COMMISSIONER OF STATE REVENUE (VIC) v UNIQEMA PTY LTD
Members:Ormiston JA
Phillips JA
Callaway JA
Tribunal:
Victorian Court of Appeal
MEDIA NEUTRAL CITATION:
[2004] VSCA 82
Ormiston JA
A number of issues are raised by this appeal concerning the proper interpretation of the former
Stamps Act
1958 (``the Act''), in particular as to the nature of goodwill, its effect on the value of real property transferred and whether it is, in itself, a ``chattel'' within the meaning of the Act, as well as the characterisation of certain items of plant and equipment alleged to have been attached as fixtures to part of the land by a tenant under an obligation to provide steam and electricity to the principal manufacturing business carried on upon the land. The appeal arises out of a largely successful appeal by the respondent to the Trial Division in which Pagone, J. found against the appellant Commissioner on each of the issues just referred to: see
2002 ATC 4449
;
[
2002] VSC 157.
2. The primary issue raised by this appeal is whether the appellant Commissioner was entitled to include in the value of the land the whole of the value of the goodwill, as designated in a Business Acquisition Agreement (``the contract'') dated 8 July 1997, whereby Unilever Australia Ltd. (``Unilever'' or ``the vendor'') sold to the respondent, now known as Uniqema Pty. Ltd. (``Uniqema''), a manufacturing business engaged in the production of oleo and similar chemicals,
[1]
Relevant facts and circumstances
3. The business sold by Unilever to the respondent had been carried on in South East Asia, Australia and elsewhere under the name ``Unichema International'', though the relative importance of that name may be seen by the fact that it, together with five patents held by the vendor, were included in the purchase price at the figure of one U.S. dollar in total. The division of Unilever which used that name had been controlled from Malaysia where the vendor's regional head office was situated. Its sales staff reported to that head office. There were, however, about three sales representatives who had a small office on the subject land, though virtually no business was directed to that office. So far as one could gather none of the business's products was sold directly to the public, but they were sold to other manufacturers who turned the chemicals and related products into soaps, cosmetics, polymers and certain lubricants. The business of Unichema International was known only to the manufacturers who bought its products but none of them were packaged or transported under that or any other name. There was in fact no other competing manufacturer in Australia although there were a number of competitors
ATC 4582
who imported and distributed like materials made overseas. As a result it seems to have been accepted that little or no goodwill attached to the name Unichema International, albeit that not long after it had purchased the land and business under the name Impkemix Trading Pty. Ltd., the respondent changed its name to its present name Uniqema, a name not entirely different in sound or appearance to the former name of the business.4. The land sold pursuant to the business acquisition agreement is situated at Ingles Street, Port Melbourne and is set out collectively on some fourteen certificates of title. A good proportion of the land (all but the land on some six certificates of title) was given over to the large and complex factory which manufactured the chemical products, as well as related sheds, yards and a relatively small office building. The size of the manufacturing enterprise may be gauged from the fact that the splitting towers alone were as tall as a fifteen storey city building but there were many other large integrated factory structures. In the contract these were designated, at least in part, as ``plant and equipment'' to which $US9,032,708 was allocated in the price. Although it was argued in the Trial Division that the vendor's factory structures were not fixtures and thus should not be treated as part of the land transferred for the purposes of the assessment, the learned judge, Pagone, J., held that all but some part worth $178,400 were to be treated as fixtures and included in the value for the purpose of assessment: see his Honour's judgment at ATC 4456-4458 [ 20]- [ 24]; VSC paras. [ 20]- [ 24]. The judge's findings on this question were neither challenged on the appeal nor by way of cross-appeal.
5. Part of the land transferred, however, had been leased since about 23 December 1992 by a company named Co-Generation Australia Ltd. (``Co-Gen'') pursuant to a sixteen year lease of the whole or part of some six of the said titles at a peppercorn rental of one dollar per annum. That lease, however, has to be read together with an ``Energy Services Agreement'' of the same date which obliged Co- Gen to operate on the leased premises plant and equipment for the generation of steam and electricity, needed to operate the lessor's factory, which Unilever agreed to purchase from Co-Gen. Up to 1992 Unilever had purchased electricity from the SEC grid and generated steam for itself. The object of the lease and agreement was to ensure that all steam and electricity required for its factory on the land was generated onsite.
