CASE 41/96

Members:
SA Forgie DP
JD Horrigan
EK Christie

Tribunal:
Administrative Appeals Tribunal

Decision date: 18 June 1996

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SA Forgie (Deputy President), JD Horrigan (Member) and Associate Professor EK Christie (Member)

On 25 August, 1994, the applicant lodged an application for review of a decision made by a Deputy Commissioner of Taxation (``the Deputy Commissioner'') in respect of an objection against an amended assessment issued under the Income Tax Assessment Act 1936 (``the Act'') on 11 June, 1992 for the year of income ended 30 June, 1989 (``the year of income''). The Deputy Commissioner's decision, made on 30 June, 1994, disallowed the objection.

2. At the hearing, the applicant was represented by Mr Somers of Counsel and the Deputy Commissioner by Mr Logan of Counsel. The documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted in evidence together with a number of documents to which we shall refer in the course of these reasons. Oral evidence was given by the applicant, his former partners, the Firm's office manager and three accountants who have undertaken accountancy work for the Firm. That oral evidence is summarised in an attachment to these reasons.

The issues

3. The first issue in this case is whether the sum of $154,196, which was part of the total sum paid to the applicant as a result of the dissolution of the partnership, formed part of his assessable income for the year of income pursuant to sub-section 25(1) of the Act. If it is not the second issue becomes relevant. That is whether the sum of $154,196 can be regarded as net capital gain accruing to the applicant as a result of the disposal of his interest in the Firm's work in progress or as a result of his deemed disposal of an asset. If it were decided that capital gain did accrue, the question arises whether the Commissioner is precluded from relying upon it or is limited to the sum of $19,520 shown as the capital gain component in his amended amendment dated 11 June, 1992.

Background

4. We find on the basis of the evidence that there existed in 1975 a firm which we will, for the purpose of these reasons, call ``the Firm''. There were two partners in that firm - Alpha & Omega. In 1975, they were joined in the partnership by the applicant. Omega retired from the partnership in 1976 and Alpha followed him in 1982. On 1 August, 1986, Omega rejoined the partnership. Others joined the partnership over the years and by 1988 it comprised the applicant, Beta, Gamma and Omega.

5. As at 1 July, 1988, each of the four partners held equal shares in the partnership. There is no evidence of any written partnership agreement among any of the partners governing their respective interests in the Firm or their entitlements on its dissolution.

6. As at 1 July, 1988, each of the partners also held equal interests in two entities associated with the firm - one, which we will call ``Devolution Pty Ltd'', traded under a business name and the other, which we will call ``Deliverance Pty Ltd'', was a service company.

7. The Firm operated on a very profitable basis between 1986 and 1988. The profit from 1 July, 1988 to 30 September, 1988 was $955,923.97. While the work of the Firm covered a wide range of matters, it centred on two types of work. They did not give advice on taxation matters as part of that work. The applicant's work focussed on a significant

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number of clients from overseas whose work generated a considerable amount of income for the Firm. The billings for the Firm in the three month period ending 30 August, 1988 were in the order of $1.5m. As at September, 1988, outstanding debts amounted to over $1m.

8. In September, 1988, the Firm changed its accountants from those whom we will call Credits and Debits to those whom we will call Trial Balance. Sirius was an accountant in Credits and Debits with responsibility for the Firm's accountancy work. When Trial Balance assumed responsibility, Polydeuces was the job partner and Castor was the job manager. Castor had a greater degree of contact with the Firm than did Polydeuces. Sirius has continued as the applicant's accountant in relation to his personal affairs. Responsibility for the accounts and supervision of the secretarial staff and computerised accounting has always rested with Alpha and Omega's office manager, Orion.

9. At a date to be determined, the applicant advised Alpha, Beta and Omega (``the continuing partners'') that he wished to retire from the partnership. The effective date of the retirement of the applicant from the Firm was to be 30 September, 1988. There were various discussions among the partners and between some of the partners and accountants during the months that followed the applicant's initial announcement of his intention to retire. There was much disagreement about the occurrence and content of those discussions and we will consider them below.

10. The total amount paid to the applicant as a result of his retiring from the Firm was $456,195. Part of this amount, $175,000, was paid for goodwill. However, the parties do not agree as to the basis upon which the remaining $281,195 was paid and that will also be considered below. The total sum was paid to the applicant in three instalments - $136,858.50 was paid some time prior to 31 October, 1988, $144,336.50 was paid some time prior to 30 November, 1988 and the sum of $175,000 was paid some time prior to 31 December, 1988.

