On 31 March 2017, the Supreme Court of Victoria handed down a decision confirming that the transition of a partnership interest was not subject to transfer duty under the Duties Act 2000 (Vic) (the Act). Despite the clear reasoning of the Supreme Court and the strong historical judicial support for the decision, disappointingly the Victorian Commissioner of State Revenue (Commissioner) has appealed the decision.
In Danvest Pty Ltd & Anor v Commissioner of State Revenue  VSC 125 (Danvest), Croft J held that the transfers of a partnership interest was neither a transfer of dutiable property for the purposes of s 7(1)(a) of the Act, nor did the transfers result in a change in the beneficial ownership of any dutiable property of the partnership for the purposes of s 7(1)(b)(vi) of the Act. It followed that, in the Court's opinion, the Commissioner was wrong to assess the transfers of the partnership interests as dutiable transactions.
This decision is a clear determination that a dealing in a partnership interest is not subject to transfer duty in Victoria (in contrast to most other jurisdictions, including NSW, which have specific transfer duty partnership provisions in their duties legislation). While the Commissioner has appealed the decision, it is expected that, absent new appeal grounds, the appeal will be unsuccessful and that legislative amendments will be required in order to bring to duty most dealings in partnership interests.
The proceeding involved the sale, by two former partners, of interests in the Faircourse Unit Partnership (the Partnership) and the subsequent purchase of those interests by Danvest Pty Ltd and Bullhusq Pty Ltd (collectively, the Appellants).
Under the 'Rules' of the Partnership, the manager of the Partnership (Manager), was to control and manage the business of the Partnership. The Manager held the Partnership property (which included three properties / land interests) "in trust for the Partners as an entirety", and was required to deal with the property as directed by the Partners. The Manager could, on behalf of the Partnership, incur expenses that would have the effect of depleting the assets or reducing the income of the Partnership.
The Appellants sought a private ruling from the Commissioner that the transactions were not dutiable. This was on the basis that the interests that were sold and purchased were nothing more than personal property that conferred no equitable proprietary interests in partnership assets, and specifically that such interests did not comprise an interest in partnership land.
The Commissioner, in his private ruling, expressed the view that the transactions resulted in an acquisition of a proportionate beneficial interest in the property of the Partnership. As the Partnership property included land interests (being estates in fee-simple) and goods (both being a type of dutiable property), the interests acquired gave rise to a liability to duty. In the alternative, the Commissioner ruled the Appellants had "in effect acquired a direct beneficial interest in the underlying assets of that Partnership", and consequently this amounted to a change in beneficial ownership of the relevant dutiable property (being a separate form of dutiable transaction to a transfer of dutiable property). As such, the Commissioner ruled that the acquisition of such interests by the Appellants constituted a dutiable transaction under the Act and assessed duty on that basis. Both Appellants subsequently filed a Notice of Objection against the assessment.
The legislative provisions in brief
An interest in a partnership is not expressly stated to be an item of dutiable property under the Act (all other States and Territories have specific partnership provisions).
Instead, the Act brings to duty a transfer of dutiable property (s 7(1)(a)) and "any other transaction that results in a change in beneficial ownership of dutiable property" (s 7(I)(b)(vi)). A change in beneficial ownership includes, but is not limited to, "a change in equitable interests in dutiable property" (s 7(4)(c)).
Dutiable property is defined in the Act to include (among other things) an estate in fee-simple in land in Victoria (s 10(1)(a)(i)), and an interest in such an estate.
Therefore the critical issues for determination by the Supreme Court were:
- the proper characterisation of the nature of a partner's interest in partnership property; and
- whether such interests were interests in an estate in fee simple.
Nature of a partner's interest in partnership property
In order to determine the nature of the rights in partnership property enjoyed by a partner under a partnership, Croft J considered numerous High Court authorities, including Canny Gabriel, Cyril Henschke, and CPT Custodian.
Having regard to such authority, Croft J rejected the Commissioner's submissions that the interests purchased by the Appellants were equitable interests in each of the assets of the Partnership and, thereby, that such interests constituted an interest in an estate in fee simple in the land of the Partnership. Croft J stated that such submissions did "not have regard to the thread, quite discernible in my view, running through the authorities that the description of a partner's interest in the partnership property as a "beneficial interest" is merely a general descriptor… and not a descriptor that informs, in itself, as to the actual nature of such an interest".
Looking past this 'general descriptor', Croft J formed the view that the unique kind of non-specific 'beneficial interest' enjoyed by a partner in partnership property cannot be characterised as analogous to a vested proprietary interest in any specific property, and that the interests are an equitable chose in action, being an expectancy only.
In particular, Croft J accepted (in line with the case authorities) that the equitable chose in action constituted a right only to a proportion of the surplus remaining after realisation of the assets, and payment of the debts and liabilities, of the partnership and until the dissolution of the partnership, there is no need in the meantime for equity to carve out a present proprietary interest.
Whether the rights provide an "interest in" the dutiable property of the Partnership?
As stated above, Croft J determined that the rights enjoyed by partners in the property under the Partnership constituted a chose in action, and therefore a species of personal property that did not confer upon a partner any equitable proprietary interest in the partnership assets or any particular partnership asset.
Croft J went on to consider whether, as a matter of statutory construction, those rights constituted an 'interest in', or 'beneficial ownership' of, the dutiable property of the Partnership.
Croft J held that the equitable chose in action acquired by each of the Appellants, being a species of personal property, was 'incapable' of conferring any equitable proprietary interest, or changing any 'beneficial ownership' in the Partnership assets. This was a similar position in CPT Custodian where the trustee owned both legal and beneficial ownership for others and that all that was conferred on those others were equitable rights against each other and against the trustee.
The Court concluded that, because the Act does not include an interest in a partnership as dutiable property, and because the rights of a partner in partnership property did not confer an equitable proprietary interest in the property, the Commissioner's assessment was wrongly issued to the Appellants.
The decision in Danvest highlights the inherent difficulty the Commissioner faces in seeking to assess partnership acquisitions to duty under the current transfer duty provisions in the Act. Further, Victoria is currently the only Australian jurisdiction that does not have specific provisions bringing to duty the acquisition of an interest in a partnership that holds dutiable property. The decision also highlights the difficulty the Commissioner has in assessing landholder duty on the acquisition of a company or unit trust that is a partner in a partnership that has Victorian land interests.
While the Commissioner has appealed the decision, it is anticipated that ultimately legislative changes will be required in order for the Commissioner to impose duty on most partnership interest acquisitions and acquisitions of a partner in a partnership that holds Victorian land.