6. The Energy Services Agreement was an elaborate document which had eleven schedules annexed to it and which contained a recital that Co-Gen had ``agreed'' with Unilever to ``construct and operate steam and electricity cogeneration Plant and Equipment upon the premises... and that [ Unilever] shall purchase from [ Co-Gen] the High and Low Pressure Steam and Electricity thereby produced'', as well as certain off-peak electricity procured from the SEC. However, in the course of argument counsel for the appellant abandoned any argument that Co-Gen's plant was erected pursuant to an ``obligation in that behalf'', within the meaning of s. 28(2) of the Landlord and Tenant Act 1958.
7. What the recital stated was loosely correct, but the terms neither of the Energy Services Agreement nor of the lease, nor of any other document to which we were taken, established an explicit obligation to build the plant. In clause 5 there was a curiously limited agreement that Co-Gen was ``required'' by Unilever ``to demolish and remove existing structures'' and to ``upgrade the existing Ingles Street high voltage substation''. There was also a clause requiring the ``interconnection of all services'' to be carried out in accordance with the provisions of Schedule 6 but the parties did not see fit to include that Schedule in the Appeal Book, presumably because it contained no relevant obligations. Thereafter there was no clause which obliged Co-Gen explicitly to erect either steam or electricity generation works, again unless they had been set out in one of the twelve schedules, six of which apparently set out ``specifications'' of one kind or another, but again none of them were set out in the Appeal Book. The obligations on the part of Co-Gen appeared primarily in clause 7 which set out Co-Gen's obligations to supply steam and electricity in a manner described in considerable detail.
8. There were also detailed clauses specifying the way in which Co-Gen would charge Unilever for both the steam and electricity supplied. In substance it was assumed that all the steam would be used by Unilever's factory, but that the electricity produced would be in excess of Unilever's needs and that that excess might be sold off to
ATC 4583
the SEC or other electricity suppliers, which is in fact what occurred, there being something over 80% surplus sold over the years into the general electricity grid. The term of the agreement was 14 ½ years [2]9. The lease, as I have said, had a term of 16 years and there was an option to renew for the same period as that applicable to the Energy Services Agreement if that were renewed. There was a covenant by Co-Gen not to use the premises other than for the purposes of the Energy Services Agreement or for purposes connected therewith. Apart from the conventional covenants there were several relating to the buildings and other works which were to be constructed in order to provide the steam and electricity to Unilever. As already stated, there was no direct covenant in the lease to construct such premises but, in the first place, by clause 12.1 Unilever acknowledged ``that the Lessee owns all improvements and fixtures constructed, installed or brought on to the Premises and the Adjoining Land by or on behalf of it absolutely... irrespective of the degree of annexation of those improvements and fixtures to the Land...''. Secondly, by clause 12.2, it was agreed that Co-Gen ``may at any time and from time to time during the term of this Lease and for a period of one month after termination of this Lease, take, remove and carry away from the Premises all or any part of improvements or fixtures referred to in clause 12.1 but shall be responsible for damage in relation thereto...''. In not dissimilar terms clause 4.3 contained a covenant on behalf of Co-Gen that: ``The Lessee shall be permitted at its election and from time to time during the term to demolish or remove any existing building or other improvement and to erect or install new buildings or other improvements... on the Premises... PROVIDED THAT any such demolition, removal, erection or installation by the Lessee shall not interfere with the Lessor in its use and occupation of the Land more than is reasonably necessary.'' One may interpolate that, although the first part of that covenant appears in a sense to be a covenant by the lessee that the lessee may do certain things, presumably it was the proviso which was seen to be important and the reason for imposing it as a lessee's covenant. Finally, for this purpose, by clause 4.5 Co-Gen as lessee covenanted that -
``at or before the expiration of a period of one month after the determination of this Lease (during which period the Lessor will allow the Lessee continued access to the Premises for this purpose) to take or remove from the Premises down to the level of the upper surface of the concrete foundations... all fixtures, fittings, plant and equipment or other articles upon the premises in the nature of trade or tenant's fixtures and fittings brought on to the Premises by the Lessee... but the Lessee shall following removal forthwith make good any damage which may be caused to the Premises.''