11. A letter dated 4 November, 1988, addressed to the applicant and signed by the applicant and the continuing partners, confirmed the sale of the applicant's interest in the Firm, as well as the associated entities, Devolution Pty Limited and Deliverance Pty Limited. It recorded that the applicant retained a quarter share of a residential unit and that his interests in the two associated entities was to be resolved at a later time. It recorded the times at which the instalments of the purchase price are to be paid. The letter recorded that payment of $281,195 was made in payment of the applicant's share of net tangible assets and $175,000 for the applicant's share of goodwill. A postscript was added at the foot of the letter. It had been initialled by all four parties and read:

``It is acknowledged that you will be responsible for income tax on that part of the payment which is in respect of work in progress, debtors and any other tangible items.''

(T documents, page 37)

12. It was agreed between the applicant and the continuing partners that the applicant would continue to work with the Firm as a consultant. Initially, he would do so for five days each week and, later, he would do so for two days each week. The applicant remained with the Firm as a consultant until 30 June, 1994.

13. The Commissioner issued a notice of assessment in relation to the year ended 30 June, 1989. He did so on 17 May, 1990 and the amount of tax assessed was payable by 21 June, 1990. The Commissioner issued a notice of amended assessment for the year ended 30 June, 1989 and did so on 11 June, 1992.

Consideration

Did the sum of $154,196 form part of the assessable income of the applicant pursuant to sub-section 25(1) of the Act?

14. There was no disagreement between the parties that the nature of the enquiry raised by the first issue has been circumscribed by authorities such as
Jamieson v Commr of Inland Revenue 74 ATC 6008,
Stapleton v FC of T 89 ATC 4818 and
Coughlan & Ors v FC of T 91 ATC 4505. Those cases recognise that, in the normal course of a business operation, the value of work in progress (which may be assessed by reference to such matters as hourly rates set according to the nature of the work of each partner) is not equivalent to earnings for the purposes of the assessment of income under the Act (see, for example,
Henderson v FC of T 69 ATC 4049 at 4060; (1970) 119 CLR 612 at 637.

15. In essence, those cases also decide that, where an amount has been paid to the partner retiring from a partnership and that amount includes an identifiable, or discrete, amount for the work in progress of the partnership at the

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date of his or her retirement, it is to be treated as income. If it does not include such an identifiable or discrete amount, then it is to be regarded as capital.

16. By the term ``work in progress'' is meant work which is incomplete and for which the clients of the Firm were not then required to pay (see Stapleton at page 4,826 referring to Henderson's case). The nature of the task to be undertaken in any case is illustrated by a passage from the judgement at first instance of Woodhouse J in
Jamieson v Inland Revenue Commr (N.Z.) (1972) 3 A.T.R. 361. He was considering an argument, which he later found to ignore realities, that work in progress was not an asset of a firm and had no value as either an asset or as income for all that could be said that there was the probability of future income or an ``amalgam of inchoate rights'' (page 364). Woodhouse J said:

``The real point of the case before me is not whether the uncompleted work had any present asset value but whether the share in it that was actually credited to the retiring partner was income in his hands. In my opinion it was a revenue or income sum computed to enable a fair and just distribution of the achievements of the partnership up to the date of dissolution.''

(page 364)

17. We turn now to the evidence in this case in order to determine whether the sums paid to the applicant as a result of his retirement from the Firm included a discrete amount for work in progress at the date of his retirement i.e. 30 September, 1988.

18. Memories of the events occurring in 1988 and surrounding the applicant's retirement were, at times, lacking in the detail that might ordinarily be expected. That is perhaps not surprising in view of the time that has passed since those events took place. Even so, they were events which have clearly left some deep, although not always the same, impressions upon the applicant and the continuing partners.

19. On the basis of the evidence of the applicant and the continuing partners, we are satisfied that events at that time were fraught with a notable degree of tension and that relations between the applicant and Omega were particularly affected by that tension. How that tension came to develop is not a matter for us and it was not addressed in evidence. It is relevant, however, to bear it in mind for tension may often heighten the degree of difference in the way people construe the same events. That is not to say that each person is not being truthful. Rather that a person's view of a set of circumstances may well be influenced not only by the usual things such as experience and attitudes but also by the tension and stresses to which he or she is then subject.

20. We find that all of the partners agreed that the applicant was regarded as the senior partner. There was a little less agreement among the witnesses regarding his role in the management of the Firm. Beta, Gamma and Omega agreed that the applicant had the major charge of the Firm's administration. The applicant acknowledged that he had the greatest interest but also acknowledged that Omega had a greater interest than either Beta or Gamma. Orion saw Omega as the administration partner. On balance, we are satisfied that, despite Orion's view of the situation, the partners themselves regarded the applicant as the person in charge of the Firm's administration.

