INSIGHT

Trusts and partnership: When is a confirmation of rights a declaration of trust?

By Adrian Chek, George Bishop
Tax

In brief

The High Court of Australia has held that certain deeds purporting to confirm a pre-existing trust of partnership property amounted to a new 'declaration of trust' within the meaning of the Western Australian stamp duty legislation.1 The case highlights the need for care when confirming or declaring a trust or dealing with partnership interests. It also highlights the complex interplay between revenue legislation and general law concepts.

Key takeaways

  • Care should always be taken before signing any document which purports to confirm or declare a trust over identified property to ensure that the document is not liable to substantial stamp duty.
  • Subject to the terms of a partnership agreement, partnership property must be held exclusively for the purposes of the partnership. Where the legal title to partnership property is held by one or more partners, the property may be described as held on trust, but the trust is unique.
  • Before dissolution, each partner has special rights in respect of partnership property. These rights include an indefinite and fluctuating interest, being the right to receive any surplus which may come to the partner if the partnership was wound up and the accounts taken. This interest does not confer any exclusive or definite proprietary right to any specific asset as against the other partners of the partnership.
  • After dissolution, each partner retains his or her indefinite and fluctuating interest. This interest will not change until completion of the winding up, which will generally be when the liabilities of the partnership have been discharged. It is only at the conclusion of the winding up that a partner may insist on the transfer of their proportionate share of the surplus, if any. Partnership agreements may of course provide for what is to occur upon dissolution and may specifically provide for the distribution of assets.
  • Before completion of the winding up, no partner has any specific, fixed or ascertained equitable proprietary interest in any specific asset of the partnership.
  • Accordingly, arrangements which purport to confirm pre-existing beneficial interests in partnership property which do not exist may, in fact, create fixed beneficial interests in that property. Such arrangements may amount to a 'declaration of trust' and attract stamp duty.

How does it affect you?

  • Take care when dealing with partnership interests, which are governed by a complex body of law. The 'interest' of a partner in partnership property depends on the nature of the partnership agreement, as well as the time at which, and purpose for which, that question is asked.
  • Be cautious about deeming or 'confirming' existing trust arrangements which are different from the position arising at law. Despite the label parties give to their arrangements, courts will look past it and examine the true legal position.
  • The meaning of terms such as 'interest' and 'trust' depends on context. Subject to the partnership agreement, partners hold partnership property on trust. The 'trust' and the 'interest' arising under it is unique.
  • If partners wish to create a specific 'fixed trust' relationship with respect to partnership property, they should consider specifically providing for this in the partnership agreement.

The facts and issues

The case concerned two family partnerships, the members of which carried on business in Western Australia. The first partnership consisted of the father and mother, each of whom held 50% shares in the partnership. The second partnership consisted of the father, mother and their three children, each of whom held 20% shares in the partnership. The partnership property of each partnership included certain freehold land in Western Australia (the Properties), legal title to which was registered in the name of two of the partners, the father and mother, as joint tenants.

In 2011, each partnership dissolved by reason of the death of one of the partners, the father. The father left his estate by will on testamentary trust to the three children in equal shares. In 2012, another partner, one of the sons, died intestate. Despite the dissolution of each partnership, neither partnership was wound up and the debts and liabilities of each remained outstanding. It was clear, however, that the cash and other assets of the partnerships would exceed those liabilities.

In 2013, for the purpose of arranging the affairs of the family, the surviving members of the former partnerships, those succeeding to the estates of the deceased partners, and a company (Rojoda Pty Ltd (Rojoda)) entered into two relevantly identical deeds (the 2013 Deeds). The 2013 Deeds relevantly provided that:

  • The wife was the sole remaining trustee of the Properties, the 'beneficial ownership' of which would 'remain unchanged';
  • The parties ‘acknowledged and agreed’ that on dissolution the ‘[Properties] and other assets' previously held by the partnership were 'beneficially owned’ in accordance with the proportional share of each partner in each partnership;
  • The legal representatives of the deceased partners transmitted the 'beneficial share' in each of the partnerships in accordance with the relevant will (in the case of the father) or rules of intestacy (in the case of the son);
  • The wife ‘confirm[ed]’ that she held the Properties 'on trust' for the partners (or successors in title of the deceased partners) in their respective shares in each partnership; and
  • The wife resigned as trustee and Rojoda was appointed as the new trustee.

