By Barry Diamond
Senior Fellow in the Melbourne Law Masters and PwC Partner
When a partner ‘confirms’ she holds land on trust for other partners upon dissolution of the partnership, is this a confirmation of a pre-existing relationship, or a new trust for the purposes of stamp duty?
Commissioner of State Revenue v Rojoda Pty Ltd  HCA 7 arose when a registered proprietor of land in Western Australia and a partner in a partnership, ‘confirmed’ that she held the land on trust for the partners in their respective shares following dissolution of the partnership. If the ‘confirmation’ was a declaration of new trust for the partners, duty was chargeable under the Duties Act 2008 (WA). However, if it was merely an acknowledgement of the same pre-existing trust relationship, no duty was chargeable. So, what was the legal nature of the pre-existing relationship between the partners? Did that differ to the relationship following the ‘confirmation’? Resolution of this question meant identifying the legal nature of the relationship between the partners and particularly the nature of a partnership interest.
The five-member High Court was divided 4:1. The majority (Bell, Keane, Nettle, Edelman JJ jointly) ruled in favour of the Commissioner of State Revenue that a new trust was created. Gageler J dissented and held that it was simply a confirmation of a pre-existing relationship. The respective judgments enlighten us on the different perspectives of the nature of a partnership interest, and I have considered both. There are other issues raised in the judgment, but I have not sought to discuss them here.
What were the facts giving rise to the decision?
The Scolaro family ran a property ownership business through two partnerships, the SIC Partnership and the AMS Partnership. As nothing in the decision turned on there being any difference in the partnerships, it is convenient to analyse the decision as if there was a single partnership, the SIC Partnership.
The SIC Partnership consisted of five equal partners: Anthony Scolaro, Maria Scolaro and their three children. The partnership property comprised land in WA. Legal title to the land was held by Anthony and Maria as joint tenants. They held the land for the partners in the partnership. Anthony died and Maria, as the surviving joint tenant, became the sole registered proprietor of the land.
Upon Anthony’s death, the partnership dissolved. At the time of dissolution, the value of cash and other current assets exceeded the value of the liabilities.
About 18 months later, Maria and Anthony’s son, John (also one of the partners), died.
Maria, her two surviving children, together with John’s wife and daughter (as legatees of Anthony and John’s estate) and Rojoda Pty Ltd executed a deed prior to winding up the partnership. Relevantly, the deed provided (at ):
- The parties acknowledge and agree that the properties that were previously held by the partnership were beneficially owned as to 20 per cent for each of the partners.
- Maria ‘confirms’ she holds the properties on trust for the partners and the legatees of Anthony and John in their respective proportions, and Maria resigns as trustee of the properties and the parties agree to appoint Rojoda as new trustee with transfers of legal title to be made to Rojoda.
The Commissioner of State Revenue imposed duty upon Maria’s confirmation as a declaration of trust. The Duties Act imposes duty on dutiable transactions. One type of dutiable transaction is a declaration of trust over dutiable property. Relevantly, a declaration of trust is defined as any declaration that any identified property vested in the person making the declaration is to be held in trust for the persons who are mentioned in the declaration.
The Commissioner’s position was that the deed created a new trust due to the change in nature of the rights of the former partners or their estates, from a unique equitable interest in partnership property (ie a non-specific, fluctuating interest in all the partnership property) to a new equitable interest under a fixed trust. Rojoda’s position was that the deed did not involve a declaration of trust because it merely confirmed the existence of the trust upon which the partners held the partnership property (at ).
The State Administrative Tribunal held that after dissolution of the partnership, but before the deed was signed, the partners only had a right to their respective proportion of the surplus after realising the partnership assets and settling the partnership debts and liabilities. As the effect of the deed was to declare a bare trust, the deed altered this position, from property used to satisfy their contractual rights of due administration of the partnership, to property held upon trust for them.
Rojoda’s appeal to the Court of Appeal was allowed. Broadly, the Court of Appeal reasoned that the partnership was in a net positive cash position (current assets exceeded current liabilities) and the practical reality was that a court of equity would order that the cash or other current assets be used to pay the partnership debts on a winding up. Equity would invoke the maxim to treat as done that which ought to be done. If the current assets were used to discharge the partnership debts, then each partner would have a specific and fixed beneficial interest in the surplus partnership assets remaining (ie the partnership land). This conclusion was supported by three decisions: Cameron v Murdoch (1986) 63 ALR 575; In re Ritson  1 Ch 128; and In re Holland  2 Ch 88. It followed that since Maria’s declaration of trust in the deed merely replicated at general law the existing trust of partnership property, the deed was not dutiable.