The clause further stated that the lessor would not ``require the Lessee to remove such items if it has been agreed that they should be left for an incoming tenant'' but, if Co-Gen did not take the fixtures, plant etc. at the expiration of the lease, ``the Lessor may at the expense of the Lessee remove and dispose of them and any fixtures fittings plant equipment other articles or signs not removed by the Lessee by that date shall become the property of the Lessor who may remove them'', the cost being recoverable from Co-Gen as liquidated damages.
10. Having regard to the terms of the lease, as well as the Energy Services Agreement, it is not surprising that, although the boilers and electrical generation plant constructed and brought on to the site by Co-Gen were very substantial and complex, they were attached to the concrete slab in a way which made them comparatively easy to detach and take away, albeit with the use of heavy equipment. It appeared that the plant which was ultimately constructed by Co-Gen was bolted to those concrete foundations but it had design factors such as lifting lugs, skid based enclosures and a general lack otherwise of permanent attachment to the site, which made it possible to have it removed. The learned trial judge found that, although Co-Gen's plant and equipment was not as large as the equipment constructed for the chemical factory, they were substantial and worth about $4m. at the time of sale, and he also found that there was a ready market for them which would take about a week to remove. As I have said, when constructed the Co-Gen plant provided all of Unilever's substantial steam requirements and likewise all of its electricity needs, although that came to
ATC 4584
require, as it would appear, only 13% of the electricity so produced. At the time of the sale it seems that something in the order of 87% was sold off by Co-Gen to the general state electricity grid.11. The products produced by the chemical factory have already been described, as well as the fact that the business name Unichema International was known only to manufacturers who bought and used the chemical products. There was no evidence as to whether the business had the benefit of any medium or long- term contracts but certainly the business acquisition agreement contained no provision with relation to them, nor did it contain any provision in restraint of trade, lawful or otherwise. Unilever as vendor had carried on the manufacture of oleo chemicals for many years but it was found by the judge that that business could have been conducted from any other physically suitable site. Shortly before the sale the business had been selling those chemical products to wholesale markets both within and outside Australia. Every State other than Tasmania had chemical products sold to it but they were also sold to Japan, China, Malaysia and India, amongst many other Asian countries, as well as to various countries in Africa and the Middle East. The total value of sales at that time was in the order of $60m. of which approximately 60% were exports and the balance sold within Australia. All sales within Australia were managed from the regional head office in Malaysia, so that the management at the Victorian factory was responsible only for the manufacture of the chemical products. Three sales representatives operated from the office at the site in Port Melbourne but reported to the regional head office in Malaysia. No sales were made to customers calling at the factory at Ingles Street in Port Melbourne.
12. The land owned by Unilever which was sold to the respondent was the subject of thirteen transfers,
[3]
13. The objection was otherwise disallowed, thus leading to a request on behalf of the respondent dated 29 June 2001 that its objection to the relevant assessments be set down in the Supreme Court as an appeal. The appeal came on for hearing before Pagone, J. in April 2002 and his judgment was handed down on 10 May of that year. The judge rejected the appeal insofar as it attacked the inclusion of the owner's improvements to the land, but on the other issues found in favour of the respondent, so that the Commissioner has appealed against those findings, there being no cross-appeal on the part of the respondent.