The wife subsequently transferred legal title to the Properties to Rojoda, who lodged the transfers and the 2013 Deeds for stamping.

The Commissioner of State Revenue (WA) later imposed duty on the 2013 Deeds on the basis that each constituted a 'declaration of trust' of dutiable property within the meaning of the Duties Act 2008 (WA) (the Duties Act). The Duties Act relevantly defined a declaration of trust as 'any declaration … that any identified property vested or to be vested in the person making the declaration is or is to be held in trust'.2

Rojoda lodged an objection arguing, among other things, that no duty was payable on the 2013 Deeds as the 2013 Deeds did not create a new trust. The Commissioner rejected this position and Rojoda applied for a review by the State Administrative Tribunal of Western Australia (the Tribunal).

Procedural history

The Tribunal dismissed Rojoda's objection.3 The Tribunal held that partners do not have any specific beneficial interest in the assets of a partnership during the subsistence of, or upon dissolution of a partnership (prior to discharge of the partnership liabilities and realisation of partnership assets). Further, the Tribunal held that the relationship between the legal owners of partnership property and the other partners is not that of trustee and beneficiary. Rather, a partner has only a right to receive their respective portion of a surplus of assets over liabilities in a future liquidation of the partnership property. Accordingly, the effect of the 2013 Deeds was the declaration of a new trust in respect of the Properties, a declaration which altered the status of the property in question. This declaration of trust over dutiable property was liable to the imposition of duty. The Tribunal also held that the 2013 Deeds did not ‘transfer’ existing equitable interests, which would have allowed the partners to have recourse to section 78 of the Western Australian Duties Act (which provides for concessional duty where partnership property is transferred to a retiring partner).

The Court of Appeal of the Supreme Court of Western Australia allowed Rojoda's appeal.4 The court held that the 2013 Deeds merely acknowledged or recorded an existing obligation of the wife which had already arisen under the general law: the 2013 Deeds were not a fresh 'declaration of trust'. The essence of the Court of Appeal's reasoning was that, after dissolution and during the course of winding up, a partner's interest in partnership property was capable of acquiring a specific or fixed character. The court considered that it was possible to hypothesise which property would be realised to satisfy the debts of the partnership and accordingly to identify what property would be distributed to the partners. Applying the maxim that ‘equity would regard as done that which ought to be done’, the court held that, in the particular circumstances of the case, the interest which each partner had in the Properties was ascertainable – it had acquired a fixed and specific character by the time of the 2013 Deeds. Accordingly, the 2013 Deeds were not dutiable: rather than declare new trusts, each deed simply confirmed pre-existing trusts of the Properties.

The High Court (Nettle and Edelman JJ) granted special leave to appeal to the High Court.

Outcome

The High Court allowed the Commissioner's appeal by majority,5 holding that the confirmations in the 2013 Deeds amounted to a 'declaration of trust' over the Properties.

The Court approached the appeal by reference to the general law of partnership, distinguishing between the nature of a partner's interest in partnership property:

  • during the life of the partnership;
  • upon dissolution of the partnership and before completion of winding up; and
  • at the conclusion of the winding up of the partnership.

Partnership interest during the life of a partnership

The majority confirmed that, during the life of a partnership, each partner has unique entitlements in respect of partnership property. Subject to the terms of the partnership, partners have a right to insist that partnership property be held and applied exclusively for partnership purposes. Each partner also has the right to claim the partner's share of the net proceeds in any future liquidation of the partnership. These entitlements, originating in equity and recognised by statute,6 confer an 'interest' in respect of all the partnership property. Yet the interest is of a unique kind – it is a fluctuating, unascertained and non-specific interest. Accordingly, to describe the interest as a beneficial one in the partnership assets is apt to mislead in a particular statutory context.

The majority accepted a submission that, in the absence of a provision in the partnership agreement to the contrary, partnership property is held 'on trust' for the partners. They emphasised, however, that this trust is 'unique' and distinct from a 'fixed trust' over specific property.7 Justice Gageler, in dissent, expressed no view on whether the term 'trust' was an appropriate description of the relationship between partners during subsistence of a partnership.

