Commissioner of State Taxation v Henschke & Ors [2010] HCATrans 23 (12 February 2010)

Last Updated: 17 February 2010

[2010] HCATrans 023

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide No A9 of 2009

B e t w e e n -

COMMISSIONER OF STATE TAXATION

Applicant

and

CYRIL HENSCHKE PTY LTD ACN 007 691 018

First Respondent

HENSCHKE CELLARS PTY LTD 007 902 986

Second Respondent

STEPHEN CARL HENSCHKE

Third Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

FROM MELBOURNE BY VIDEO LINK TO ADELAIDE

ON FRIDAY, 12 FEBRUARY 2010, AT 9.51 AM

Copyright in the High Court of Australia

__________________

MR M.G. HINTON, QC, Solicitor-General for the State of South Australia: If the Court pleases, I appear in this matter with my learned friend, MR M.J. WAIT, on behalf of the applicant. (instructed by Crown Solicitor’s Office (SA))

MR M.T. FLYNN: I appear for each of the respondents, your Honours. (instructed by Finlaysons Lawyers)

FRENCH CJ: Yes, Mr Solicitor.

MR HINTON: The key facts of this matter are not in dispute. We had a deed dated 17 January 1986, or by-deed dated that day. The partners of CA Henschke and Co held interests in the partnership in the following proportions: Doris Henschke, one-sixth; Stephen Henschke, one-sixth; Cyril Henschke Pty Ltd, one-third and the Henschke Cellars Pty Ltd, one-third. In early 2004 the assets of the partnership are valued at approximately $36 million, of which the bulk of that is goodwill.

By deed of retirement dated 23 December 2004, the partners agreed that Doris would retire, that she would be paid approximately $6 million, representing her one-sixth interest in the goodwill of the partnership, and that her former partners would continue the partnership business. The deed of retirement then acknowledges that the continuing partners’ respective shares would be Mr Stephen Henschke, one-fifth; Cyril Henschke Pty Ltd, two-fifths and Henschke Cellars Pty Ltd, two-fifths.

It is our submission, in a nutshell, that to describe a partner’s interest in partnership property as an interest in each and every asset of the partnership, expressed as a right to a share of the surplus, if any, after the realisation of the assets and the discharge of any liabilities and characterised as an equitable chose in action is correct as far as it goes but it is not complete, nor is it exhaustive of the nature of a partner’s interests.

In our submission, a partner has a proprietary right in each and every asset that does not equate to a right to a fixed portion or percentage of the value of an asset of a partnership but does extend the exercise of control over the asset and the management of the asset for the purposes either of promoting the partnership or protecting the interest of the individual partner.

FRENCH CJ: The question in this case is whether the transaction effected a conveyance or transfer of property.

MR HINTON: Yes, your Honour.

FRENCH CJ: It is not so much a question of whether there was property as to whether it was conveyed or transferred.

MR HINTON: A combination of both. In order to determine whether or not property was transferred, you first have to determine what is the nature of the property. The Chief Justice characterised a partner’s interest in partnership property in, with respect, the traditional way. He did not, in our submission, include within it those aspects of a beneficial interest that allow control and management, those aspects of that beneficial interest that can be protected by caveat, or give priority.

KIEFEL J: I think one of the points arising from judgment which may be made against you is that there cannot be seen to be any diminution in the partnership assets by reason of the retirement and the payment of the moneys to Mrs Henschke. Nothing has gone out.

MR HINTON: But the proprietary right – conceded, with respect. But the proprietary right that has transferred is her right to take action with respect to individual assets of the partnership for the purposes of protecting the partnership and promoting it and/or protecting her own interest in the bottom line, if I can put it that way, upon dissolution or retirement.

KIEFEL J: But how do you characterise the proprietary right?

MR HINTON: The proprietary right extends beyond its expression in a chose in action. It extends to the ability to protect both the interests of the partnership and the interests of the individual partner during the life of the partnership, and to the extent that it includes those rights – those rights being enforceable by way of a caveat where it is land, for example, or give you priority to consider the Canny Gabriel Case – to the extent that it includes those rights, upon retirement there was the transfer of those rights, that aspect of the partnership of - - -

KIEFEL J: To what extent is the notion of goodwill caught up in this because one would assume that goodwill would be perhaps a significant part of this partnership?

