The High Court recently handed down its decision in Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7 and allowed the Commissioner's appeal from the Court of Appeal of the Supreme Court of Australia (Rojoda Pty Ltd v Commissioner of State Revenue [2018] WASCA 224).
In doing so, the majority (4-1) have yet again reiterated that while each partner in a partnership has an equitable interest in all the partnership assets, that interest is unascertained and non-specific. Therefore, although any partner who holds partnership property does so as trustee for all the partners in the partnership, the partners do not have a fixed interest in the partnership property (not even based on their partnership interests). As a result, a declaration by a partner stating that he/she holds the partnership property on trust for the partners in fixed proportions, will give rise to different equitable rights to those that arise under a partnership.
How did we get here?
The Scolaro family conducted a business of property ownership in Western Australia through two partnerships. The partners of the A&MMR Scolaro Partnership ("AMS Partnership") were Mr and Mrs Scolaro in equal shares. The partners of the Scolaro Investment Company Partnership ("SIC Partnership") were Mr and Mrs Scolaro and their three children, Rosana, John and David in equal shares. Upon Mr Scolaro’s death in 2011, his estate was divided equally between his three children, the partnerships dissolved (but the assets were not sold), and Mrs Scolaro became registered as proprietor of the 11 freehold titles to land previously held by Mr and Mrs Scolaro as joint tenants (6 for the SIC Partnership and 5 for the AMS Partnership). In 2012, Mr and Mrs Scolaro’s son John passed away, and his estate was divided one third to his wife, Bianca, and two thirds to his children.
On 1 December 2013, the surviving partners and legatees of the deceased estates entered into deeds ("Deeds") which detailed the nature of each party’s interests in the partnership property. Those deeds included an operative clause Mrs Scolaro "confirms" that she holds the properties on trust for the partners and legatees of Mr Scolaro and John in their respective shares and appointed Rojoda Pty Ltd (“Rojoda”) as the new Trustee to “to replace [Mrs] Scolaro as trustee of the Properties.”
Under the Duties Act 2008 (WA) ("Duties Act"), a declaration of trust over land gives rise to a duty liability. The Commissioner argued that the Deeds created a new trust due to the change in the character of the rights in the freehold titles and accordingly imposed duty upon the declarations of trust in each of the Deeds. On the other hand, Rojoda claimed that the Deeds did not involve a declaration of trust, but rather, the Deeds merely confirmed and continued the existing position that the partnership property was held on trust for the partners.
What is the nature of the interest of partners in a partnership?
The majority did not dispute the fact that in the absence of a provision otherwise in the partnership agreement, partnership property is held on trust for the partners. Instead, the court sought to determine the nature of the interests of the partners after the dissolution of the partnership and upon entering into the Deeds, and in doing so, they travelled back in time to review the fundamental features of a partnership through the ages.
The majority held that the relationship of partners was a fiduciary one, and that some features of a partnership were shared with those of a fixed trust, for example:
- interests of the partners were in fixed shares or proportions;
- there was a common duty to apply the partnership property exclusively for the benefit of the partnership in accordance with the partnership deed; and
- a partner was entitled to dissolve and wind up the partnership and distribute the partnership assets.
However, the majority noted that unlike in a fixed trust, a partner’s interest was not in relation to any specific asset, but rather it was an equally divided entitlement to their share of the proceeds of the partnership assets at the completion of winding up. Drawing on a long line of cases, the High Court noted that the nature of a partner’s interest in each asset of a partnership is fluctuating, unascertained and non-specific.
But we were just documenting what was already in place!
The High Court determined that prior to establishment of the Deeds, as there was no provision to the contrary in either of the partnership deeds, Mrs Scolaro held the freehold titles on trust for the partners of the respective partnerships. Each partner had an unascertained and non-specific interest in relation to all the partnership property (as well as all of the current assets in each partnership) with a right, upon dissolution, to compel the sale of the partnership property in order to realise and convert into money an amount from which all the debts and liabilities of the partnerships are paid and discharged. The remaining funds could then be divided and claimed by each partner.
Although under the Deeds, Mrs Scolaro “confirmed” that she held the freehold titles of each partnership on trust in the relevant proportions for each former partner or their successors, these confirmations had a substantive effect in extinguishing the fluctuating equitable rights of the partners under the partnership trusts and created new fixed trusts. Under the Deeds, each partner now had ascertained and specific equitable rights in relation to the partnership property (including the freehold titles) held on fixed trust.
What about the dissolution of partnerships concession?
When dutiable property is transferred upon the dissolution of a partnership from one partner to another, a concession is available under section 78 of the Duties Act to charge duty only to the extent that the legal interest transferred exceeds that partner’s partnership interest immediately before dissolution. In the alternative, Rojoda argued that the word “transfer” in section 78 should be interpreted loosely and expanded to also encompass a declaration of trust.
This submission was also rejected by the High Court, as a declaration of trust does not involve any transfer. The High Court also pointed out that the word “transfer” was actually defined in section 9 as including an “assignment” or “exchange”. It was noted that the definition did not include a “distribution”, nor did it include a “declaration of trust” which is actually a separately defined term in the same section.
Key takeaways
This case once again reinforces the principle that partners in a partnership do not hold any specific interest in partnership property. It is important to understand this point before dealing with or amending such rights.
This case also highlights the importance of careful drafting, even with innocuous agreements that appear to merely formalise and confirm previous positions. For duty purposes, this can still give rise to an unexpected duty liability. Going forward, agreements and transactions purporting to hold property on trust should be carefully reviewed to confirm the exact nature of the interest held on trust.
Finally this case also confirms that, in a stamp duty context, the term "transfer" within the legislation does not extend to other types of transactions. Often an exemption or concession may be worded using the term "transfer" only. It does not follow that the exemption or concession would apply to all types of dutiable transactions.