On appeal to the High Court, the Commissioner maintained her previous position that the deed created a new fixed trust. The High Court agreed with the Commissioner. The Tribunal was correct to conclude that the deed involved a dutiable transaction and the Court of Appeal’s decision and reasoning was wrong.
What was the nature of the partner’s interest? The majority view: a new trust was created
The majority (Bell, Keane, Nettle and Edelman JJ) began its analysis by considering the nature of partners’ rights in equity before the Partnership Act 1895 (WA) and under the Partnership Act.
Before the Partnership Act, the majority noted the prevailing view that in equity a surviving partner held the partnership assets on trust for the estate of the deceased partner (at –). However, the partner’s interest was not an interest in any specific asset. It was only a right to the partner’s share of the net proceeds from the sale of each asset at the completion of winding up the partnership (at ).
Under the Partnership Act, statutory recognition is given to the equitable principle that partners hold legal rights to partnership property on trust for all the partners (s 30) (at –). This will still be the case upon dissolution but before the partnership is wound up (at ). The position in equity is reflected in the partners taken to have an interest in relation to all partnership property, although the interest can be finally ascertained only when the winding up of the partnership is completed and until then it is a non-specific interest (s 33) (at ). Once winding up is complete and the interest of each partner in the surplus can be identified, the Act then recognises the partners’ right to that surplus entitlement (s 50) (at ). And moreover, according to the majority, in the absence of agreement, the Partnership Act specifically provides that partners lack a vested interest in any land that is partnership property (s 32) (at ).
Accordingly, prior to executing the deed, the legal position was that Maria held legal title to the land on trust for the partners, but the rights of the partners under that trust were unique. Each partner had a non-specific interest in all of the partnership assets with a right, upon dissolution, to compel the sale of the land in order to realise a fund from which, at the conclusion of the winding up, the partner could claim their share (at ).
The majority then turned its attention to the effect of the deed. Maria’s ‘confirmation’ changed the legal position. It extinguished the unique equitable rights of the partners under the partnership trust and created a new fixed trust. This was because the deed effectively removed all the freehold land from the property available to pay the partnership debts so that only the current assets were left to pay the debts. No partner could individually compel the sale of any parcel of land in the winding up of the partnership, and each partner had new ascertained equitable rights in relation to the freehold land on fixed trust (at ).
As to the application by the Court of Appeal of the equitable maxim that equity treats as done that which ought to be done, the majority said this was wrongly applied because it was inconsistent with the equitable principles incorporated in the Partnership Act about the position of external creditors, and also contrary to the partnership agreement. Under the Partnership Act, it was implied that each partner was entitled after dissolution to insist upon the sale of all the partnership assets for cash to pay the partnership debts and liabilities. Upon dissolution, the creditors also had priority for the partnership assets to be applied to pay the debts owing to them (at –). The partnership agreement was consistent with this position.
Finally, the majority said that none of the three decisions relied upon by the Court of Appeal supported the use of the equitable maxim.
What was the nature of the partner’s interest? The dissenting view of Gageler J: no new trust was created
Gageler J dissented and preferred the taxpayer’s submission that there was no new trust.
While the majority and Gageler J agreed that the nature of a partnership interest is essentially a partner’s proportionate share in the surplus assets of the partnership once all debts and liabilities have been paid, they diverged in what this really means.
For the majority, as explained, it means that the interest is a chose in action, essentially a right of administration to have all the partnership assets applied in satisfaction of all the partnership liabilities and for the surplus to be ascertained on completion of winding up the partnership. That right is the same, single right which continues to the point of completion of winding up. Only upon completion do the partners become entitled to their proportionate share in the distribution of the surplus.
However, for Gageler J, the nature of a partnership interest can be considered from two perspectives, an internal and an external perspective (the majority rejected this at ). And, in the context of the case, the external perspective should be considered (ie that the partnership interest is essentially a proportionate share in the beneficial interest of each partnership asset). On that basis, and considering two important facts in the case (the partnership had been dissolved and was solvent at the time of the deed), it was only a small step to reason that, by operation of law (and not by Maria’s ‘confirmation’ in the deed), the partners had a fixed proportionate interest in each partnership asset (ie including the land held on trust by Maria) and therefore the deed did not create a new trust. This reasoning is explained and elaborated upon below.