Upon dissolution, but prior to winding up

The majority held the only right that a partner has in partnership property, both before and after dissolution, is a right to the account and distribution after sale of a partner's proportionate share in any surplus. That is, a partner’s interest in partnership property can be finally ascertained only when the liquidation has been completed – until then it is a 'non-specific' interest.8 The majority held that, upon dissolution but before completion of the winding up, partnership property will continue to be held by the legal owner on trust, with a duty to sell. Similarly, Justice Gageler affirmed that, on dissolution, partners have the right to have partnership debts and liabilities paid out of partnership property and then to have the surplus applied in payment of what is due to each partner under the partnership agreement.

Accordingly, prior to dissolution, the mother and father held the Properties on trust for each of the partners. Yet that trust was unique: each partner only had 'non-specific' interests in respect of the Properties. In the ordinary course, that interest would only become a specific, ascertained or fixed beneficial interest in a specific item of partnership property once winding up was complete.9

The effect of the 2013 Deeds

The majority held that the 2013 Deeds had a substantive effect: they 'extinguished' the unique, pre-existing entitlements of the partners described above and created new, ascertained equitable rights in relation to the Properties which amounted to 'fixed trusts'.10 This conclusion flowed from the nature of the partners' rights prior to dissolution, and the proper construction of the 2013 Deeds. The 2013 Deeds were therefore each a 'declaration of a trust' and subject to duty under section 11(1)(c) of the Duties Act.

The majority rejected the view that a fixed trust had arisen prior to the 2013 Deeds.11 Their Honours rejected the Court of Appeal's view that the maxim that 'equity regards as done that which ought to be done' meant a partner might acquire a specific, fixed interest in partnership property prior to completion of winding up. The majority held that it is only once winding up is complete and the interest of each partner is identified that a partner acquires a vested interest in specific items of partnership property: the interest 'does not change before winding up is complete'.12

It was on these matters that Justice Gageler diverged from the majority. In his dissenting judgment, His Honour reasoned that:13

  • section 33 of the Partnership Act 1890 (WA) contains the formula by which an existing share in an existing item of partnership property can be ascertained after dissolution but prior to liquidation;14
  • this formula requires one to hypothesise the immediate liquidation of the partnership property and the payment of all existing debts and liabilities. The share of a partner in a specific item is then equivalent to 'the proportionate share of the surplus to which each partner would be entitled under the partnership agreement' in this hypothesised scenario; and
  • once a partnership is dissolved, this reckoning can occur, provided the partnership is solvent in that their assets exceed their debts and liabilities.

Turning to the facts, Justice Gageler noted that the proportionate shares of each partner had been fixed by the partnership agreements at the commencement of the partnership. His Honour also noted that when the 2013 Deeds were executed, each partnership had been dissolved and was solvent. Accordingly, the 2013 Deeds merely recorded the pre-existing, proportionate and fixed beneficial interests in the Properties: they recited a position reached automatically under the general law and did not therefore constitute a declaration of trust. While this dissenting view has similarities to the view of the Court of Appeal, it does not rely on anticipation of steps yet to occur. It simply applies a 'statutorily prescribed hypothesis' and recognises as ascertainable and ascertained a pre-existing share in a solvent partnership.15

Additional arguments

The majority considered and rejected two further arguments raised by Rojoda.

First, the majority rejected Rojoda’s submission that the 2013 Deeds merely ‘converted’ the pre-existing beneficial entitlements of the partners into specific equitable interests. Their Honours pointed out that trusts can be created by agreement as well as by unilateral declaration, and that any so-called 'conversion' effected by the 2013 Deeds necessarily entailed extinguishing existing rights and the creation of new interests under a 'fixed trust'.  

Second, the majority rejected the submission that Rojoda could have recourse to s78 of the Duties Act. Section 78 creates a concession where a partner is transferred former partnership property by reason of their retirement or a dissolution. The amount of duty is reduced to the extent of the retiring partner's proportionate share in the partnership. The majority held that the 2013 Deeds created new rights in the parties and did not merely ‘transfer’ pre-existing rights in partnership property. The majority held that 'transfer' in s78 was not broad enough to capture the creation of new equitable rights.

Comment

The nature of a partner's interest in partnership property is a familiar issue in tax litigation. Rojoda contains an important restatement of the general principles, as well as some clarification regarding their interaction with revenue legislation. 

