership interest in favour of the BCK Partnership Trust.

76    The primary judge observed that Mr Kelly’s notice of objection had contained no reference to the Sterling Retirement Deed or to the Bligh Nomination Deed and that the Commissioner had objected to the raising of the new argument by Mr Kelly on the basis of s 14ZZO(a) of the Taxation Administration Act (Cth).

77    That section provides as follows:

The appellant is, unless the Court orders otherwise, limited to the ground stated in the taxation objection to which the decision relates.

78    The primary judge found that Mr Kelly had not applied for leave to rely upon his new argument, and that no explanation was provided by him as to why the matter was not raised in the notice of objection.

79    Further, the primary judge said that neither Mr Kelly nor any of the other witnesses said anything in their affidavits or oral evidence about creating trusts or engaging in equitable assignments in October 2008. In fact, the primary judge said that, to the contrary, the witnesses had said they did not create interests after a date well before October 2008. The primary judge said that if leave was required to raise the new argument, he would refuse it.

80    The primary judge, however, went on to find that, in any event, the deeds relied upon did not constitute the declaration of trust contended for by Mr Kelly.

81    The primary judge at [167]-[168] of his reasons for decision, observed as follows:

167    Mr Kelly fails to establish a clear intention to create trusts in October 2008. He fails to establish certainty of subject matter with respect to the alleged trusts (see Mowbray, J, Lewin on Trusts, (Sweet & Maxwell, 18th ed, 2008) [3-05], [3-06]). There is no express declaration of trust by Mr Kelly in the Sterling Retirement Deed or Bligh Nomination Deed, nor any statement from which such a declaration may be inferred. There is nothing in either document identifying, directly or indirectly, the interests which were the subject of the alleged trusts. If one goes beyond the deeds, there are no contemporaneous documents which support the new argument. There are no duty forms because nobody, other than Ms Bligh, considered that they were dealing with their interests in the manner now suggested.

168    Even if it is possible to consider the partners’ evidence as to their intentions, that evidence is directly against the propositions comprising the new argument.

82    Mr Kelly contended that it was unnecessary for him to obtain the leave of the Court to make the contention founded on the 2008 deeds before the primary judge. He said that the contention was inherent in his claim in the notice of objection that part of his partnership interest was the subject of trusts and that by virtue of s 96 of the Income Tax Assessment Act 1936 (Cth) (the ITAA36) he was not liable to pay tax on the income of the trust estates. Mr Kelly relied strongly on the following observations made by the Full Court in Cajkusic v Commissioner of Taxation (2006) 155 FCR 430 at 435 (Cajkusic):

In our view, the applicants’ notices of objection lodged against the amended assessments for the year ended 30 June 1998, in particular the express reference in [(5)] to s 97 of the 1936 Act, is sufficiently explicit to direct the attention of the respondent to the fact that his reliance on s 97 is considered to be erroneous, and is put in issue. It is not necessary, in our view, that the component arguments under s 97 of the 1936 Act be articulated at this stage. In this Court, if not in the Tribunal, the medium for that function comes later in the form of the respondent’s appeal statement (O 52B, r 5 of the Federal Court Rules 1979 (Cth)) and the applicant’s statement of facts, issues and contentions in response thereto.

83    Further, Mr Kelly contended that the primary judge erred in determining that the October 2008 deeds were not to be construed as a declaration of trust by Mr Kelly in respect of portion of his partnership interest. Mr Kelly said that the primary judge had ignored the fact that one of the capacities in which Mr Kelly had entered into each of the deeds was “for and on behalf of the BCK Partnership Trust”.

84    It is unnecessary for us to determine whether Mr Kelly required leave to advance his contention based on the October 2008 deeds, because, like the primary judge, we are of the view that the argument should be dismissed. However, we would observe, in passing, that there appear to be significant differences between the circumstances of this case and that in Cajkusic.

85    In our view, the October 2008 deeds do not demonstrate any intention on the part of Mr Kelly or any of the other partners to create any trust in respect of any portion of their partnership interest in favour of the BCK Partnership Trust.

86    Indeed, the Sterling Retirement Deed does not record any recognition by Mr Sterling that any part of his partnership interest is held by him on trust for the BCK Partnership Trust. Likewise, there is no recognition in the Deed of Nomination that Ms Bligh holds any part, or will hold any part, of her partnership interest on trust for the BCK Partnership Trust.