21. We are satisfied that, by mid 1988, the Firm used a BHL accounting software package for its computerised time recording system (``the computerised system''). There was no disagreement, and we find, that the computerised system was used as a management tool to set benchmarks for each partner's and each professional staff member's productivity. Each was assigned an hourly rate and each hour was divided into ten six minute lots. We also find that it was used to assess the relative profitability of different types of work as well as identifying and/or estimating the amount of time spent on work bringing general benefit to the Firm but not attributable to any particular client.

22. There was also no disagreement between the partners, that the computerised system produced a printout showing the time costing of work on files, debtors in terms of billings, aged debtors, aged work in progress and bank and management accounting data. Data was entered into the computerised system each day. Every file in the Firm was listed in each printout which was an extensive document. On the basis of Orion's evidence, which was not refuted, we find that he manually prepared a spreadsheet summarising the key data in the printout. He did that each month before the partners' meetings or at the request of a partner.

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23. There is a question as to the extent to which the computerised system was used to ascertain the value of the Firm's work in progress. We find that the term ``work in progress'' was used in the Firm to indicate the work that had been done but not billed. This finding is not altered by the statement in a letter later written by Sirius to the Deputy Commissioner of Taxation (``the Deputy Commissioner'') that work in progress had never been regarded by the partnership as a tangible asset (T documents, page 63). The use of the term in the Firm is not inconsistent with the characterisation adopted by the Firm's accountants.

24. The applicant said that the system produced billings but it was not the case that the time costed figure was automatically the figure used in the ultimate account rendered to the client. Omega said that they were used in the preparation of individual bills. Orion said that he would quite often split the main print out and distribute the parts to the various authors of the work asking them to mark up the work that could be billed on an interim basis. He said that some of the work of the Firm would be billed on the basis of the value of the work rather than the hourly rate. He agreed in cross-examination that the figure for work in progress from the computerised system would not be equivalent to the amount of the bill but that the computerised system produced a figure that was a ``working guesstimate'' (transcript page 85).

25. Looking at all of the evidence, we have placed greater weight on the evidence of Orion in relation to this matter. He was working with the system every day, concerned intimately with the financial management of the Firm and had an overview of all of the Firm's accounts. He was better placed to judge the practices of the partners of the Firm than each of the partners could be. We find, therefore, that the computerised system did produce a figure that was a ``working guesstimate'' of the Firm's work in progress. The figure shown on the computerised system as the hourly rate costing for any particular file might not be precisely reflected in the bill rendered to the client as it might be adjusted if the billing was to be based on value and not upon hours. Taken overall, however, the figure shown on the Firm's computerised system for work in progress was a fair indication of the value of that work for management purposes.

26. We find that the applicant first told Beta that he wanted to retire in either August or early September 1988. He subsequently told Gamma. Both Beta and Gamma counselled him not to do anything rash but he made a decision in early September, 1988 that he would resign. We find that the applicant did not tell Omega of his decision until late September, 1988 and told Orion somewhat earlier but after he had told Beta and Gamma.

27. There was no evidence as to the precise time Omega heard about the applicant's retiring from the partnership, as opposed to being told of the decision by the applicant himself. There is also no evidence as to whether Omega was part of the initial discussions, or even as to whether there were any such discussions, as to the applicant's date of retirement from the Firm. We find that the applicant decided to retire on 30 September, 1988 but are unable to make any finding as to whether there was also agreement from the other partners to his doing so.

28. The evidence regarding the negotiations as to the amount to be paid to the applicant upon his retirement is generally imprecise. It was vague as to when the negotiations took place, who took part in them, what they were about and even the tone of them.

29. We are satisfied that all of the negotiations were oral. That is consistent with the evidence of all of the partners. As we have already found, we are also satisfied that the partners agreed upon a definite figure of $175,000 for goodwill after agreeing to a revaluation of the amount recorded in the Firm's accounts for goodwill. We accept the applicant's evidence that he had no realisation at the time that he agreed to this amount that it would be subject to capital gains tax.

30. On the basis of the applicant's own evidence, we are satisfied that he expected that the amount he would be paid on his retirement would be for his quarter interest in the Firm. We also find that the continuing partners also accepted that he was entitled to be paid for his quarter interest in all of the Firm's assets including work in progress. This was expressed by Omega and to a lesser extent by Gamma and was inherent in the evidence of Beta.

31. The continuing partners, we find, felt pressured by the applicant to arrive at a figure for his payment. The applicant may not have intended them to feel that way but that does not detract from our finding that he did. He was

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under pressure in his personal life, felt that his relationship with Omega had become strained and so made the partnership unworkable. He wanted to retire from the partnership. Beta and Gamma, in particular, felt pressured by the applicant.