Issues raised by the appeal
14. Each of the issues arises out of the transfers of Unilever's estates in fee simple in the fourteen parcels of land sold to the respondent being charged for duty, (pursuant to s. 17 of the Act), under Part B Heading VI of the Third Schedule of the Act. The relevant provisions relating to transfers of land are set out both in Heading VI and in subdivision 6 of Division 3 of Part II of the Act. Most of the provisions relevant to this appeal have been set out in detail in two recent decisions of this Court, in
Vopak Terminals Australia Pty Ltd v Commr of State Revenue (Vic)
[4]
ATC 4585
particular on the principal issues in the present case. It is first useful to remember that under sub-s. (1) the word ``conveyance'' is defined to include ``transfer'' and that ``real property'' is defined to include ``any estate or interest in real property''. The relevant parts of s. 63(3) and (4) at that time read:``(3) Except as otherwise provided in this Act -
- (a) a reference in this subdivision or in the provisions of the Third Schedule under Heading VI to real property or property includes a reference to chattels not being stock-in-trade held or used in connexion with a business carried on or in connexion with the real property -
- (i) that, by reason of the sale of or agreement to transfer the real property or property to the transferee, are transferred to the transferee; or
- (ii) the sale or transfer of which to the transferee or any other person forms, in the opinion of the Comptroller of Stamps, substantially one transaction with the conveyance of the real property or property;
- (b) a reference in this subdivision or in the provisions of the Third Schedule under Heading VI to the value of real property or property is a reference -
- (i) in relation to a conveyance on sale of the real property or property -
- (A) to the sum of the consideration for the sale and the consideration for the transfer of chattels included in the real property or property by reason of paragraph (a); or
- (B) to the sum of the amount for which the real property or property and the amount for which such chattels might reasonably have been sold if they had been sold, free from encumbrances, in the open market on the date of the sale -
whichever is the greater; and
- (ii) in any other case, to the sum of the amount for which the real property or property and the amount for which such chattels might reasonably have been sold if they had been sold, free from encumbrances, in the open market on the date of the conveyance, direction, consent or application
- ...
(4) Notwithstanding sub-s. (3) where -
- (a) in connexion with a conveyance of real property used for primary production, there is a sale or transfer of stock, implements or other chattels held or used in connexion with the use of the real property for primary production;
- (b) the conveyance is lodged with the Comptroller of Stamps for stamping together with the prescribed form signed by or on behalf of the transferor; and
- (c) the Comptroller of Stamps is satisfied that the real property is used for primary production -
the value of the stock, implements and other chattels shall be disregarded in ascertaining the value of the real property within the meaning of this subdivision.''
(Emphases added)
15. The first issue raised in the Trial Division concerned the inclusion of the stated value of the goodwill of the business in the value of the land for the purpose of the Commissioner's default notices of assessment. The first way in which it was contended that it should be included in the value was by asserting that the value of real property in respect of the transferred land was greater than the stated consideration in that the value should have included the whole of the agreed price for the goodwill of the business because it was entirely attributable to and connected with the land. Because it was not possible to show that there was any other source of the goodwill, it was said that all the value of that goodwill was properly attributable to the land and formed part of its value. A subsidiary argument used to support this view was that the key asset of the business was the factory constructed on the land so that the goodwill wholly derived from using the real property. It was secondly said that, if that approach to valuing the land were not correct, nevertheless the goodwill was a ``chattel'' within the meaning of the provisions I have just set out inasmuch as that goodwill was an asset ``held or used in connection with a business carried on or in connection with'' the land. It followed that in calculating the value of the real property one might look at either the
ATC 4586
sum of the consideration for the land sale together with the consideration for the transfer of the goodwill, as being a chattel within the meaning of s. 63(3)(a), or, alternatively, the value should be the amount at which both land and goodwill might have been sold in the open market, although the Commissioner had chosen in his reassessment merely to add the two sums fixed by way of consideration in the sale of business.16. The second general issue related to the value of the land itself arising out of the construction by Co-Gen as lessee of the steam and electricity generating plant. That plant, of course, was not the subject of the contract, for Unilever did not purport to transfer it to the respondent, but the appellant asserted that the plant and equipment were fixtures which formed part of the real property at the time of the sale and thus had to be taken into account in valuing the whole of the land sold by Unilever. Because the plant and equipment were fixtures, the value of the land was greater than the consideration paid for it and the Commissioner was entitled to bring the land to duty at the higher figure. As originally argued a question arose as to the meaning and effect of s. 28(2) of the Landlord and Tenant Act 1958; that was before the decision had been handed down by this Court in Vopak . Vopak was not considered by the learned trial judge, but on appeal to this Court counsel for the Commissioner persisted in an argument, after judgment had been handed down in Vopak , that it should not be followed for various reasons which will have to be looked at in due course. The final issue argued before the learned judge was whether the plant and factory erected on the land used by Unilever itself for its chemical processing works should be treated as fixtures and therefore as part of the land. The learned judge held that that factory and the related plant were sufficiently affixed to the land for them to form part of it, so that the value for duty should have been increased accordingly. That was the only issue on which the appellant won before Pagone, J., so it was not the subject of the appeal or any cross-appeal to this Court.