87    Insofar as there is a reference to the BCK Partnership Trust in each of the deeds, it is a passive reference. If anything, the structure and content of the deeds reflect a collective (but mistaken) belief that the BCK Partnership Trust held an independent interest in the BCK partnership. This would be consistent with the oral evidence which was given by some of the partners that the interest in the BCK partnership held by the BCK Partnership Trust was the interest derived from the transfer of the 20% McFadzean partnership interest on 30 June 1999. This is also consistent with the contentions made in Mr Kelly’s notice of objection and with the fact that neither Mr Sterling nor Ms Bligh recognised that any portion of their respective partnership interest was held or was to be held by them on trust for the BCK Partnership Trust. In our view, the primary judge did not err in the findings he made at [167]-[168] of his reasons for decision (see [81] above).

88    Accordingly, even if Mr Kelly did not require leave to advance this argument, we would dismiss this ground of Mr Kelly’s appeal.

the superannuation issue

89    As mentioned, a company, 351 Pty Ltd was trustee of the Kelly Family Trust (the Family Trust). Its directors were Mr Kelly and his wife. Mr Kelly is the sole shareholder in the company.

90    There was a distribution to Mr Kelly from the Family Trust for the year of income in issue of $50,748. A similar amount was distributed to his wife. The Family Trust had earlier received a distribution of $203,027 from the Sean Kelly BCK Holdings Trust, but deducted amounts, including an amount for superannuation of $100,000, before making the distributions.

91    The Family Trust did not trade or carry on business and it did not have any employees or pay any wages. The expenses of the Family Trust for the year of income in issue were accountancy fees of $1,000, bank fees of $332 and superannuation of $100,000.

92    The superannuation deduction related to Mr Kelly and his wife and, according to him, was made on the basis that they were directors of 351 Pty Ltd and did everything for the Family Trust.

93    The primary judge concluded that there was no evidence that Mr Kelly and his wife were entitled to payment for any of the duties they performed as directors of 351 Pty Ltd, and accordingly, were not “employees” of the company for the purposes of s 290-70 of the Income Tax Assessment Act 1997 (Cth) (the ITAA97) because they did not fall within the expanded definition of “employee” in s 12(2) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the SGAA). It followed, as the primary judge found, that the superannuation deduction was not an allowable deduction under s 290-60 of the ITAA97. The result of the disallowance of the deduction is that Mr Kelly’s assessable income under s 97 of the ITAA36 was increased by the amount corresponding to the superannuation amount claimed in respect to him.

94    Ground 12 of the appeal is to the effect that the primary judge erred in concluding that the superannuation deduction claimed by the Family Trust was not an allowable deduction under the relevant provisions of the ITAA97 in that the primary judge failed to:

12.1    construe “entitlement to payment” in s 12(2) of the Superannuation Guarantee (Administration) Act 1992 (“the SGA Act”) as including actual payment;

12.2    conclude that the appellant and his wife were each an “employee” for the purposes of s 290-60 of the 1997 Act, within the expanded meaning of “employee” in s 12(2) of the SGA Act; and

12.3    construe and apply s 290-60 and s 290-70 of the 1997 Act in a manner consistent with the operation of s 95 of the 1936 Act.

95    Section 12(2) of the SGAA provides:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate. (Emphasis added.)

Section 12(2) of the SGAA applies for the purposes of s 290-60 pursuant to s 290-65 of the ITAA97.

96    Mr Kelly submitted that the primary judge misconstrued the section by wrongly focusing only on the phrase “entitled to payment” and requiring, for it to be satisfied, that the body corporate be under an antecedent obligation to pay.

97    Mr Kelly contended that the provisions in the SGAA are concerned with charging employers by reference to the “salary or wages” they in fact pay. Under s 11(1)(b) of the SGAA, “salary or wages” is defined to include:

(b)    payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate.

98    Accordingly, Mr Kelly submitted that, having regard to the relevant statutory context, the question posed by s 12(2) of the SGAA is whether, in respect of an actual payment made to a person, the person was paid for the performance of certain duties, or whether the payment was made for some other purpose. The section, he argues, does not pose the theoretical question of whether the employer was under an antecedent legal obligation to pay due to a formal resolution or an antecedent contractual obligation as found by the primary judge.