32. There were clearly various discussions among Beta, Gamma and Omega, or between any two of them at various times, regarding the manner in which the value of the work in progress was to be calculated so that they could pay a quarter to the applicant. Discussions took place between the applicant and Beta and, to a lesser extent, between the applicant and Gamma or the applicant and Beta and Gamma. Discussions rarely took place between the applicant and Omega whether with or without the other partners present.

33. Orion, we find on the basis of his evidence, was not involved in any discussions regarding the calculation of the value of the work in progress. He certainly provided financial information, including the computerised system's print out. We make that finding despite Omega's recollection that Orion might possibly have been at a meeting in the Firm's library. Omega acknowledged that it was only a possibility while Orion was quite clear and there was no suggestion from Beta or Gamma that Orion was involved in the discussions.

34. We also find that neither Polydeuces or Castor, from Trial Balance, or Sirius, from Credits and Debits, attended any meeting with the Firm's partners at which details of the applicant's retirement were discussed. This accords with their evidence and also with the fact that Beta and Gamma did not recall or make reference to any such meeting. While not involved in the discussions, we are satisfied that Polydeuces provided a checklist of matters that should be addressed upon the retirement of a partner. Those matters included valuation of the work in progress. Polydeuces sent that checklist to Omega.

35. We find that Castor prepared a three page worksheet for the purposes of the valuation of the applicant's share in the Firm. Castor recalled preparing it and Polydeuces recalled instructing him to prepare it. That worksheet, we find was prepared in late October, 1988 and sent to Alpha & Omega on 21 October, 1988. That finding is supported by Trial Balance's facsimile transmittal form attached to an original printout of the worksheet as well as by Castor's evidence. Even though there is no printout showing the time and date of transmission, there is no reason for either Trial Balance or Castor to have created the worksheet or the transmittal form at a date later than that shown on the transmittal form.

36. The worksheet showed the work in progress as $616,784. This accorded with the figure shown on the computerised system's printout and we find that it was taken from that printout. It not only matched the figure shown on the printout but also was properly something within the responsibility of Orion, who was responsible for the day to day financial management of the Firm and controlled the computerised system, rather than Castor who was the accountant.

37. We can make no finding as to the precise material that the continuing partners had before them in their consideration of the amount that the applicant should be paid. Orion knew that he had supplied the partners with a printout from the computerised system at the time of the applicant's retirement but he was not aware of the retirement at the time. We make no finding whether the applicant or the continuing partners had any regard to Castor's worksheet for there is no evidence that they recalled having seen it until much later.

38. We are satisfied that Beta, Gamma and Omega reached an agreement amongst themselves as to the value of the work in progress and that the value they assigned to it was that on the computerised system's printout. Omega would have accepted no other value for it was in the books and so something that could not be changed. Beta regarded the computerised system as one method of assessing the value of the work in progress. Gamma said that they all agreed that the figure of $616,784 was an accurate estimate of the work in progress.

39. We find that the applicant did express a view that the value of the work in progress could be ascertained on the basis of the figures in the computerised system's printout. In addition, we find that he told Beta and Gamma that if they did not accept the figures in the printout that each of the files would have to be assessed by a cost assessor. In this regard, we prefer the evidence of Gamma to that of the applicant. It is a statement consistent with the tension that all agreed attended the negotiations and with the applicant's understandable view

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that he was entitled to a quarter of what the Firm was worth.

40. Was there ultimately an agreement between the applicant and the continuing partners that this was the value of the work in progress? The applicant has said not. Gamma has said that he did not think that there was any discussion regarding the full amount of all the components other than goodwill. He could not say that he discussed the figure of $616,784 with the applicant. Beta had the greatest contact with the applicant but he did not assert that there was an agreement as to the precise amount although he did say that the applicant was involved in some discussions regarding the calculation of his entitlement. Castor said that he distinctly recalled a gratuitous statement made by either Beta or Omega that they had met with the applicant and agreed that the book value of the work in progress was fair and reasonable.

41. We have taken account also of the precise figures contained in the worksheet. That worksheet was certainly available to the Firm at the time of the negotiations for we have already heard that it was sent to them. Mr Logan submitted that the letter of 4 November, 1988 signed by the applicant and the continuing partners and recording the oral agreement was based on the figures in the worksheet and that its language mirrored it. As the worksheet showed work in progress as valued at $616,784, it followed that the partners had agreed that the applicant would be paid one quarter of that figure for his share of that work in progress.

