Case K18

Judges:
AM Donovan Ch
RK Todd M
LC Voumard M

Court:
No. 2 Board of Review

Judgment date: 28 April 1978.

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A.M. Donovan (Chairman); R.K. Todd and L.C. Voumard (Members): By a printed document dated 29th May, 1973, and signed by him, the taxpayer in this reference applied to a company, AP, to become a member of what was called a partnership. At that date it appeared that the so-called partnership had not been formed, for the space on the form for the insertion of its name was left blank. By his application the taxpayer applied for a stated number of units, and stated that if admitted as a member he (a) appointed AP as his agent with authority to execute a deed of partnership on his behalf, (b) appointed AP as his proxy to vote in favour of three resolutions, which were set out, at the first meeting of members of the ``partnership'', and (c) authorised the moneys subscribed by him to be applied by the

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manager in a stated manner. The three resolutions were for the appointment of AP as manager of the partnership, for the appointment of an individual, D (who was not then and did not afterwards become a partner), as a member of the ``Committee of Management'', and for the purchase of land by or for the partnership. A second printed document, dated the same day and also signed by the taxpayer, authorised AP to sign on his behalf ``the application to register the Business Name...'' The space for the insertion of the name was also left blank.

2. Then, on 21st June, 1973, there was held what was described as the first meeting of the members of ``Partnership No. 73-0-020''. Apparently none of the partners, of whom there were 19, attended, although their representative, D, did, and presumably the manager was represented. A document recording the proceedings, after reciting that AP was authorised to sign the Deed of Partnership on behalf of the members, noted that it was resolved that AP execute the document accordingly. The meeting also ``acknowledged'' AP's appointment as manager of the partnership, resolved ``to arrange'' for the purchase of land on behalf of the partnership, and authorised certain dispositions of the moneys contributed - all in accordance with the terms of the application for membership described above. Next came a ``Deed of Partnership'' dated what we read as 24th June, 1973. It was not on its face executed by or on behalf of any members, although AP executed it as manager. But another exhibit tendered by the taxpayer as a schedule of members of this partnership was expressed to be ``signed for and on behalf of the persons whose names are set out opposite'' by AP. It was not disputed that in this manner the ``Deed of Partnership'' was executed by AP on behalf of the taxpayer and others in accordance with the authority given in the application for membership.

3. The management company, AP, had been incorporated to promote partnerships to conduct afforestation operations, and although legislation subsequent to the year to which this reference relates had curtailed these promotional activities, AP was at the date of the hearing engaged in managing 104 such partnerships, including the one styled ``Partnership No. 730020'', that it had promoted.

4. The procedure to become a member of any of these partnerships was the same in each case. Applications were sought by advertising and personal solicitation, and when received by AP the applicants were separated into groups of 19; each such group was treated as a partnership, and a standard form deed of partnership was executed in the same way as the one involved in this reference, and stamped. Thereafter, as was the case here, an interest in land was purchased for the partnership. Evidence was given that in this case a second (and associated) company, AF Nominees, acted as a trustee in purchasing for the benefit of the members of ``Partnership No. 730020'' a 25/100ths interest in certain land. The documentation regarding the trustee company and this purchase, which we were told was made during the year ended 30th June, 1973, is not as clear as it might be. The deed of trust is dated 1st July, 1974, and the only document tendered that was related to the purchase was undated, and contained terms more appropriate to the sale of land by the management company than to the purchase of land by the nominee company. However, no dispute exists over the purchase of land for the partnership of which the taxpayer is a member.

5. During the year ended 30th June, 1973, an area of land representing that partnership's interest in a larger area was cleared and prepared for planting. Pine trees were planted, and firebreaks provided. For this work a sum of $4,875, described as ``Plantation Establishment expenses'', was paid to a contractor. In the partnership income tax return for the year ended 30th June, 1973, it was claimed that this sum was an allowable deduction under sec. 75 of the Income Tax Assessment Act, 1936 as it then stood. At the hearing there was a suggestion that, in the alternative, this expenditure was deductible under sec. 51(1), but it was not seriously pressed. The partnership return also claimed a deduction under sec. 51(1) of $4,818, made up of various ``amounts paid for management'', namely ``commissions'' $3,750, ``administration'' $938, ``general management'' $94, and sundry expenses $52, less an amount of income of $16, apparently derived as interest on the investment of contributed funds not immediately required. This amount of $4,818 represented the partnership loss for the period ended 30th June, 1973, after capitalising the plantation establishment expenses of $4,875 claimed under sec. 75.