99    Put another way, the question, as Mr Kelly characterised it, in respect of any given payment is “What was that payment for?” If it was for the performance of duties, then the person is, in respect of that payment, an employee. If it was for something else, he or she is not. This construction is said to be preferred because it best achieves the purpose of the provisions and because it avoids two irrational and capricious outcomes, being (i) that liability depends on whether a body corporate puts in place formal resolutions before making a payment and (ii) that liability depends on whether the services are performed before or after payment.

100    Mr Kelly’s evidence was that the superannuation payments were made by 351 Pty Ltd, as trustee, for the duties that Mr Kelly and Mrs Kelly performed as directors of the company, as trustee for the benefit of the Family Trust. He submitted that the company, as trustee, was empowered to make them under the trust deed of the Family Trust (the trust deed) and thus he and his wife were entitled to them for what they did, and not for something else.

101    Mr Kelly then submitted that even if the primary judge was correct to focus on whether the trustee had an antecedent obligation to pay Mr Kelly and Mrs Kelly, the same result follows for two reasons.

102    First, he submitted that the primary judge failed to distinguish between what are two different entities for taxation purposes, being the trustee company and the Family Trust as a notional taxpayer under s 95 of the ITAA36. Section 960-100 of the ITAA97 relevantly provides:

(1)    Entity means any of the following:

…

(b)    a body corporate;

…

(f)    a trust;

…

(4)    If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.

Example: A provision that refers to a company does not cover a company in a capacity as trustee, unless it also refers to a trustee. (Original emphasis.)

103    As to this, Mr Kelly contended that the primary judge wrongly considered the position from a Corporations Act 2001 (Cth) (the Corporations Act) perspective, rather than a trust law perspective. He then makes the following submissions. The payments were trust expenses, not company expenses. That is, Mr Kelly and Mrs Kelly were not working to earn fees for the trustee company in its own right, but working in respect of the Family Trust’s affairs. Whether the trustee company was empowered to pay them as a trust expense was a matter for the trust deed, not its own constitution. It is the trust deed that entitled them to keep the benefit of the payments as against the beneficiaries.

104    Mr Kelly submitted that equity looks to substance, not form, and no formal resolution was required for payment to be effective citing the observations of Gummow J in Federal Commissioner of Taxation v Vegners (1989) 20 ATR 1645 at 1650:

Nor, in my view, was it essential for the effective exercise of the power contained in para (a) of cl 2 of the trust deed that a payment or application of the income of the trust fund be preceded by some formal resolution on the part of the company as trustee. In my view, the effect of the resolutions passed at the end of each financial year was confirmatory rather than dispositive. Further, in my view, the making of each payment itself involved the exercise by the company of a discretion as trustee within the meaning of s 101 of the Act.

105    Secondly, Mr Kelly submitted that in a dispute between payer and payee, the law recognises the absurdity of drawing a distinction between a prepayment or a payment in exchange for goods or services and an antecedent entitlement to payment that is then discharged by payment. It treats the payment as being preceded by an antecedent entitlement. He further submits that as a matter of law, he and Mrs Kelly are to be treated as having been entitled to their payments by way of superannuation immediately before payment. Those payments, he contended, were made pursuant to powers under the trust deed and he and Mrs Kelly are entitled to retain the benefit of them.

106    Accordingly, as Mr Kelly in conclusion submitted, the primary judge ought to have found that he and Mrs Kelly were each an “employee” for the purposes of s 290-60 of the ITAA97 by virtue of the expanded definition of “employee” in s 12(2) of the SGAA which applies for the purposes of s 290-60 pursuant to s 290-65 of the ITAA97.

107    We do not accept these submissions.

108    Mr Kelly acted only in his capacity as a director of 351 Pty Ltd. There were no employees of the Family Trust.

109    Section 290-60 of the ITAA97 sets out the requirements for an employer to be entitled to a deduction for an expense they incur, when the employer makes a superannuation contribution for an “employee”, to a superannuation fund.

110    As we have identified earlier, s 290-65 of the ITAA97 extends the definition of the term “employee”, beyond the term’s common law meaning, by reference to a person that satisfies relevantly, s 12 of the SGAA.

111    Contrary to Mr Kelly’s submission, the mere fact of an actual payment does not, of itself, necessarily mean that there was an “entitlement to payment” for the purposes of s 12(2).

112    As s 12(2) of the SGAA relevantly provides, a director of a body corporate will be deemed to be an employee, when that director is “entitled to payment” for the performance of duties as a member of the executive body of the body corporate.