42. The language of the letter of 4 November, 1988 is consistent with that used in the worksheet in so far as it refers to ``net tangible assets''. If the letter were mirroring the worksheet, it could also be expected that the figures in that letter would also mirror those in the worksheet. We find that they do not in an important respect. The figures given in the two documents for goodwill are consistent. With respect to the net tangible assets they are not. After the value of the residential unit and the value of the goodwill are deducted from the total value of the net tangible assets ($1,955,629), the value of the net tangible assets is $1,137,462. A quarter of that figure amounts to $284,365. The figure shown in the letter for the applicant's share of net tangible assets is $281,195.

43. It follows from this analysis, that the most we can find is that the worksheet may have provided a guide in the terminology used in the letter. We cannot find that the foundation of the figures recorded in that letter lay in the worksheet. This accords also with the memories of Beta, Gamma and Omega who had no recollection of seeing the worksheet at the time of the negotiations.

44. Taking that evidence with that of the applicant and of Gamma, we find that there was no agreement either that the specific amount of $154,196 was to be paid to the applicant or that the applicant was to be paid a quarter of the work in progress valued at $616,784. In reaching this conclusion, we are aware of Castor's evidence that he had been told there had been an agreement. Castor, however, was reporting simply what he understood from what he had been told and is outweighed by the clear evidence of the applicant and of Gamma.

45. We have also noted that there was a considerable amount of evidence regarding the signing of the letter of 4 November, 1988, the addition of the postscript regarding liability for tax on work in progress and the applicant's continuing to accept further instalments without raising with the continuing partners the meaning of that postscript. These were events which postdated the partners' reaching an oral agreement and recording it. It indicates that the continuing partners expected the applicant to pay tax upon work in progress but it also indicates that at least some of them did not think that tax was payable on that item. It does not assist in determining whether or not an agreement was reached as to the discrete amount of the work in progress to be paid to the applicant.

46. It follows that we have concluded that the sum of $154,196 is not assessable income within the meaning of sub-section 25(1) of the Act.

Is the sum of $154,196 to be regarded as a net capital gain accruing to the applicant?

47. In considering this question, we have turned first to the definition of the word ``asset'' appearing in paragraph 160A(a) in the form in which it was enacted at 30 June, 1989. It provided:

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``In this Part, unless the contrary intention appears, `asset' means any form of property and includes-

• (a) an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property;
• ...''

48. Also relevant is section 160M of which sub-section 160M(1) provided at the relevant time:

``Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.''

49. Mr Logan submitted, in the first instance, that the applicant disposed of his fractional interests in each of the partnership's assets. He had arranged the preparation of a document based on the evidence submitted to the tribunal. It showed the various assets owned by the partnership and the applicant's interests in Devolution Pty Ltd and Deliverance Pty Ltd as well as a loan account. The document noted the applicant's interest in each, the consideration thought by the Commissioner to have been paid for each, the cost base for each and the resulting capital gain or loss.

50. Although Mr Logan submitted that the burden of proof lay upon the applicant and his figures were not determinative of the matter, he focussed upon work in progress. He did so because of his submission that it was likely that all work in progress would have been performed after 19 September, 1985 and so after the introduction of capital gains tax. A cost base of ``nil'' was assigned as no consideration had been paid by the partnership to acquire the work in progress in the first place and it was unlikely that there would have been any non-deductible costs. A market value cost base could not, Mr Logan submitted, be deemed under sub-section 160ZH(9) for the applicant did not acquire the work in progress from another person.

51. Mr Somers submitted that no portion of the $281,195 paid in respect of the net tangible assets of the partnership is assessable for capital gains tax. This was so for several reasons, he said. First, the sum of $137,084 comprised the repayment of loan monies due to him from Deliverance Pty Ltd. Second, the sum of $44,058 was his share of tangible assets including the library and computer software. Third, due to the effluxion of time, all records of the partnership entered by the applicant on 1 August, 1986 have been destroyed and it is no longer possible for him to attribute a cost base with respect to any of those assets. In any event, the work in progress is not an asset for the purposes of capital gains tax. The work only becomes an asset when it is billed out. It cannot be presumed that any element of work in progress that may have existed is automatically part of the net tangible assets for it may equally have been part of the $175,000 paid to the applicant as goodwill.

