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SUPREME COURT OF WESTERN AUSTRALIA

RE HONNIBALL (DEC'D); DUNKLEY v COMMISSIONER OF STATE TAXATION (WA)

JACKSON CJ

26, 27 August, 31 October 1975, 7 January 1976 -

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Jackson CJ    The appellant is the executor and trustee of the will and codicil of Gerald Leonard Honniball who died on 5 March 1973. At the time of his death the deceased was, and had been for 10 years, a partner in the legal firm of Muir, Williams, Nicholson & Co of Perth. At his death he was one of nine equal partners. There was no formal partnership agreement entered into by the partners, but the terms of the partnership may be gathered from letters written from time to time relating to the admission of new partners or the retirement of existing partners. The most recently admitted partners were Mr J R Hayward and Mr B R Johnston, and identical letters to each of them bearing date 30 June 1970 were signed by the other partners and accepted by the new partners. So far as is relevant to the issues raised in this appeal, the terms of the partnership agreement may be summarized as follows:-

  1  Each new partner paid a capital contribution to the firm.

  2  Weekly drawings for each partner were mutually agreed.

  3  Subject to those drawings, profits and losses were shared equally.

  4  An incoming partner made no payment to the partnership in respect of the value of work in progress, and he was not entitled to share in work in progress, upon death or retirement, until he had been a partner for five years.

  5  An incoming partner was not required to make any payment for goodwill, it not being considered that there was any goodwill of the firm. No amount in respect of goodwill was payable to a retiring partner or to the estate of a deceased partner, but the surviving partners agreed to reimburse the estate of a deceased partner the amount of any additional duty which might be assessed on his estate in respect of goodwill.

  6  On retirement or death of a partner, he or his estate would be paid an amount comprising, (a) the balance to the credit of his capital account, (b) the amount of his current account, and (c) his share in work in progress, paid as and when received.

   At Mr Honniball's death, his capital and current accounts were in credit in the sum of $13,567. The respondent Commissioner assessed the value of his interest in the partnership for purposes of probate duty under the Administration Act at $56,356, made up as follows -

Capital and current accounts ...	$13,567
One-ninth share of goodwill ...	$22,222
One-ninth value of work in progress ...	$20,567
	$56,356

   The appellant objected to the assessment upon grounds which I need not set out, as they are included in the grounds of the present appeal, and on the disallowance of the objection, lodged this appeal under s 107 of the Act. But neither the objection nor the appeal disputes the correctness of the amounts of each item included in the assessment.

   The first two grounds of appeal depend upon the meaning and effect of cl 2 of the deceased's will made on 24 April 1970, which reads:-

   "I RELEASE AND FORGIVE subject to all probate and estate duties (both State and Federal) payable thereon upon or by reason of my death my share and interest in any legal partnership of which I am a partner to my fellow legal partners in proportion to their respective indebtedness to me as at the date of my death."

   These grounds of appeal are expressed as follows:-

   "(1) On and from the date of his death on the 5th day of March 1973 the share and interest of the deceased in the partnership of Muir Williams Nicholson and Co did not form part of the estate of the deceased for the purposes of s 66A(1)(a) of the Administration Act 1903-1972 by reason of the provision in cl 2 of the will of the deceased.

   

"(2) The respondent's assessment of the value of the share or interest of the deceased in the said partnership as at the 5th day of March 1973 was made without regard to the provisions of cl 2 of the said will and is excessive and the respondent's assessment of the value of the estate for probate duty exceeds by $56,356 the true value of the estate as at that date."

   The appellant submitted that the effect of cl 2 of the will was to release the deceased's surviving partners from their liability to pay to him as executor any moneys which would otherwise be payable to him in respect of the deceased's share in the partnership according to the agreement between the partners. The argument was that by the agreement between the partners, the deceased's interest in the partnership was, on his death, converted into a debt due to his estate by the remaining partners; that cl 2 released and forgave that debt which thereby did not form part of his estate for purposes of probate duty. For the latter part of this proposition, reliance was placed on the recent decision of the High Court in Bone v Comr of Stamp Duties (NSW) (1974) 3 ALR 561; 4 ATR 553.