MR HINTON: In one way that is what makes this perhaps a very difficult case. Goodwill is an asset, but when one is talking about the “Hill of Grace” label, for example, the retirement, with the greatest of respect to Doris Henschke from the partnership, would not undermine the goodwill that goes with that label. So whilst we have an adjustment in accounts to reflect perhaps the surplus upon realisation minus liabilities discharge, goodwill still remains by virtue of the reputation of that label of a higher value and that - - -

KIEFEL J: I am sorry, Mr Hinton. I think you have said that the only case which might really be drawn upon in relation to a description of partnership property or the interests of partners in that property is Canny Gabriel [1974] HCA 22; 131 CLR 321, and perhaps the Everett decision at [1980] HCA 6; 143 CLR 440. But you contend that the Full Court’s judgment involves a misinterpretation, or do those decisions not go far enough to answer this question. I am not quite sure what you are saying about that?

MR HINTON: With respect to the Full Court’s decision, we say as far as it goes it is correct but it does not consider the entire nature of partnership property. With respect to decisions of this Court, this Court has not had the opportunity to consider what is the full nature of partnership property. Do I draw some comfort from the Canny Gabriel Case? With respect, I do, and it is to be found at page 87 of the application book set out in our outline of submissions at paragraph 26, the top of page 87.

It is where three judges of this Court decided that a partnership interest was not perhaps adequately characterised as expressed in a chose in action, but extended as outlined in the paragraph there, often recognised as a beneficial interest and in this case in particular it gave priority over and above an equitable charge given to a stranger by another partner. So if it gives priority over that equitable charge, then the nature of partnership property extends beyond just a chose in action.

KIEFEL J: You do not rely upon there being something in the nature of a notional winding up of one partnership and the formation of another in the process of the retirement of a partner and the continuation of the other partners?

MR HINTON: Not in this case. Upon retirement or dissolution it matters not. For the purposes of this case, Doris Henschke gave up those added aspects of her interest in the partnership property as I have described.

FRENCH CJ: Those added aspects you speak of in terms of such things as ability to protect.

MR HINTON: Control and manage, yes, your Honour.

FRENCH CJ: Are they anything more than incidents of her equitable interest, in the sense that they speak of the sorts of remedies or processes

that are available to protect it? Are they a property right? It is just an odd expression to characterise as a property right an ability to protect something.

MR HINTON: Property right perhaps might be a loose use of the language, definitely the transfer of an interest, an equitable interest, for the purposes of the Stamp Duties Act. Are they anything more than perhaps another expression derived from the chose in action or the existence of the chose in action? In our submission, they exist independent of the chose in action, although they perhaps do protect ultimately what is to be achieved by exercising the right to an interest in the surplus after realisation of the assets and the discharge of any liability, if the Court pleases.

I cannot really put our argument any higher, if the Court pleases. It is that added aspect that was not taken into account and it is that added aspect that amounts to a transfer of property for the purposes of the Stamp Duties Act. Those are my submissions.

FRENCH CJ: Yes, all right, thank you, Mr Solicitor. Yes, Mr Flynn.

MR FLYNN: Your Honours, I would like to begin by addressing an issue not covered in the respondent’s written summary. I rely upon an affidavit sworn by Michael St John Randal Butler on 4 February 2010.

KIEFEL J: This is about the retrospective ruling.

MR FLYNN: Yes, your Honour. The ruling announces that the South Australian Government intends legislating to reverse the effect of the Full Court’s decision in this proceeding.

FRENCH CJ: That is just a statement of executive intention, is it not? Why should we take any notice of that?

MR FLYNN: Well, the point is that if such legislation is passed it would remove that element of public importance because the decision could only ever affect one particular taxpayer - - -

FRENCH CJ: Well, it might be passed and it might not. I do not think it is appropriate for us to assume that the will of the Executive is that of Parliament.

KIEFEL J: But the question might also transcend the particular case, might it not? If there is a question about the proper description of a partner’s interest in the assets and how they are described and whether or not Canny Gabriel is sufficient to go far enough to answer the sort of questions which are thrown up by this type of case which would not be singular, if not in South Australia, elsewhere, it would be of more general importance, I would have thought.

