The Victorian Court of Appeal has dismissed an appeal by the Commissioner of State Revenue and ruled that the sale and purchase of a partner’s interest in a land-owning partnership was not a “transfer of dutiable property” because a partner’s interest in a land-owning partnership is not an ‘interest in’ an ‘estate in fee simple’ in the land owned by the partnership.
The facts, in the case, were these.
- The Faircourse Unit Partnership owned land which it leased for the operation of an aged care business.
- The first respondent Danvest Pty Ltd (‘Danvest’) and the second respondent Bullhusq Pty Ltd (‘Bullhusq’) purchased partnership units in February 2014.
- After the purchases they each held 50 per cent of the partnership units.
- They wrote to the applicant, the Commissioner for State Revenue, for confirmation that they would not be required to pay duty on the purchases.
- In response, the applicant issued a private ruling in December 2014 which relevantly expressed the view that a partner’s interest carried, with it, a beneficial interest, in all the assets of the partnership, and that duty was, therefore, payable.
- In April 2015, the applicant issued an assessment, confirming the view expressed in the private ruling, and assessed duty, in the amount of $1,751,352.
- The respondents objected to that assessment and, in April 2016, the applicant disallowed the objection. The matter was then referred to the Trial Division on the request of the respondents pursuant to s106 of the Taxation Administration Act 1997.
The trial judge concluded:  VSC 125, that the partnership interest acquired, by each of the respondents was ‘no more than an equitable chose in action—the right to partnership property, as a mere expectancy, on the dissolution of the partnership and realisation of assets’. It followed that the interests acquired by the respondents were not interests in an estate in fee simple but personal property that ‘conferred no interest in the Partnership property, in particular the land, and did not cause any change in the beneficial ownership of such property’. As such, the partnership interests were not dutiable property and the assessment was set aside.
The Court of Appeal agreed with the decision at first instance, by Justice Croft, as we see shortly.
The relevant statutory provisions are worth look at, more carefully, before seeing what the Court of appeal said.They are to be found in the Duties Act 2000 (Vic).
- There is duty on a ‘transfer of dutiable property‘ (under s7(1)(a)).
- There is also duty on a ‘change in the beneficial ownership of dutiable property’ (s7(1)(b)(vi)).
- A ‘change in beneficial ownership’ is defined as including: “change in the beneficial interests in dutiable property” (s7(4)).
- ‘Dutiable property’ is defined as including: “an estate in fee simple” in “land in Victoria” (s10(1)(a)(i)).
- ‘Dutiable property’ is also defined as including: “an interest in dutiable property” being the estate in fee simple in Victorian land (s10(1)(ac)).
The duty questions, therefore, hung on the issue nature of partner’s interest in the partnership assets.
The Commissioner’s argument was that a partner has an interest in all the assets of a partnership, and thus had an ‘interest’ in dutiable property (being Victorian land), which was transferred and, thus, was dutiable.
But both courts found that the ‘right’ was too tenuous to be relevantly an ‘interest’ in land. I will quote some of the portions of the judgements, shortly. But the substance, of the matter, is this.
- The partnership assets are committed to the business of the partnership, until the partnership ceases.
- A partnership can, and usually will, incur liabilities, which the partners expect, can be met, first, out of partnership property.
- A partner’s rights include a right to an amount, being their share of the partnership’s income, if the partnership agreement permits. The right to this amount is ‘severed’ from the assets that remain committed to the partnership business. Ordinarily, the right to a share of the partnership’s income, does not arise until the partnership’s accounts, are struck, and the quantum, of that income, is calculated. And that, in turn, is usually done annually.
- The other key right, a partner has, is to share in any surplus of partnership assets, over partnership liabilities, when the partnership ends. Unless otherwise agreed, partnership liabilities would be discharged by realising partnership assets. Any remaining surplus must then be distributed, either in-specie or by realising the remaining assets and distributing cash (depending on what the partnership agreement says).
- As a result, a partner’s right to the partnership assets (including any land) is only that, they remain committed to the partnership business, and those that remain, at the end of the partnership, and after discharging partnership liabilities, might be distributed to that partner, in-specie (all in all, a very tenuous ‘expectancy’ only).
- It is because this right is so tenuous, that it has long been held that a partner’s interest in ‘realty’ is only ‘personalty’ – namely the ‘inter-se’ rights, partners have between themselves, to have the partnership assets dealt with in this way (namely: committed to use in the partnership business, until the partnership ends, and then made available to meet partnership liabilities before distributing any surplus).
This is the gist of what Her Honour, Justice Tate, of the Court of appeal, found, in her brief judgement, reproduced below.
1. I have had the considerable benefit of reading, in draft form, the reasons of Santamaria JA and those of McLeish JA. I agree with their Honours, for the reasons they give, that a partner’s interest in a land-owning partnership is not an interest in an estate in fee simple in the land owned by the partnership; it is not ‘dutiable property’ within the meaning of ss 10(1)(a)(i) or 10(1)(ac) of the Duties Act 2000 (‘the Act’). Its transfer is thus not a transfer of dutiable property within the meaning of s 7(1)(a) or s 7(1)(b)(vi) of the Act attracting a liability to pay duty.
2. The interest a partner has in partnership property is an equitable right to a proportion of any surplus upon the dissolution of the partnership after the realisation of the assets and payment of the debts and liabilities of the partnership. I agree, for the reasons their Honours give, that this interest is a presently existing equitable chose in action which protects the partner’s future entitlement to a proportion of the surplus but is not, prior to dissolution, a proprietary interest in the assets of the partnership, including land owned by the partnership.
(Comr of State Revenue v Danvest Pty Ltd & Anor  VSCA 382, Court of Appeal of the Victorian Supreme Court, Tate, Santamaria and McLeish JJA, 20 December 2017).
- Did the purchasers of the 50% partnership interests have to pay land transfer duty?
- Did the partnership have a significant Victorian land asset?
- Did the partners relevantly acquire an ‘interest’ in Victorian land?
- Does a partner have to wait until net assets are being distributed, on the partnership ending, to have any hope of getting any of the partnership’s real property?
- Is a partner’s interest in real property considered merely personal property?