The Full Court has dismissed an appeal by a taxpayer against a decision at first instance that a deed transferring a retiring partner’s interest in a partnership to a trust did not transfer a continuing interest in the partnership.

The taxpayer was a partner in a law firm. The taxpayer had been assessed on the basis that he was entitled to a one-seventh interest in a 7 partner firm.  

Prior to becoming a partner in that firm, a retiring partner and his associated company had entered into a deed with a trust pursuant to which the retiring partner and his company purported to transfer their respective interests in the partnership to a holding trust for the benefit of the continuing partners’ respective family trusts. The taxpayer argued that this deed had transferred a 20% interest in the partnership to that holding trust and therefore that holding trust was entitled to 20% of the partnership income. Therefore he was should not have been assessed on that proportion of the partnership income.  

The judge at first instance held that the deed did not have the effect of transferring a 20% interest in the partnership to the holding trust. If this has been intended what the deed should have done was for a continuing partner to have assigned an interest in the partnership to the holding trust or for a continuing partner to have declared himself a trustee of such an interest. In other words in a practical sense what should have occurred was for the retiring partner to have transferred his share in the partnership to a new partner where all the existing partners agreed to the admission of a new partner. The deed did not have this effect.  

By reason of the retiring partner’s interest in the partnership, the retiring partner was entitled to a proportionate share of the net assets of the partnership on dissolution and also a proportionate share of the profits made by the partnership whilst he remained a partner.  

Therefore the deed only had the effect of transferring the retiring partner’s proportionate share of the profits made by the partnership up to the date of his retirement.  

The Full Court upheld the decision at first instance that the deed did not transfer any continuing interest in the partnership to the trust. Therefore the trust did not have a 20% interest in the partnership of which the taxpayer was a partner.  

This contrasted with another deed which the continuing partners had entered into to transfer a 30% interest in the continuing partnership to the holding trust. This was held to be effective to transfer the 30% interest in the partnership.

The outcome in this case shows the importance of ensuring that legal documents give effect to what is intended by the parties. In this case the parties had not considered what happens at law when a partner retires from a partnership. Effectively the partnership comes to an end and a new partnership comes into existence. The deed in this case did not take account of that fact meaning that all that was assigned was what interest the former partner had in the former partnership. The retiring partner did not have an interest in any continuing partnership so no such interest could be transferred by the retiring partner.