   I pause to note that this submission by the executor appears to be more in the interests of the deceased's former partners than of the beneficiaries under his will. I was not informed whether it met with the approval of the beneficiaries.

   At the time of Mr Honniball's death, State probate duty was assessed in accordance with the provisions of Pt V of the Administration Act 1903-1972 (WA). By s 66, the executor of his will was required to file with the respondent Commissioner a statement giving particulars of "the real and personal property in Western Australia of which the estate of the deceased person consisted at his death". But the substantive provision regarding dutiable property was found in s 66A, which provided by subs (1) :-

   

"For the purposes of this Part of this Act the following property shall be and be deemed to form part of the estate of a deceased person -

 

(a) the real and personal property in Western Australia of the deceased person;"

   and para (b) deemed certain further "notional" property to form part of the estate.

   In his statement of assets and liabilities filed under Pt V of the Act, the appellant included as part of the personal property of the deceased his interest in the partnership of Muir, Williams, Nicholson & Co, stated as an amount of $25,567, which is exactly $12,000 more than the sum of the amounts to the credit of the deceased's capital and current accounts. The respondent accepted that the partnership interest was property of the deceased but increased the value thereof to $56,356 as already mentioned. It is now contended that both the return and the assessment were wrong. The argument involved two main steps. Firstly, that the deceased's partnership interest was upon his death converted into a debt due to his estate by his former partners, and secondly, that this debt was extinguished by cl 2 of the will. It was not at all clear that the first step in this argument had been raised in the appellant's objection to the assessment, for this document stated (in para 6) of cl 2 that the will had the effect of releasing and forgiving the surviving partners "from the chose in action constituted by (the deceased's) share or interest in the said partnership". But after some hesitation, I allowed the appellant to amend his grounds of appeal so as to raise this issue in specific terms. The amendment now appears as ground (4), paras (a) and (b) of which read as follows:-

   "(a) It was an express or implied term of the partnership agreement between the deceased and his surviving partners that on the death of the deceased the surviving partners would purchase the said share and interest of the deceased in consideration of the payment to the personal representative of the deceased of an amount comprising the amounts standing to the credit of the capital and current accounts of the deceased and work in progress.

   

"(b) The effect of the said term was that on and from the date of death of the deceased on the 5th day of March 1973 the beneficial ownership of the share or interest of the deceased was acquired by his surviving partners subject to their liability to pay the purchase price therefor pursuant to the said term whereby on and from such date his share and interest in the said partnership did not form part of the estate of the deceased for the purposes of s 66A(1)(a) of the Administration Act 1903-1972 but his estate included as an asset the debt of the surviving partners due to the personal representative of the deceased and payable in accordance with the partnership agreement."

   Paragraph (c) of this amended ground raised the issues of including an amount for goodwill in the assessment, an issue also raised by ground (2) and which will be considered when I deal with that ground.

   As there was no formal partnership agreement, the terms of the partnership are to be found partly by implication and partly expressed in the letters of 30 June 1970 to the then incoming partners. It is clearly an implied agreement that on the death of a partner the partnership would not be dissolved but would continue as between the surviving partners. Provision for payment, in respect of a deceased partner's share or interest, presumably to his personal representative, is made in the letters of 30 June 1970 in these terms:-

   

"On the death of a capital partner or his retirement due to incapacity or age then capital and current accounts and work in progress shall be paid as follows:-

 

(a) Capital account - within 12 months after death or retirement;

 

(b) Work in progress - as and when received by the firm but in any event by predetermined monthly payments of not less than half of the then current salary of the deceased or retiring partner and free of interest;

 

(c) Current account - within 3 months after death or retirement free of interest."