First, the decision is a welcome reminder that terms such as 'interest', 'transfer' and 'trust' depend on the context in which they appear. It is always a question of statutory construction whether a particular set of rights fall within the language of a particular statutory provision. In this regard, the High Court's approach in Rojoda echoes that taken by the Victorian Court of Appeal in Danvest in 2017.16 After an exhaustive review of the authorities, the Victorian Court of Appeal held that a partner in a land-owning partnership lacked an estate in fee simple. This was because the partner only had an equitable right to a proportion of any surplus upon dissolution of the partnership. Prior to dissolution, that unique right did not confer any specific interest in the partnership property, including the land held exclusively for the purposes of the partnership. It is one thing to identify rights which may be protected in a court of equity and another to identify an interest with the necessary quality to fall within revenue legislation.17

Second, the majority in Rojoda described the relationship between partners as one of 'trust', illustrating the flexibility of that concept. This description must be used with care. As the High Court has previously emphasised, general assumptions about the nature of trusts can mislead when attempting to resolve revenue law questions.18 Such questions generally depend on the precise terms of the legislation, having regard to its text, context and purpose. When considering how revenue law applies to a particular legal relationship, such as a partnership, one should start by examining the unique set of relations which exist between partners. The "trust" description derives from those unique relations, not the relations from that description.19 As the majority explained, the trust which arises in the absence of specific provision in the partnership agreement is 'unique'. This is no doubt why, as a general description of a partner for all purposes, the trust characterisation has long been disfavoured.20 The interest of a partner in respect of partnership property at any point in time is a complex set of rights. Prior to dissolution and before winding up, equity confers only an indefinite, fluctuating and sui generis interest in partnership property.

Third, Rojoda highlights the care required when attempting to deal with a partner's share in a partnership, as well as the distinction between subjective intent and legal effect. Whatever label parties put upon their relationship, they cannot deem it to be something other than that which it is upon its true construction.21 While the parties to the 2013 Deeds may have intended simply to confirm pre-existing beneficial interests in the partnership property, the law was clear: until completion of the winding up, the partners lacked any specific, exclusive rights in any particular asset of the partnership. The attempt to characterise these indefinite and fluctuating interests as fixed accordingly failed: the 'confirmation' of a trust was in truth the creation of a new trust.

Fourth, although not referred to any stage in the Rojoda litigation, it is worth recalling that courts have previously accepted that an instrument purporting merely to confirm pre-existing beneficial entitlements in respect of land may amount to a 'settlement'22 or 'declaration of trust'23 in respect of that land. In such cases, a material factor was that the arrangements amounted to a fresh 'charter' of future rights and obligations; that is, the documents became the 'new starting point' for consideration of the parties' rights and were not a bare recitation of an existing state of affairs.24 The substantive effect was that property was 'taken out of the ring fence' of existing arrangements.25 Although the majority in Rojoda were not taken to such authorities, their Honours' approach is consistent with them. Their Honours described the 2013 Deeds as having 'effectively removed' the Properties from the existing fund for the payment of partnership debts.26 In effect, the 2013 Deeds, rather than the previously subsisting arrangements, became the starting point when ascertaining entitlements in respect of the Properties.  

It follows from these points that a statutory concept (eg 'declaration of trust') may be broader than general law understandings. The question is always whether legal relations answer a particular statutory description, not whether they conform to some assumed 'ordinary sense' of a legal phrase.27 In this regard, although the Commissioner does not appear to have relied upon this argument, the words 'is or is to be held in trust' (rather than 'shall be' held in trust) may extend the statutory concept of a 'declaration of trust' to declarations confirming a subsisting trust.28 The possibility that a purported confirmation may amount to a 'declaration of trust' ought to be borne in mind in all jurisdictions which adopt such language.29 One lesson from Rojoda is particularly clear: parties should be cautious about deeming or 'confirming' existing arrangements, which may in fact be different from the position at law. Despite the label parties give to their arrangements, courts will look past it and examine the true legal position. 

Footnotes

  1. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7.

  2. Duties Act 2008 (WA), s 9.

  3. Rojoda Pty Ltd v Commissioner of State Revenue (2017) 91 SR (WA) 76; [2017] WASAT 35 (Judge Sharp, Deputy President).

  4. Rojoda Pty Ltd v Commissioner of State Revenue [2018] WASCA 224 (Buss P and Beach JA in a joint judgment; Murphy JA in a separate judgment).

  5. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7 (Bell, Keane, Nettle and Edelman JJ; Gageler J dissenting).

  6. Relevantly, Partnership Act 1890 (WA), ss 30, 50.

  7. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [26]-[35].