113    Mr Kelly acted as a director of 351 Pty Ltd, and not as an employee. Accordingly, his entitlement to payment was governed by the constitution of 351 Pty Ltd, and in particular, cl 26.1, which provides that the remuneration of the directors shall be such sums (if any) as shall from time to time be voted to them by resolution of the company in general meeting. 351 Pty Ltd’s constitution reflects s 202A(1) of the replaceable rules in the Corporations Act.

114    The common law has long considered that a director, as a fiduciary, is not entitled to remuneration, unless and until authorised “by the instrument which regulates the company or by the shareholders at a properly convened meeting” (In re George Newman & Co [1895] 1 Ch 674 at 686; Hutton v West Cork Railway Company (1883) 23 Ch D 654 at 672 per Bowen LJ). Further, the constitution of a company operates as a contract between the director and the company (s 140 of the Corporations Act). It was by reference to 351 Pty Ltd’s constitution, that the primary judge, correctly considered, at [27], whether Mr Kelly, as a director of the company, was entitled to payment: Kelly v Commissioner of Taxation (No 2) [2012] FCA 689 (Kelly (No 2)).

115    The primary judge correctly found, at [27], that, absent a company resolution, there was no entitlement to payment. It is not to the point whether payments were actually made or not made. The issue is one of entitlement to payment whether paid or not.

116    Further, the existence of the contract, as the primary judge found, ruled out any possibility of a quantum meruit claim by a director (see for example, Pavey & Matthews Proprietary Limited v Paul (1987) 162 CLR 221 at 256 per Deane J (Mason and Wilson JJ agreeing at 227)).

117    In the absence of Mr Kelly’s entitlement to the payment, the deeming effect of s 12(2) of the SGAA was not enlivened.

118    Mr Kelly’s submission that it was wrong for the primary judge to focus on the term “entitlement to payment” should be rejected. The text of s 12(2) of the SGAA is clear. By requiring the director to be entitled to payment, necessarily implies that there be an obligation, arising from a resolution of 351 Pty Ltd. That obligation to pay is the corollary to a director’s entitlement to payment.

119    A director’s entitlement to remuneration, arising upon compliance with the constitution of a company, is neither irrational nor capricious. Rather, it is the contractual provision by which a director’s entitlement to remuneration, if any, is created.

120    The definition of salary or wages, pursuant to s 11(1)(b) of the SGAA, does not assist in the determination of whether a director is an employee. As the Commissioner submitted, even if its operation was considered, the reference in s 11(1)(b) of the SGAA to a payment of wages, logically occurs after that person is an employee, and in the circumstance of a director, an entitlement to payment would have already arisen.

121    Mr Kelly points to the fact that under the trust deed, the trustee is given power to pay superannuation to directors in the case of a corporate trustee. As the primary judge noted, at [28] of Kelly (No 2), correctly in our opinion, this is no answer to the question whether the provisions of s 12(2) are engaged. Rather, as the primary judge observed, it is the constitution of 351 Pty Ltd which is relevant and decisive on this question. The power under the trust deed does not operate so as to entitle Mr Kelly and his wife, as directors of 351 Pty Ltd, to payments from the company such as to render them employees within the provisions of s 12(2) of the SGAA. That 351 Pty Ltd, as trustee, was empowered under the trust deed to make superannuation payments to its directors is quite distinct from an entitlement of a director to receive payment from the company for the performance of duties as a director. 351 Pty Ltd, whilst empowered to deduct superannuation contributions in its role as trustee of the Family Trust, is nonetheless, under its own constitution, required to pass a resolution in general meeting that its directors be remunerated in a particular sum for performing their duties as directors. This was never done and thus no entitlement to remuneration or payment arose.

122    Irrespective of whether the trust deed authorises the Family Trust to make such payments, the requirements in this case for an income tax deduction, pursuant to s 290-60 and s 290-70(aa) of the ITAA97, were that 351 Pty Ltd as “employer” was able to deduct contributions to a superannuation fund made for its “employees” within the expanded meaning given by s 12(2) of the SGAA. The primary judge, for the reasons we have set out, was correct when he concluded that Mr Kelly and his wife were not such “employees”.

123    The primary judge was correct when he concluded that the superannuation deduction was not an allowable deduction under the ITAA97.

124    Accordingly, ground 12 of Mr Kelly’s grounds of appeal is dismissed.

Associate:

Dated:    8 August 2013