   The necessary implication is that the surviving partners would acquire the share of a deceased partner on his death and pay his executor the amounts calculated in accordance with the clause quoted. But in my view this must be taken to be a consequence which follows upon the death of a partner and which accepts rather than denies that at the moment of death he was possessed of personal property consisting of his share in the partnership. That share was, in terms of s 66A of the Act, the personal property of the deceased person and thus formed part of his estate. The acquisition of that share by the surviving partners occurred in consequence of his death "and therefore is logically to be treated as subsequent to" his death - see per Kitto J in Robertson v FC of T (1952) 86 CLR 463 at 486. Accordingly (subject to the possible effect of cl 2 of the will) the relevant asset which formed part of Mr Honniball's estate was not the debt which became payable by the other partners to his executor but his share and interest in the partnership at his death.

   I have not found it easy to construe cl 2 of the deceased's will. The verbs "release and forgive" are apt words to use in relation to a debt in existence prior to death. They were the verbs used in Mrs Bone's will. In modern usage, to release generally means to discharge another from some claim, demand or right of action. If the testator's intention was to bequeath his share in the partnership to his surviving partners then to "release and forgive" that share to them is an odd way for a lawyer to express that intention. I also find it hard to understand what is meant by the words "in proportion to their respective indebtedness to me as at the date of my death". The only "indebtedness" in contemplation would appear to be the debt from the surviving partners to the testator's executor representing the amount to be paid by them for his share in the partnership. There was no "indebtedness" prior to his death. The debt arising in consequence of his death was a joint debt of equal surviving partners - why them is it said to be "in proportion to their respective indebtedness"?

   I am not required in these proceedings to determine, as between the persons entitled under the will and the surviving partners, the meaning and effect of cl 2. Counsel for the appellant claimed that cl 2 released the surviving partners from the liability to pay to the appellant the debt into which the deceased's partnership share was converted upon his death. The only alternatives which occur to me are that the clause amounts to a gift to the surviving partners of the deceased's share and interest in the partnership, or that it has no effective meaning at all. Neither of these alternatives would assist the appellant in this appeal. I am therefore prepared to adopt the construction of cl 2 propounded by counsel, though without in any way accepting its correctness. But having done this I am bound to conclude that the deceased's share in the partnership did form part of his estate for the purposes of probate duty, for the reason already given, namely that the share was his personal property at the time of his death and thus fell within s 66A(1)(a) of the Act.

   In my opinion, the appellant's reliance on the decision in Bone's Case is misconceived, for two reasons. In the first place, the testatrix by her will in that case forgave and released debts which were due and owing to her in her lifetime, which was held to have the effect of extinguishing those debts. In the second place, the relevant provision of the NSW Stamp Duties Act 1920, included in the dutiable estate of a deceased person only the property of the deceased "to which any person becomes entitled under the will or upon the intestacy of the deceased". It is at least open to doubt whether the same conclusion would be reached under the Administration Act in this State, where the words just quoted do not appear - see the remarks of Mason J at 572 and at 575 of the report of Bone's Case in (1974) 3 ALR 561; 4 ATR 553 at 563 and 565.

   For these reasons, I am of opinion that the appeal on the grounds stated as (1), (2) and (4)(a) and (b) cannot be sustained.

   Ground (3), and also para (c) of ground (4), raise the question whether the respondent was correct in including an amount for goodwill as part of the partnership property, because of the express agreement between the partners of the firm that "it is not considered that there is any goodwill of the firm" and "that there be no goodwill payable to any deceased or retiring partner" to use the words of the letters of 30 June 1970.

   Section 110(1) of the Act provides:-

   

"In the valuation of the share or interest of any person in any partnership for the purpose of this Act, the share or interest of the partner concerned shall be that sum which bears the same proportion to the total capital of the partnership as his fractional share bears to the whole number of shares in the partnership. In this section total capital means the value of the assets of the partnership less the liabilities of the partnership."