MR FLYNN: If there was such an issue that would be correct, your Honour. We say that there is not.

KIEFEL J: In South Australia if this legislation goes through.

MR FLYNN: We say that there is not a broader issue at stake in this case. All that we point to in respect of the proposed legislative change is that certainly from a point of view of South Australian stamp duty, the Henschkes are going to be the only people ever affected by this issue. I would like to move on then to the reason that we gave in our written summary why special leave should be refused, which is that the Full Court’s decision is not attended with sufficient doubt.

We rely on the arguments in our written summary, but in addition to those arguments I would like to take the Court to some passages in the courts below that support our argument. In the opening paragraph of his summary of argument, the applicant identifies as the important issue for the Court to be whether the beneficial interest of a partner in partnership property is a mere chose in action or whether it is a proprietary interest in partnership property. In fact, that supposed issue was not in controversy in either of the courts below. If I could take the Court to appeal book 33, paragraph 48 of the judgment of Justice Gray, where his Honour says that:

The Commissioner submitted that it was a misconception to equate Doris’ entitlement upon retirement to her share of the goodwill of the partnership. It was said that she had no such entitlement. Her entitlement was to an equitable chose in action against the continuing partners with respect to, and a beneficial interest in, all of the partnership property, including the goodwill.

So that was the Commissioner’s submission at first instance. Then the primary judge adopted that submission at appeal book 35, paragraph 57, where his Honour says that:

Prior to 23 December 2004 –

this is right at the bottom of the page –

Doris held a one sixth interest in the partnership. This interest was an equitable interest in the nature of a chose in action.

So that was the starting point at first instance. Then likewise before the Full Court, it was common ground that the partners have an equitable chose in action and a beneficial interest in the property, the partnership. One can see that at application book 57, paragraph 26, where Chief Justice Doyle says:

The Commissioner’s first point is that a partner has a beneficial interest in all of the property of a partnership. So much is common ground.

Then over the page at page 58 of the application book at paragraph 36, Chief Justice Doyle refers to the appellants’ submissions.

The appellants, like the Commissioner, begin with the proposition that Mrs Henschke held an equitable chose in action against the continuing partners with respect to, and to a beneficial interest in, all of the partnership property.

Those statements of the law are each supported by the High Court’s decision in Everett and also by Justice Kitto’s judgment in Livingston v Commissioner of Stamp Duty (Qld) which is set out at page 59 of the application book in paragraph 42 of Chief Justice Doyle’s judgment.

FRENCH CJ: That is common ground as far as it goes. The first question though talks of a mere chose in action and conversion to an entitlement to payment.

MR FLYNN: If one goes to the applicant’s summary of argument, what they seek to do is to draw a sharp distinction between a mere chose in action and a beneficial interest in the underlying property. What these passages demonstrate is that there is no such sharp distinction; rather the equitable chose in action and the beneficial interest in the underlying assets are each facets of the same interest. The judge at first instance and the Full Court and the parties were all in heated agreement about that up until the time of this appeal.

KIEFEL J: Was the question of what the remaining partners are actually paying for squarely raised? Was that question raised? They are paying good money to Mrs Henschke on her retirement. What are they paying for?

MR FLYNN: Well, the continuing partners are paying for the extinguishment of her interest.

KIEFEL J: Which must be of benefit to them. Put it another way, their interests in the partnership property are increased by the extent of the extinguishment of hers.

MR FLYNN: With respect, we would say no, your Honour.

KIEFEL J: What happens to her interest?

MR FLYNN: Her interest is extinguished. So the property that the continuing partners own after the extinguishment continues to be the same as the property that they owned before the extinguishment, subject to the assets that were distributed to the outgoing partner. But the real benefit to the continuing partners was that Mrs Henschke was no longer a partner in that partnership. They did not achieve an immediate financial gain or an additional proprietary interest as a result of her retirement.

KIEFEL J: But it is not a new partnership?

MR FLYNN: It is a new partnership, yes.

KIEFEL J: In which case, an analogy with notional windings-up might be considered.

MR FLYNN: I do not really understand.