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6. The partnership net loss for the period ended 30th June, 1973, thus amounted to $9,693. Of this, the taxpayer, who contributed $750 out of total contributions of $16,500, claimed to deduct his share amounting to $388, but certain concessions were made by counsel on his behalf. The amount described in para. 5 as ``commissions $3,750'' represented commission paid to salesmen for successfully obtaining capital contributions to the partnership, and this was conceded to be an outgoing of a capital nature, and so non-deductible under sec. 51(1). A similar concession was made in respect of the amount described in para. 5 as ``administration $938'' which represented an initial fee to cover administration and preliminary expenses of the partnership. As well as falling outside sec. 51(1), neither of these items represented expenditure of the kind for which sec. 75 granted a deduction.

7. The effect of these concessions was said on behalf of the Commissioner to be that if the taxpayer should in all other respects be successful before the Board, the allowable deduction to which he would be entitled as his share of the partnership net loss would be reduced from $388 to $228. This figure was not contested by the taxpayer.

8. In order to succeed in his claim, the taxpayer had to show (a) that the sec. 51(1) deductions claimed by the partnership represented losses or outgoings necessarily incurred in carrying on a business - for they could scarcely be said to have been incurred in gaining the assessable income of $16 from temporary investment - and (b) that the sec. 75 deductions claimed were incurred in carrying on a business of primary production. Briefly, therefore, his argument was that the partnership was carrying on a business; that the business was one of ``forest operations'', that is, operations conducted in the course of, or for the purposes of, a business, and being ``the planting or tending in a plantation... of trees intended for felling...'' (see the expression ``forest operations'' defined in sec. 6(1)), and therefore ``primary production'' (sec. para. (d) of the definition of this term in sec. 6(1)). It became apparent, however, that the issue between the parties was not whether a business of primary production was being carried on, but by whom that business was being carried on. Counsel for the Commissioner conceded that for the purposes of this case, and for those purposes only, a business of primary production was being carried on, but he submitted that the business was not that of what these reasons have hitherto referred to as ``the partnership'', nor was it that of the taxpayer; that the activities of the so-called partnership did not amount to forest operations but were of a mere investment nature; and that any gain that the so-called partnership and its members might derive from the venture would be of a non-assessable capital nature, thus negating the application of sec. 51.

9. The argument that the group of 19 people, including the taxpayer, did not constitute a partnership, and that it was not they who were carrying on the business of forest operations was not, perhaps, immediately apparent from the statement furnished by the Commissioner under reg. 35, and its advancement may have taken counsel for the taxpayer somewhat unawares, but the Commissioner is not restricted by his statutory statement in the arguments he may advance before a Board, notwithstanding the restriction imposed on the taxpayer by sec. 190(a).

10. As a first step towards the solution of the real issue before the Board, it is necessary to refer in some detail to the document entitled ``Deed of Partnership'', dated 24th June, 1973 (Exhibit E). It contains much that one would expect to find in a ``normal'' partnership agreement. Amongst the provisions emphasised by Mr. Williams, who appeared for the taxpayer, were these: -

Para. 2: The business to be carried on was described as that of ``afforestation the leasing or purchasing of the land the development of the land as a Pine Plantation the harvesting, manufacturing, marketing and selling of the produce of the land either standing or manufactured''.

Para. 5: Subject to earlier termination as provided later, the partnership was to continue for 18 years from 24th June, 1973.

Rule 7A provided for ordinary and extraordinary general meetings of partners, and required meetings of the former type to be held at least annually. Rule 8 permitted the committee of management or any five partners to convene a meeting.

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Rule 15 authorised a stipulated majority of partners to terminate the partnership by giving one month's notice.

Rule 17 dealt with the appointment of a manager (AP had been so appointed - see para. 1 and 2) and provided machinery whereby the partners in general meeting might replace such manager.

Rule 18 contemplated a committee of management to consist of the manager, and one other person appointed by the partners. (The original appointee was D - see para. 1 and 2.) A quorum for meetings of the committee was fixed at two members present in person or by proxy, and a unanimous vote was needed to decide all questions. The non-manager member of the committee was not required to be a partner.