Gageler J accepted the taxpayer’s submission that there is a distinction between an internal and external perspective of partnership property. The internal perspective is that each partner has a right against all other partners to have all the partnership property held and applied exclusively for the purposes of the partnership and, upon dissolution, to have all the debts and liabilities settled and then to have the surplus paid to the partners. That right is an equitable chose in action (at ). It is the perspective (and only perspective) which the majority endorsed and, according to the majority, remains the same, single right to the point of completion of the winding up of the partnership. In contrast, the external perspective is that, as against the rest of the world, each partner has rights of a different nature. The partners collectively have the beneficial interest in each item of partnership property and therefore each partner individually has a share in that beneficial interest (at ). The practical result of applying both perspectives is that, as between the partners, the partnership assets must be dealt with in a particular manner. But so far as the rest of the world is concerned, there is no limitation on the interest of the partner (at ). That is, from the perspective of a third party, the partner has a share in the beneficial interest of each partnership asset and the third party can feel confident in dealing with the partner in relation to each partnership asset on that basis.
Accepting that a partner’s share in a partnership is the partner’s proportion of the surplus assets, the real issue for Gageler J was how and when the partner’s share is to be ascertained. Is it only at such time as after all the partnership assets have been liquidated and the debts paid so that there is a surplus pool of money available for distribution to partners (ie an ‘actual’ liquidation test)? Or does it merely provide a formula by which the existing share of a partner can be ascertained at an earlier time (at –) (ie a ‘hypothetical’ test)?
Gageler J preferred the latter. The precise share that each partner has at any time is to be ascertained by hypothesizing (as recognised in the Partnership Act) the immediate liquidation of all partnership property and the payment of all partnership debts and liabilities (at ). The share is not a fixed proportion that is immediately ascertainable but is rather an indefinite and fluctuating interest which ‘at any given moment’ is in proportion to the partner’s share in the ultimate surplus if the partnership were to be wound up (at ). But, once the partnership is dissolved, and it is solvent (the partnership assets exceed the partnership liabilities), the reckoning to fix the partner’s share can occur without actual liquidation of partnership assets and payment of partnership debts (at ). The result is that in this circumstance, although an item of partnership property might remain unsold and unappropriated to pay partnership debts, the partner’s proportionate share in that item is fixed until the winding up of the partnership is completed (at ). Support for this position could be found in two of the three decisions (rejected by the majority decision but relied upon by the Court of Appeal) (at –).
In the circumstances of the case, for Gageler J, two facts were critical. The first was that, at the time of the deed, the partnership had been dissolved. The second was that the value of the partnership assets exceeded the partnership liabilities (ie the partnership was solvent). In these circumstances, the proportionate share of each partner in the surplus partnership assets (including the partnership land held by Maria on trust) could be calculated (at –).
By ‘confirming’ the respective shares of the former partners and legatees in the land held on trust by Maria, according to Gageler J, the deed did no more than acknowledge the existing legal position, that Maria held the land on trust for the former partners and legatees in the specified shares by operation of law (at ). The deed involved nothing more than recognising the fixed share that each partner had, on dissolution of the solvent partnership, in the land held on trust by Maria, and in accordance with the hypothesis prescribed by the Partnership Act (at ). She did not declare a new trust. Therefore, there was no dutiable transaction.
What can we learn from this decision?
The key learning from this enlightening decision may be summarised in the following points:
- Legal title to partnership assets held by a partner are held on trust by the partner for all the partners (ie a ‘partnership trust’).
- The trust is a special and unique one because the beneficiaries (partners) have special rights under that relationship, being their partnership interest.
- The partner’s interest in the partnership is, unless the partnership agreement specifies otherwise, a special, fluctuating right to the surplus partnership assets once the partnership is dissolved and all partnership debts and liabilities have been settled. The right is a chose in action and not a beneficial interest in any specific partnership asset. That right continues until the partnership is wound up. (Gageler J diverges from the majority on this point and, if a partnership is dissolved and is solvent at the time, by operation of law, the nature of the partnership right is a fixed right (ie a proportionate share of the beneficial interest in each partnership asset).
- A confirmation, acknowledgement or agreement by the partners as to how the partnership assets are held may change the nature of the partners’ rights.
- And a change in partners’ rights (interest) may be a dutiable transaction under applicable Duties legislation.
AGLC4 Citation: Barry Diamond, ‘The Fluctuating Nature of a Partnership Interest: Commissioner of State Revenue v Rojoda Pty Ltd’ on Opinions on High (15 April 2020) <>.
Barry Diamond is a Senior Fellow in the Melbourne Law Masters program, teaching State Taxes and Duties. He is a partner at PwC specialising in stamp duties and other state taxes.