KIEFEL J: That is, that the retiring partner as on winding-up and distribution, on the winding-up of a partnership has taken her share in the interests of the partnership and the two remaining partners continue on.

MR FLYNN: Well, yes. That is – effectively the retirement effected a dissolution of the old partnership and the new partnership commenced immediately, yes. But again, that did not entail any conveyance of a proprietary interest. Once one accepts that Chief Justice Doyle correctly identified the subject matter of the potential conveyance, this case simply turns on the construction of section 60 of the Stamp Duties Act, and to have a conveyance what one needs is an assignment or a transfer of a proprietary interest. There was no such assignment or transfer here.

The reasons for Chief Justice Doyle’s decision are summarised at paragraphs 51 and 52 of his judgment at application book 62, but you see it logically from that construction of section 60. At page 62, line 12, he says:

That interest –

that is the partners’ interest –

is described as a beneficial interest in the assets of the partnership, but it is one of a unique nature, and one that flows from the equitable chose in action.

From this I draw the preliminary conclusion that the Deed effects a transaction by which that equitable chose in action was converted into an entitlement to payment of a specific amount. Mrs Henschke did not deal with a beneficial interest in the assets of the partnership.

So it was open to her if she had wished to assign her interest to the continuing partners. They would have had to have paid for that interest out of their own resources, then that may have entailed a conveyance.

FRENCH CJ: When the word “conversion” is used here, does that mean anything more than the extinguishment of the equitable chose in action?

MR FLYNN: It simply means the extinguishment of the equitable chose in action and payment of - - -

FRENCH CJ: And a payment of a consideration to her for that extinguishment.

MR FLYNN: Yes.

FRENCH CJ: Which must enlarge the scope of the continuing partners’ rights, must it not, in relation to the partnership property?

MR FLYNN: No, your Honour. We would say no. There is actually a table that illustrates the point which is set out at - - -

FRENCH CJ: This is in Chief Justice Doyle’s judgment, I think, is it not?

MR FLYNN: And I think we also set it out against at application book 94.

FRENCH CJ: Page 90?

MR FLYNN: Application book 94 in our written summary, and if one focuses here on the goodwill revaluation reserve, what one sees is that before the extinguishment Stephen Henschke, for example, had a one-sixth fraction which gave him an entitlement to about $5.8 million. The fraction does change, that is true, but the entitlement does not because the assets of the partnership have been diminished by the distribution to the retiring partner. That was the reason for then drawing the analogy with MSP Nominees where - - -

KIEFEL J: How are the assets diminished by her retirement?

MR FLYNN: Because she receives a payment of I think it was about $6 million.

FRENCH CJ: That is out of partnership capital.

MR FLYNN: That is out of partnership capital. So each partner’s assets and each partner’s capital remains the same after her retirement as it was before her retirement.

KIEFEL J: The deed itself which appears at application book 54 and 55 shows that increase in the interests of the partners consequent upon her retirement.

MR FLYNN: We say it does not show an increase. It simply says:

Recital B states:

B The interests . . . are as follows:

(a) Cyril Henschke - one third;

(b) Henschke Cellars - one third;

(c) Stephen - one sixth; and

(d) Doris - one sixth.

Then at paragraph 5, it says:

(a) Cyril Henschke - two fifths;

(b) Henschke Cellars - two fifths; and

(c) Stephen - one fifth.

But as I have explained, that does not actually change the value of the interests that each partner had, and it does not change the underlying assets apart from the cash that would have been distributed out to Mrs Henschke at the time of the retirement. Apart from that, all the assets are still the same, and the value of the partners’ interests is the same. Given that one defines the partnership interest as the equitable chose in action - - -

KIEFEL J: Which is her right to claim on a winding-up.

MR FLYNN: Which is her right to claim on a winding-up and a beneficial interest in the underlying assets, there has not been required to be any conveyance of property. It may have been different if, for example, the partners had each owned an interest in land, and then if Doris had retired there would have needed to have been a transfer of land to give effect to the retirement and then you would have had a dutiable instrument. But stamp duty under the Stamp Duties Act is a tax on instruments, so the only issue before the Court is whether that instrument – leaving aside 71E which I will come to – is whether that instrument was dutiable.