52. Mr Somers referred to Case N91,
81 ATC 487 where a taxpayer had claimed a deduction of $7,000 in respect of work in progress acquired when he purchased a legal practice. He had paid $25,000 for the practice and of that the sum of $21,000 was paid for work in progress and the balance for the library, furniture and effects. The deduction was claimed on the basis that it would take two to three years to complete the matters acquired and that the fees would be recovered equally over a two or three year period. None of the work in progress had been billed to the clients at the date of purchase. Mr Somers referred us to the passage in which Dr Gerber, with whom Mr Logan agreed, had said:

``It follows from the above that what the taxpayer bought was in no sense a `debt' - ascertainable or otherwise - nor a chose in action capable of assignment. Nor was it a novation since, in the absence of consent of the clients, no new contracts came about by which the purchaser was substituted for the vendor; an agreement to introduce a purchaser to the vendor's clients cannot constitute a novation. Even if it were held that the purchaser had acquired `book debts', in the case of contracts for personal service, it must be shown that the annulment of one debt was followed by the creation of a substituted debt in its place. This was not done in this case. A contract between solicitor and client is one involving personal skill and confidence, and is incapable of assignment without the consent of the client. At its highest, what this taxpayer obtained for his $21,000 was an expectancy - a fond

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hope that all or most of the clients of the office would remain with the firm notwithstanding a change of solicitors. In the words of Lord Esher M.R. in Styles the $21,000 was the money the taxpayer agreed to pay for that expectancy. `Now nothing can be more plain, if that is so, than that ($21,000) was the capital which (he) embarked in that business, the money (he) paid for it'.''

(page 490)

53. Upon reading the case, it seems to us that Dr Gerber was dealing with an argument that the sum of $21,000 was paid for ``ascertained book debts'' and that, as these debts came to be paid to the taxpayer, might not be subject to tax since the result was that the taxpayer had paid a capital sum for something that was restored to him as and when the book debts were actually paid. Dr Gerber's words were directed to his refuting this argument and were not directed to the question whether the taxpayer had acquired an asset for his $21,000.

54. That this was so is also clear from the particular passages he quoted from the cases of
City of London Contract Corporation Ltd. v Styles (1887) 2 T.C. 239 and Henderson's case to which we have already referred. Styles was concerned with the question whether the capital paid to purchase a business consisting of wholly and partially unexecuted contracts could be deducted from the income earned. The House of Lords held that the capital to purchase the business could not be deducted from the net profits.

55. Henderson's case was concerned, in part, with whether the work in progress was to be taken into account as earnings when a partnership changed the basis of its internal accounting affairs and taxation returns from a cash to an earnings basis. As we have already noted above, that case decided that, in the normal course of a business operation, the value of work in progress is not equivalent to earnings for the purposes of the assessment of income under the Act. Again, Henderson's case was not concerned with the question whether the work in progress could be regarded as an asset.

56. The case of Coughlan was concerned with that question. Upon the dissolution of a partnership, the business of the partnership was sold to three of the original partners and three others. An amount was specified as the value of the work in progress. The new partnership completed most of the work in progress and received approximately 90% of the fees for it. One of the arguments put forward was that the sum paid for the work in progress by the new partnership was an outgoing of a revenue nature and deductible by the members of the new partnership.

57. Heerey J said:

``In my opinion, this argument ignores the critical circumstance that work in progress was acquired by the new firm as part of the assets of a business with the intention of using those assets to produce revenue. The new firm hoped and intended that from 1 July 1979 onwards clients would come through their door attracted by the goodwill of the name Sherlock & Co and that income would be earned by doing work for those clients. The new firm paid the old firm money to obtain that opportunity. In the same way, the new firm paid money for the right to get access to the work that was in progress in the old firm's office and the right, from 1 July, 1979, to complete that work and charge clients for it. Money was paid for goodwill and work in progress, along with other assets, to acquire a structure which could be used to produce income.''

(page 4,508)

58. Heerey J had earlier noted that contracts for the performance of professional work such as accountancy services are not assignable without the consent of the client. The result of that is that the person acquiring the firm did not have a legal right to complete the work and charge the client (at page 4,507). He concluded, however, that the lack of a legal right of enforcement against the client was

``... not of itself inconsistent with work in progress acquired as part of the assets of a business being properly characterised as capital.''

(page 4,509)

59. It is clear from all of the cases that the work in progress of a partnership of a firm is, like goodwill, something that can be sold and purchased. In the case of partnerships providing professional services (such as legal or accounting services) work in progress is part of the essential framework of the business which is purchased. It is clearly an asset when regard is had to it in the sale and purchase of such a business.

60. In this case, an amount was included for work in progress even though we have found

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that it was not quantified. We have made that finding on the basis that there was never any suggestion from any of the witnesses, particularly the partners, that no amount was allowed for work in progress. Indeed, as we have found, the applicant wanted a quarter share of all of the partnership assets including the work in progress. That was so even though he stated that he had been prepared to accept as payment any figure offered provided it fell within a fairly broad range. The other partners, we have found, did formulate amongst themselves a figure for the work in progress.