  8. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [40].

  9. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [40], [3], [35], [38]-[39]; Commissioner of State Taxation (SA) v Cyril Henschke Pty Ltd (2010) 242 CLR 508, 517 [25].

  10. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [40]-[41].

  11. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [46]-[58].

  12. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [3].

  13. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [77]-[90].

  14. 'The share of a partner in the partnership property at any time is the proportion of the then existing partnership assets to which he would be entitled of the whole were realised and converted into money, and after all the then existing debts and liabilities of the firm had been discharged'.

  15. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [99].

  16. Commissioner of State Revenue (Vic) v Danvest Pty Ltd (2017) 55 VR 190.

  17. Gartside v Inland Revenue Commissioners [1968] AC 553, 617-618; CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98, [17].

  18. CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98, [15]-[17]; [31]-[32].

  19. Scott and Fratcher, The Law of Trusts (5th ed, Vol 1), §2.1.3; and see Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 93 ALJR 807, [84], where Bell, Gageler and Nettle JJ emphasised that the choice of description should conform to, rather than dictate, how fundamental principles are applied when resolving concrete legal problems.

  20. Commissioner of the Commonwealth of Australia v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592, [26] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Sze Tu v Lowe (2014) 89 NSWLR 317, [112]-[127] (Gleeson JA; Meagher and Barrett JJA agreeing); Boyd v Attorney-General of British Columbia (1917) 54 SCR 432, 55 (Supreme Court of Canada); Hollins v Brierfield Coal & Iron Co, 150 US 371 (1893), 385 (Supreme Court of the United States); see also, Heydon and Leeming, Jacobs' Law of Trusts in Australia (8th ed, 2016) at [2-07].

  21. Limmer Asphalte Paving Co v Commissioners of Inland Revenue [1872] LR 7 Exch 211, 214; Davidson v Chirnside (1908) 7 CLR 324, 345; TNT Worldwide Express (NZ) Ltd v Cunningham [1993] 3 NZLR 681, 699; Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306, [125]; South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 117 ALR 611, [134]-[135].

  22. Davidson v Chirnside (1908) 7 CLR 324; cf Wedge v Acting Comptroller of Stamps (Vic) (1941) 64 CLR 75; Commissioner of Stamp Duties (Qld) v Hopkins (1945) 71 CLR 351.

  23. Crowther v Commissioner of Stamp Duties [1978] 1 NSWLR 82; Upper Hunter Timbers Pty Limited v Commissioner of Stamp Duties (NSW) (1993) 93 ATC 4859.

  24. See Davidson v Chirnside (1908) 7 CLR 324, 340-341 (Griffith CJ), 345 (Isaacs J), 350 (Higgins J); Commissioner of Stamp Duties (Qld) v Chaille (1924) 35 CLR 166, 168-169 (arguendo); Crowther v Commissioner of Stamp Duties [1978] 1 NSWLR 82, 89 (Sheppard J); Farrar v Commissioner of Stamp Duties (1975) 5 ATR 364, 340 (Sheppard J).

  25. Davidson v Chirnside (1908) 7 CLR 324, 350 (Higgins J).

  26. Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7, [42].

  27. Tooheys Ltd v Commissioner of Stamp Duties [1960] SR (NSW) 539, 545-546 (Walsh J).

  28. This language was initially introduced into the New South Wales stamp duty legislation in 1931 (Stamp Duties (Amendment) Act 1931 (NSW), s 5(e)), seemingly in response to Perpetual Executors & Trustees Association of Australia Ltd v Wright (1917) 23 CLR 185 where Barton ACJ distinguished between (i) a dutiable declaration that property henceforth be held in trust; and (ii) a document simply evidencing a trust then and theretofore subsisting (at 192; and see 198 per Isaacs, Gavan Duffy and Rich JJ).  In Crowther v Commissioner of Stamp Duties [1978] 1 NSWLR 82, Sheppard J distinguished Wright, emphasising that the Victorian legislation then under consideration had only referred to declarations that property 'shall be' held in trust.

  29. Duties Act 1997 (NSW), s 8(3); Duties Act 2000 (Vic), s 7(4); Duties Act 2008 (WA), s 9; Duties Act 1999 (ACT), s 6; Stamp Duty Act 1978 (NT), s 4; Duties Act 2001 (Tas), s 6.