In brief - High Court confirms that a partner's interest in partnership property before the partnership is wound up is an equitable interest under a unique trust, which is different from a fixed trust
If the partners enter into a document which provides that the partnership property is held on trust for the partners in their respective shares, this is a declaration of trust which is subject to stamp duty.
The decision in Commissioner of State Revenue v Rojoda Pty Ltd  HCA 7 is significant because:
- it explains the nature of a partner's interest in partnership property before the partnership is wound up
- it indicates that the nature of that interest can be changed by the partnership agreement
- it demonstrates that any document that relates to a partner's interest must be carefully considered so as not to trigger stamp duty
- the stamp duty consequences that arose under the Western Australian stamp duty legislation probably would have also arisen in the other Australian jurisdictions
- although the decision did not relate to capital gains tax, similar considerations apply and capital gains tax may be triggered. In many cases, the capital gains tax consequences will be much more significant than the stamp duty consequences.
Partners object to Commissioner's assessment that stamp duty be imposed as deeds constitute declarations of trust
The Scolaro family operated a property investment business through two partnerships.
The first partnership consisted of the father and the mother and the second partnership consisted of the father, mother and their three children.
The property of each partnership included land in Western Australia.
The land was registered in the names of the father and the mother as joint tenants.
The father died in 2011, which dissolved the partnerships, and the mother became the sole registered owner of the land as the surviving joint tenant. The partnerships were not wound up.
The father left his estate to a testamentary trust for the three children.
One of the children died in 2012 without a will. His estate passed to his wife and children under the intestacy rules.
In 2013, two deeds were executed by the relevant family members and Rojoda Pty Ltd. Under the deeds:
- the parties acknowledged and agreed that on dissolution of the partnerships the property was beneficially owned by each of the partners in their respective shares in the partnerships
- the executors of the father's estate transmitted the father's beneficial interest in the land in accordance with the father's will
- the administrator of the deceased child's estate transmitted the child's beneficial interest in the land in accordance with the intestacy rules
- the mother confirmed that she held the land on trust for the partners and their successors in their respective shares
- the mother resigned as trustee of the land and the parties agreed that Rojoda be appointed as the new trustee with transfers of the legal ownership to be made to Rojoda
The partnerships were at all relevant times solvent.
The transfers and deeds were submitted for stamping and stamp duty was imposed by the Commissioner of State Revenue on the basis that the deeds constituted declarations of trust.
The partners objected to the assessment and submitted that no stamp duty was payable because the deeds did not create new trusts. The land had always been held on trust and the deeds merely confirmed the trusts.
The objection was rejected because the Commissioner's view was that the deeds created new trusts due to the change in the rights of the former partners or their successors from a unique equitable interest in partnership property to a new equitable interest under fixed trusts.
Rojoda applied to the State Administrative Tribunal for review and its application was dismissed. It appealed to the Court of Appeal and was successful. The Court of Appeal held that the deeds did not involve any dutiable transaction because after the dissolution of the partnerships the reality that the liabilities would be discharged from the current assets meant that the land was held on fixed trusts for the partners according to their partnership shares.
The Commissioner appealed to the High Court.
High Court's findings in Commissioner of State Revenue v Rojoda
The High Court held by a majority of 4 to 1 that:
- although legal title to partnership property is held on trust for all partners, the nature of the partner's rights under that trust is unique. They differ significantly from the rights under a fixed trust and their nature does not change before winding up of the partnership is complete
- each partner had a non-specific interest in relation to all of the partnership property with a right, upon dissolution of the partnership, to compel the sale of the property and at the conclusion of the winding up to share in the surplus after payment of liabilities
- the partnership agreements did not change the position
- the creation of fixed trusts by the two deeds involved the extinguishment of those unique equitable rights, the removal of the land from the partnership and the creation of new fixed trusts
The dissenting judge Gageler J placed significance on the fact that the partnerships were solvent. This meant that the share of each partner in the surplus could be determined in accordance with the partnership agreements and the deeds did no more than acknowledge the position which had come to exist.
Partners should consider stamp duty and capital gains tax consequences when drafting documents relating to partnership property
While the decision concerned specific provisions of the Western Australian stamp duty legislation, it is likely to be applicable in all jurisdictions. All jurisdictions other than Queensland impose stamp duty on a declaration of trust and that concept has a similar meaning in those jurisdictions. Queensland imposes stamp duty on a creation of a trust, a wider concept that includes a declaration of trust.
The reasoning is also significant for capital gains tax (CGT) although the decision did not concern that issue. CGT event E1 happens if a person creates a trust over a CGT asset by declaration or settlement. The meaning of declaration is similar to the meaning of declaration of trust in the stamp duty legislation. There is an exemption for a trust created in favour of a sole beneficiary that is absolutely entitled to the asset as against the trustee. That exemption does not apply where there is more than one beneficiary.
Partners need to take care in drafting documents which deal with their interests in partnership property so as not to inadvertently trigger stamp duty and capital gains tax consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.