   It is therefore necessary first to ascertain the total capital of partnership of which the deceased was a member, and this requires the ascertainment of the value of the assets less liabilities. The section is plainly designed to avoid the effect upon value for duty purposes of special arrangements between the partners fixing a value as between themselves of the share of each partner - see Boan v Comr of Stamps (WA) (1946) 72 CLR 226 at 235 and 245. It is conceded that in general the goodwill of a partnership is part of the partnership assets. But it is contended for the appellant that this ceases to be so where the partners have agreed that there shall be no goodwill. This broad proposition appears to me to be in direct conflict with the opinion of the Privy Council in Perpetual Executors & Trustees Assocn of Australia Ltd v FC of T [1954] AC 114; [1954] 1 All ER 339 see particularly at 130 and 131; 346 and 347. But in any case the submission does not accurately reflect the terms of the letters of 30 June 1970, which provide the evidence of the arrangement between the parties. All that the letters say is that "it is not considered that there is any goodwill of the firm"; and the letters also state that an ingoing partner is not required to, make any payments for goodwill, and that a retiring or deceased partner is not to be paid anything for goodwill. Such expressions afford no ground for concluding that goodwill was not an asset of this partnership. It follows that the goodwill, like other assets, is to be valued to arrive at the total capital of the partnership in order to calculate the value of the deceased's share or interest therein under s 110. The appellant's submission on this ground also fails.

   The final ground of appeal, added by leave during the hearing, is as follows:-

   

"(5) In the further alternative to paras 1 and 2 and paras 3 and 4 thereof the respondent's assessment of the value of the share or interest of the deceased in the partnership at $56,356 as at the 5th day of March 1973 is excessive and exceeds by $20,567 the true value of the estate at that date in that the said sum of $20,567 was the amount payable to the personal representative of the deceased pursuant to the partnership agreement on account of 'Work in Progress' which was not an asset of the partnership for the purposes of s 110 of the Administration Act 1903-1973 or at all."

   The submission for the appellant in substance is that the respondent has assessed duty not merely in accordance with s 110 by ascertaining the deceased's interest in the partnership assets less liabilities, but has then added a further amount representing the value of work in progress, not because it forms part of the assets of the partnership, but because it was part of the amount to be paid by the surviving partners to the appellant under the terms of the partnership agreement. It is said that if the respondent relies on the agreement as to what is to be paid to the executor by the surviving partners, then although he may include the value of work in progress, he should not include goodwill; but if he relies on s 110 to include the value of goodwill as an asset, then he cannot also include the value of work in progress.

   It is not in dispute that the phrase "work in progress" used in the letters of 30 June 1970 refers to pending matters in which instructions from clients have been received and are in the course of being carried out, but have not reached the stage where any professional fees have been earned in the sense of being chargeable to the client. Disbursements incurred in pending matters are on a different footing, and the accounts of the partnership show these as current assets under the heading "Debtors - unbilled disbursements". But the accounts correctly omit any other reference to the value of work in progress. Until such work reaches the stage where a fee is due by the client, no income is earned by the partnership - Henderson v FC of T (1970) 119 CLR 612; 1 ATR 133; 596 per Windeyer J at CLR 636; ATR 146 and on appeal, per Barwick CJ at CLR 650; ATR 601. To adopt the learned Chief Justice's words, it is only when the legal service is so far performed that according to the agreement of the parties, or in default thereof the general law, a fee has been earned that it will mature into a recoverable debt. A bill then rendered for the fee results in a book debt which, until it is paid, is an asset of the partnership - see per Wild CJ in Jamieson v Inland Revenue Comr (NZ) (1974) 4 ATR 327. It is accepted that no part of the sum of $20,567, being the item "Work in progress" in the respondent's assessment represented fees actually due to the partnership, but referred only to a valuation placed by the partners on unfinished business. It follows in my view that no part of this sum can be said to be an asset of the partnership to be valued as part of its capital under s 110(1) of the Act. I respectfully adopt the opinion of Wilson J on this subject, though expressed in a different context, in Robertson v Brent [1972] NZLR 406.

   The appeal should therefore be allowed in part and the respondent's assessment of the value of the deceased's estate for probate duty should be reduced by $20,567.