61. We do not accept Mr Somers' submission that the value of the work in progress was not necessarily attributable to the figure of $281,195 paid for net tangible assets but to the figure of $175,000 attributable to goodwill. Goodwill and work in progress are similar in that both are assets of the partnership but they refer to different assets. Goodwill may be described as

``the benefit and advantage of the good name, reputation and connection of a business''

(Inland Revenue Commissioners v Muller & Co's Margarine Ltd [1901] A.C. 217 at 223)

62. This was quoted with approval in
Geraghty v Minter (1979) 142 CLR 177 by Stephen J, who continued that goodwill

``... is inherently inseverable from the business to which it relates. It may cease to exist or may be purloined by one who falsely represents his own business as the original business, but it cannot be disposed of separately from the business which created it nor can it survive the cessation of that business. The reason is simple: since it reflects and is dependent upon the reputation of that business, to sever it from the business destroys it.

Thus where, after dissolution, the business previously conducted by a partnership continues to be carried on under the same name by one of the former parties or by a purchaser, the old goodwill will tend, at least initially, to adhere to that business. As time passes the business, under its new management, will acquire for itself its own distinctive goodwill which will gradually take the place of the old goodwill.''

(page 193)

63. The meaning of ``goodwill'' was simply stated in
Cruttwell v Lye (1810) 17 Ves. 335 to mean

``Nothing more than the probability, that the old customers will resort to the old place,...''

(page 346 and cited with approval in Whiteman Smith Motor Co v Chaplin [1934] 2 K.B. 35)

64. We have already found that the term ``work in progress'' means work which is incomplete and for which the clients of a partnership or firm are not yet required to pay. As Heerey J expressed it more allegorically in Coughlan's case, work in progress is like:

``... an orchard on which there are trees growing with fruit not yet harvested.''

(page 4,510)

Goodwill is not an expectation of future earnings, as Mr Somers submitted, but to adapt the imagery used by Heerey J in Coughlan, work in progress is the fruit grown on the partnership's trees but not yet harvested. The goodwill comprises the blossoms on those trees which may or may not be fertilised and so may or may not grow into fruit. It cannot be described even as an expectation of future fruit because, for one reason or another, the blossom may never be fertilised.

65. It follows that we have found that the applicant thought that he was selling, and the continuing partners thought that they were purchasing, among other things, the applicant's interest in the work in progress as a matter entirely separate from the goodwill of the Firm. The continuing partners bought, and the applicant sold, an asset. It is, therefore, subject to capital gains tax within the terms of the Act. The applicant has not produced any evidence establishing that the work in progress had a cost basis. In the absence of that evidence, we are not satisfied that the amended assessment dated 11 June, 1992 is excessive.

Is the Commissioner precluded from assessing a capital gain in addition to the sum of $19,520 shown as the capital gain component in the amended assessment?

66. Mr Somers submitted that the Commissioner is precluded from assessing as capital gains any sum other than the sum of $19,520 included in the notice of amended assessment issued on 11 June, 1992 (T documents, page 125). Although the Commissioner is entitled to support the

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assessment on a ground not taken into account when the assessment was made, he may not do so if his doing so would cause undue embarrassment or surprise to a taxpayer. This is the effect, Mr Somers submitted, of
FC of T v Peabody 94 ATC 4663; (1994) 123 ALR 451 and
FC of T v ANZ Savings Bank Ltd 94 ATC 4844; (1994) 181 CLR 466.

67. The applicant in this case has been caused undue embarrassment as his records have been destroyed, Mr Somers continued. The Deputy Commissioner wrote to the applicant on 20 August, 1991 advising him that he was taken to have disposed of his interest in each of the partnership assets. In order to determine the amount of capital gain or loss in respect of the applicant's interest in each asset, he invited the applicant to advise how the proceeds should be apportioned (T documents, page 60). The applicant's accountant, Sirius wrote in response that he had never been advised of the allocation of the sum of $281,195 and considered it inappropriate that it should be allocated across any particular items. Notwithstanding Sirius' view, he submitted what he considered to be a fair allocation. On that allocation, the sum of $98,737 was described as a premium primarily reflecting an inducement to agree to sell and be bound by such things as the restraint of trade clause in the agreement between the applicant and the continuing partners. As far as the assertion that the sum of $154,196 was work in progress was concerned, Sirius stated that work in progress had never been recognised by the partnership as a tangible asset.

68. There was no further action until 20 May, 1992 when the Deputy Commissioner again wrote to the applicant and advised him that he had accepted that $154,196 was paid as his share of the work in progress at the date of his retirement (T documents, page 64). It also stated that only one quarter of the payment for goodwill was post capital gains tax and that in turn was subject to a 60% reduction under section 160ZZR . An amended assessment was issued on 11 June, 1992 (T documents, page 125). It noted that the amended taxable income was $538,002 and that it included the sum of $19,520 as capital gains. The assessment was payable by 16 July, 1992.