FRENCH CJ: What role does the definition in section 60 of the Act of conveyance – I am looking at the widest scope of that definition, I am looking at pages 52 and 53 of the application book, at the bottom:

conveyance includes –

. . .

(d) every other assurance or instrument of any kind,

by which . . . any real or personal property or any estate or interest in any such property is assured to, or vested in, any person –

Now, I would take it that that is probably the most general coverage, if you like, of the definition. Was that addressed in the Full Court’s judgment?

MR FLYNN: The Full Court did address section 60.

FRENCH CJ: The conclusion is there was no conveyance on sale – that is at paragraph 74 on page 67.

MR FLYNN: Well, at page 53 of the application book, paragraph 15 of the judgment, Chief Justice Doyle first of all, having set out section 60 in the definitions, says at paragraph 15:

Clearly enough, to satisfy either definition there must be a transfer or vesting of property.

So at the core of this definition is this idea of an assignment or a transfer. It could have been drafted differently. It could have been drafted to include, for example, the leases.

FRENCH CJ: Assurance to or vesting in.

MR FLYNN: Yes. We say that once you identify the property correctly, then the outcome follows from that construction of section 60. Your Honours, I would like to conclude with section 71E of the Stamp Duties Act. At application book 53 to 54, Chief Justice Doyle sets the section out.

FRENCH CJ: Yes.

MR FLYNN: Now, we say this provision was really designed to prevent transactions that are effected without an instrument from escaping stamp duty. It applies under subsection (1):

to a transaction in the following circumstances –

(a) the transaction results in a change in the ownership of a legal or equitable interest in –

so far as relevant –

(A) a business situated in the State; or

. . .

(iii) an interest in a partnership –

Stopping there, we say that there was no change in ownership of a legal or equitable interest because the equitable chose in action was discharged. It did not change from being owned by Mrs Henschke to the continuing partners. But then (b), the second set of requirements is that:

(i) the transaction is not effected, or not wholly effected, by an instrument on which ad valorem duty is chargeable; but

(ii) if the transaction had been effected, or wholly effected, by an instrument, the instrument would be chargeable with duty as a conveyance or as if it were a conveyance.

Well, if the deed of retirement was not chargeable with duty, then what we say is that there was no hypothetical instrument that if it had effected the transaction would have been dutiable as a conveyance. The transaction was wholly effected by the deed of retirement which was a written instrument. So if it is not dutiable, well then we say 71E cannot apply and it is not surprising that 71E does not apply because its purpose was clearly to tax transactions that were not affected by documents.

KIEFEL J: What did the Chief Justice say about 71E? Perhaps that is at paragraph 39 on page 59.

MR FLYNN: I thought he dealt with it - - -

FRENCH CJ: Page 68.

MR FLYNN: Yes, application book 68. He really deals with the Commissioner’s argument here which was that in some way if this transaction were to escape duty it would be a triumph of substance over form. He denies that that is the case because here both the substance and the form are consistent with each other. At paragraph 79 he says:

On the approach that I favour, Mrs Henschke’s equitable chose in action has been extinguished in return for the payment.

FRENCH CJ: He is really saying he cannot use 71E to conjure “the real transaction” and then say the deed does not deal with it.

MR FLYNN: Yes, exactly. And then at paragraph 80 he says:

The Commissioner’s argument is an attempt to rewrite what the Deed does by invoking considerations of substance over form, and to call that the transaction for the purposes of s 71E. I do not consider that s 71E can be used in this way.

Then over the page at paragraph 83 he says:

There is no suggestion that the Deed is a sham or a mere device, concealing or cloaking the true or underlying transaction. Nor did the Judge make any such finding.

KIEFEL J: What about the reference made to decisions in other States, in particular that of Chief Justice Malcolm in West Australian decision of Connell v Bond Corporation (1992) 8 WAR 352 which seemed to regard a partner’s interest as a proprietary interest – for other purposes, I understand, not in the context of stamp duty – but what do you say about the Commissioner’s reliance upon those as potentially in conflict with the view taken by the Full Court?