Rule 19 provided for the manager to hold land in trust for the partnership, and subject to any contrary directions given by a general meeting or the committee of management, vested in the manager the power to control and manage the business of the partnership. Specific powers and duties were conferred and imposed respectively on the manager by this rule.

Rule 21 provided for the manager to receive an initial fee, a half-yearly management fee, and a share of the net profit on the sale of timber and of any investments. The latter share was to equal one-half of the amount by which the net profit exceeded ten per cent of the amount of capital contributions invested.

Rule 22 authorised payment of commissions to persons introducing new capital or new partners (although elsewhere it was made clear that whether by new admissions or the transfer of an existing partner's units the number of partners was not to exceed twenty - Rule 4).

Rules 27-29 called for the keeping of minutes of meetings, and of accounting records, and required the manager to lay a profit and loss account and a balance sheet before a general meeting once in every year. Partners were entitled to inspect the books of account.

Rule 36 made provision for the partners by resolution to alter the rules.

11. A major part of the argument addressed to the Board by counsel for the taxpayer was related to the submission that the partnership was carrying on a business of primary production, but in his final address he did emphasise that the several provisions in the rules, to which he had referred, preserved the rights of the partners themselves to conduct the business if they were so minded. This, he submitted, negated the claim that the business was really that of the management company. The rules did constitute the management company the agent of the partners, it was true, but it did not follow from that, counsel said, that the business was that of the company.

12. For the Commissioner, Mr. Heenan submitted that the way in which the so-called partnership was arranged and its affairs conducted, coupled with the unusual nature of some of the rules, all pointed to the conclusion that the words ``partners'' and ``partnership'' were not correct descriptions of the 19 ``investors'' or of the relationship between them. He instanced the fact that ``partnership'' units were transferable, the passive role played by all 19, the general lack of attendance at meetings save by proxy, the fact that their representative on the management committee was not one of their number, and the vesting of the overall control and management of the business in the manager, subject only to the provision in the rules (which was not acted upon) empowering the members to overrule the manager, as factors suggesting that the 19 were mere investors, not partners. He referred too to rule 20, which forbade the ``partners'' to pledge the credit of or incur any liability on behalf of the ``partnership'', and provided that the management company would, by way of advance, meet liabilities or debts incurred by the ``partnership'' which it was unable to pay. And counsel found further support for his contention in rule 37, which permitted the manager, on a change in the law of the State relating to the formation, establishment and management of partnerships, to convert the interests of the ``partners'' in the ``partnership'' into interests in a trust, co-operative society or limited company - all without prior reference to the ``partners''. Mr. Heenan added that there was no mutuality of interest between the ``partners''; that they were not known to each other, had not met together and, indeed, at the time of applying for membership an applicant did not even know of which particular ``partnership'' he would find himself a

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member. On the alleged want of mutuality, he referred to a passage in the judgment of James L.J. in
Smith v. Anderson (1880) 15 Ch. D. 247, where it was said (p. 275): ``Persons who have no mutual rights and obligations do not, according to my view, constitute an association because they happen to have a common interest or several interests in what is to be divided between them.''

13. But we think that these criticisms may be answered in the same way as Street J. (as he then was) answered similar criticisms in
Playfair Development Corporation Pty. Ltd. v. Ryan (1969) 2 N.S.W.R. 661, a decision which Mr. Heenan very fairly admitted did present an obstacle in the way of acceptance of the view for which he was contending. That case concerned the prohibition contained in the Companies Act, 1961 (N.S.W.) against public offerings of interests other than shares and debentures except on compliance with certain conditions. Before an amendment made in 1971, that Act excluded from the scope of ``interests'' subject to these conditions interests in partnership agreements. The question to be decided was whether an interest in a form of property syndicate was ``any interest in a partnership agreement'', and Street J. held that it was - that is, that the group of people concerned constituted a partnership within the Partnership Act, 1892 (N.S.W.). There were some points of similarity between the facts of that case and those before the Board. There was a manager of the property the subject of the investment, and one of the terms of the agreement called the partnership agreement was to the effect that provided the manager properly carried out its duties and properly exercised its powers, the partners would not ``collectively or individually interfere with or attempt to overrule the exercise of the manager's discretion or attempt to engage personally in the management of the property of the partners''. Moreover, the manager held powers of attorney for each partner, and was able to sign all necessary documents on their behalf. The partners were physically or personally remote from each other; if all went smoothly it appeared that it would never be necessary for them to meet. There, as here, the units held by partners were transferable. But none of these matters prevented those who had joined the syndicate from being properly regarded as members of a partnership. Nor could it be said that the business carried on was not the business of the partners. Indeed, the fact that each partner had delegated to the manager the partner's ordinary rights of running the partnership business, and that each had assented to the manager being deemed to be his attorney, so that for all practical purposes the manager rather than the members would dictate the policy of the partnership was said to have obvious business attractions. And his Honour also noted that by the terms of the deed of partnership the partners had submitted themselves to a series of mutual obligations. In our opinion this last feature is likewise present in the case before us, and meets the argument based on a lack of mutuality. There was no suggestion that the deed of partnership was a sham.