69. Mr Somers submitted that, had the Commissioner wanted capital gains to be a live issue he should have said something about it in the response of 20 May, 1993. In any event, as there had been full and true disclosure, the Commissioner only had three years form the date on which the amended assessment became due and payable to issue a further amended assessment.

70. While sub-section 170(3) of the Act, as it was in force during the financial year ended 30 June, 1989, did limit the Commissioner's power to issue an amended assessment as Mr Somers submits, we do not consider that it takes the matter any further. It provides that where a taxpayer has made full and true disclosure of all the material facts necessary for the assessment and the assessment is made after that disclosure, no amendment increasing the taxpayer's liability may be made after the expiration of three years from the date upon which the tax became due and payable under the assessment. In this case, the tax under the assessment became due and payable on 21 June, 1990. The amended assessment was issued on 11 June, 1992 and so well within the three year period. As the amended assessment was made within the three year period, the Commissioner was not limited by sub-section 170(3) and could amend the amendment regardless of whether or not the applicant had made a full and true disclosure of all material facts necessary for the assessment. In view of that, we do not need to consider whether the applicant had, or had not, made that disclosure.

71. As Mr Somers submitted, the ANZ Savings Bank case establishes that the tribunal is seized of the whole of the Commissioner's decision on the objection and not just a part. This is so even if a taxpayer is dissatisfied with only a part of the decision. The tribunal must specifically consider the aspects causing the taxpayer's dissatisfaction but it is also at liberty to review all other aspects of the Commissioner's decision. Its task is not to decide whether the grounds of objection have been made out but whether the taxpayer has satisfied the burden cast by the now section 14ZZK of the Taxation Administration Act 1953 (``the Administration Act'') of proving that the assessment is excessive.

72. Where the Commissioner wishes to support the assessment upon a ground not taken into account at the time that the assessment was made, he may do so, the High Court said. There is a proviso, however, and that is that he will be required to give notice to the taxpayer and may

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be directed to give particulars. The High Court had expressed a similar view a little earlier in Peabody's case. It had said of a scheme case that:

``... the Commissioner is entitled to put his case in alternative ways.... provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course.''

(at ATC page 4670; ALR page 459)

73. What is an assessment? An ``assessment'', in so far as it is relevant to this case is ``the ascertainment of... the amount of taxable income... and of the tax payable on that taxable income...'' ( sub-section 6(1) of the Act). It follows that the applicant in this case has the burden of establishing that the amended assessment of 11 June, 1992 is excessive. In our view, he has failed to do so. His failure to do so is not brought about by some shift in ground by the Commissioner that has caught him by surprise. The issue of capital gains was raised very early and it was the Commissioner's original view on 20 May, 1992 that capital gains was ``the issue'' rather than simply ``an issue''.

74. Although the Commissioner then left the path of capital gains and took the income path, there is nothing in the material to suggest that he abandoned it entirely. The issue of capital gains has been fairly and squarely on the table since Mr Beddoe, Senior Member, directed on 17 February, 1995 that the parties furnish further statements of facts, issues and contentions. The parties were required to set out their contentions should it be found that the payment to the applicant included a component for work in progress but there was no detailed calculation agreed as to the amount of that work in progress. The Commissioner's statement was filed on 14 March, 1995 and the applicant's signed on 18 April, 1995. These statements both addressed the issue of capital gains tax on any payment for work in progress.

75. We do not find that there is any substantive unfairness in allowing the Commissioner to raise the issue of capital gains at the hearing. The statements were filed some months before the hearing of the matter and so the applicant could not be said to have been caught by surprise. He has certainly been embarrassed by Credits and Debits' destruction of records for the financial year ended 30 June, 1987. That occurred automatically in Credits and Debits' office for they were more than seven years old. We accept Sirius' evidence in this regard. We also accept his evidence in his statement (Exhibit C) that he did not retain them because the Commissioner has expressed his view in his letter of 20 May, 1992 that the sum of $154,196 was the applicant's share of the profits of work in progress. Sirius' view, however, did not take account of the applicant's view that the Commissioner was incorrect and that, if successful, might well need these records to establish a cost base.

76. It follows that the applicant has been placed in a very difficult position to establish a cost base with respect to the formation of capital gains assessment. His difficulties, however, do not arise from the Commissioner's being permitted to rely upon the ground but from the loss of the records.

77. The result is that, although there was no statutory obligation to retain the records, the applicant, on the evidence before us, is unable to substantiate his cost base and so is unable to establish that the assessment was excessive. We have considered whether he should be given a further opportunity to establish that cost base from records which may (or may not) be in the possession of people other than Credits and Debits. We have decided that he should be given that opportunity. Consequently, we have adjourned further consideration to a date to be fixed.