MR FLYNN: We say that the Commissioner’s submission on that is misconceived. We say that Connell v Bond Corporation is in fact entirely consistent with the decision of the Full Court. In Connell v Bond Corporation the parties were arguing about whether or not there was a proprietary interest sufficient to support a caveat, and so it was incumbent on the party trying to deny that there was a caveatable interest to establish that whatever interest the partners had in the underlying property, it was not a full beneficial interest.

They failed in that submission, which is not surprising, given the High Court’s judgment in Everett and in Canny Gabriel. But here the Chief Justice accepted that the nature of the partners’ interest in the partnership is such that it does confer a beneficial interest in each and every underlying asset. So we say there is no conflict between the two decisions. In fact, the issue that the Commissioner – the real obstacle for the

Commissioner is that the interest by its nature is a non-specific interest. It is not a crystallised one-sixth interest, so there is no need, therefore, to have a conveyance of a one-sixth interest to the continuing partners.

FRENCH CJ: I think your time is up, Mr Flynn, thank you. Yes, Mr Solicitor?

MR HINTON: If the Court pleases. What is a beneficial interest? In my submission, that question is posed because the characterisation of partnership property as giving rise to a beneficial interest hides the very issue. I can refer your Honours to page 87 of the appeal book and, somewhat reluctantly, footnote 15 to the academic work on Equity; Doctrines and Remedies, where the learned authors make clear that:

“While the result may be correct, this decision –

and there they are talking of the Canny Gabriel decision and in particular the paragraphs that we have excised and inserted at paragraphs 25 and 26 of our written submissions –

is sadly illustrative of the word play which in this area passes for analysis. For it assumes [that the phrase] ‘beneficial interest’ is a term of fixed import rather than infinite variety”).

FRENCH CJ: The language of that text ramped up a little after the change in authorship, I think.

MR HINTON: Perhaps so, but the very question in this case is what is the content of that “beneficial interest”, and we say it extends beyond a mere expression or extends beyond merely being expressed as a chose in action.

FRENCH CJ: What do you say to Mr Flynn’s contention that the characterisation of the interests of the partner in this case as an equitable chose in action was not controversial, either at first instance or before the Full Court? Are you really raising something new?

MR HINTON: No, it was controversial insofar as what was the nature of the issue was debated before both. Am I putting it slightly in different terms? Yes, but in both courts – first instance and before the Full Court the question was what is contemplated by partnership property and what is transferred.

KIEFEL J: Did you contend for a proprietary interest beyond that?

MR HINTON: In the Full Court it was contended that the interest of a partner in each and every asset was a proprietary interest. The Connell v Bond Case was relied upon in support of that argument.

FRENCH CJ: When you say in - - -

MR HINTON: I am sorry, your Honour, I am corrected. Connell v Bond was not relied upon but the argument was put that it is a proprietary interest, an in rem interest and therefore does not evaporate.

KIEFEL J: You did not argue to the contrary of Canny Gabriel, though?

MR HINTON: No, your Honour. In actual fact, we enlisted those two paragraphs in support of our argument, but the nature of this interest, although described as beneficial, described as sui generis, is more than just an expression or more than can merely be expressed in the characterisation as a chose in action. If the Court pleases, those are my submissions.

KIEFEL J: Could I ask you then, Mr Hinton, before you sit down, your reliance on your draft notice of appeal under section 71E, are you intending to pursue that?

MR HINTON: It lives or dies with the argument on the interpretation or characterisation of partnership property.

KIEFEL J: I do not quite see that. I would have thought it was a separate and distinct argument, one which has regard to the manner of expression whether or not something is contained within the document that is put forward and whether or not you are entitled to ignore – the Court is entitled to ignore that document.

FRENCH CJ: You have basically given us one line of argument on that, I think, have you not, at paragraph 28?

MR HINTON: I have, your Honour. We do not press it. If the Court pleases.

FRENCH CJ: Yes. There will be a grant of special leave in relation to grounds 2 and 3 in the notice of appeal but not in relation to ground 4 which is the section 71E point. Mr Solicitor, will this be encompassed within one day? I would think it would.

MR HINTON: Yes, your Honour.

FRENCH CJ: Mr Flynn, do you agree with that?

MR FLYNN: It will be one day, yes.

FRENCH CJ: Yes, all right. We will grant special leave on that basis. Thank you.

AT 10.30 AM THE MATTER WAS CONCLUDED