14. We were invited to distinguish the Playfair Development case from the present one principally on the ground that in the former case there appeared to be but one syndicate in operation, whereas in the present case the management company manages no fewer than 104 similar partnerships, so that in inviting people to purchase an interest in a partnership the management company was simply peddling an interest in its own enterprise. With respect, we cannot accept this. No doubt the more partnerships that were promoted and managed the greater might be the management company's profits, but the circumstances suggest to us that the business of the management company was that of promoting afforestation partnerships, and of managing various plantations for 104 different partnerships, each of which, or at least the one of which the present taxpayer is a member, was carrying on, through an agent, a business of forest operations on the land allocated to it.

15. It was also said that the so-called partnership was not carrying on any business, whether of afforestation or otherwise; that the admitted business of primary production that was being carried on was being carried on by and for the benefit of the management company. Here, reliance was placed on the majority decision of Board of Review No. 1 reported as Case J26,
77 ATC 237. Since the hearing, the taxpayer's appeal against that decision has been heard and dismissed by Sheppard J. of the Supreme Court of New South Wales, and the proceedings are reported sub nom.
Ferguson v. F.C. of T. 78 ATC 4010. The substantial basis of the Court's decision that during the period in question the taxpayer was not carrying on a business was

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expressed thus (at p. 4013): ``But I think the reality of what was being done was that some stock was being acquired at what was believed to be a fairly cheap price against the day when the property would eventually be acquired and the business commenced'' (our italics). The Court did not make any observations about the terms of the agreements into which that taxpayer had entered for the lease of the Charolais cattle and for the management thereof. Mr. Heenan's argument in the present case, however, was that the terms of the agreements in Ferguson's case were such as to leave the taxpayer in a situation where he could not correctly be described as conducting the business himself, and he invited the Board to draw a similar conclusion in the present case. But we do not think that Ferguson's case, decided as it was on a different ground, and concerned as it was with different facts, lends any assistance to this argument. As indicated in para. 14 of these reasons, we are satisfied on the facts that the members of ``Partnership No. 730020'' were ``carrying on a business (of primary production) in common with a view of profit'' (see Partnership Act, 1895 (W.A.) sec. 7(1)) and also represented a partnership as that term is defined in sec. 6(1) of the Income Tax Assessment Act.

16. This finding disposes of the Commissioner's submission that the partnership's activities were merely of an investment nature, and makes it unnecessary to consider his final submission to the effect that any financial gain which the parties might derive from the undertaking was of a capital nature and so non-assessable, by analogy with the decision in
Clowes v. F.C. of T. (1954) 91 C.L.R. 209, confirmed in
Milne v. F.C. of T. 76 ATC 4001 and
Lloyd v. F.C. of T. 76 ATC 4007.

17. A question might arise whether the management company was itself to be regarded as a member of this and indeed of other similar partnerships that it managed. This possibility gained some support from the evidence of AP's managing director that the number of partners was restricted to 19 following advice from the Corporate Affairs Commission that AP could itself have been a partner, so that more than 19 other partners would have caused the number of members to exceed the statutory maximum. But the matter was not argued, and its solution is not relevant to the reference before us. It is enough to note that if the manager were to be regarded as a partner, it would simply be a managing partner with wide powers. If it were not so regarded, then it is a case of the partners confiding wide powers of management to an agent. In neither case is the finding that the taxpayer was a member of a partnership affected.

18. Because of the reduction in the amount of the partnership's claim resulting from the concessions described, in para. 6 and 7, the amount of the taxpayer's share of the partnership net loss is reduced to $228. For the reasons given, we would uphold his objection to the extent of allowing a further deduction of $228, and amend the assessment accordingly.

Claim allowed in part