17. In the judgment given after the trial the learned judge dealt with the other issues in the following way. So far as goodwill was concerned he rejected the appellant's contentions that the value of goodwill increased the value of the real property conveyed in that he considered that no part of the goodwill sold depended upon the location of the premises or otherwise found its source in the premises. He further rejected the argument that the goodwill was a chattel within the meaning of s. 63(3), thereby rejecting the reasoning of Harper, J. in Australian Rice Holdings , which he set out in detail and likewise in detail rejected. As to the appellant's remaining arguments as to the fixtures, that is, those which he alleged were part of the property sold and thus formed part of its value for stamp duty purposes, namely, the plant and equipment brought on to the leased part of the property by Co-Gen, the learned judge likewise rejected the appellant's arguments: see ATC 4454-4456 [ 10]- [ 19] and 4458 [ 24]; VSC paras [ 10]- [ 19] and [ 24]. In part his Honour's reasons depended upon his conclusion that it was inappropriate to add the whole of the value of that plant and equipment to the consideration which the vendor and purchaser had agreed on for the sale of the land, especially when that plant and equipment had not been the subject of the sale. Whether or not that conclusion be correct, the further basis upon which he reached his conclusion excluding the value of that plant and equipment, upon which argument centred in this Court, was that the items in question were not fixtures properly so described because they were capable of being removed and more particularly because the parties to the lease intended that they should be removed, according to its terms. Further, the learned judge appeared to accept the argument that, by reason of s. 28(2) of the Landlord and Tenant Act 1958, that plant and equipment remained the property of Co-Gen as tenant and thus did not form part of the land sold. At the time, of course, Vopak had not been decided by this Court, but his Honour's conclusions seem consistent with the reasons there stated, albeit that his Honour referred to s. 28(2) only briefly.
Whether value of goodwill formed part of value of land sold
18. In relation to the goodwill of the chemical business it appears to be asserted by the Commissioner that the whole of the goodwill sold was attributable to the site value of the land and that there was no goodwill sold by the vendor to the respondent which was referable to or found its source in any of the conventional factors said to attract customers to a business arising out of its conduct. Rather the
ATC 4587
contention seemed to assume that the goodwill sold had its source solely in that goodwill said to derive from the fact that the factory was situated where it was and that in some way, largely because it contained the whole of the manufacturing capacity of the business, the factory's site was the only source of the goodwill purchased by the respondent.19. Consequently the first principal issue raised by this appeal is whether the site on which the vendor's business was conducted at the time was the exclusive or primary source of the goodwill of the oleo chemical manufacturing business which it sold to the respondent. If so the Commissioner submitted that he was entitled to add the whole of that agreed value for goodwill to the value of the land itself in order to determine the land's true value for stamp duty purposes. Alternatively it was said that the fact that a business is carried on from a purpose-built factory must add an element of goodwill value to the land itself for stamp duty purposes whenever the land is sold together with the business there carried on. Consequently, it was contended that the stated value of the land was inadequate to reflect that added element for goodwill, notwithstanding that a separate price had been placed on the goodwill element when it was sold. The third way the appellant Commissioner put its case was to allege that goodwill was a ``chattel'' sold together with the land such that under s. 63(3)(a) the land value for stamp duty purposes was required to include the value of that so called ``chattel''.
20. I cannot accept any of the arguments of the Commissioner. The sale of the business was effected on entirely conventional terms. The agreed total price in excess of $US22m. was divided between the major assets of the enterprise; indeed there was a contra entry whereby a higher total price was reduced by some $US6,859,148 for trade creditors. Of course, the division might have been artificial, designed to suit only the respondent's purposes (or the vendor's purposes, or both), but it was a genuine sale and the parties to the present litigation have agreed that it was not in any sense a sham. That is not surprising when vendor and purchaser were independent and negotiated on an arm's length basis.
[6]
21. More importantly, there is no reasonable basis for asserting that the goodwill of this particular business had its ``source'' to any extent in the site in Port Melbourne where the manufacturing operations of the business were carried on. There is no reason to suppose that the land itself was not valued fairly and, now that the value of certain items which had been wrongly (in law) treated as merely part of the plant and equipment has been included in the value of the transferred land, (as to which there has been no appeal from the judge of the Trial Division), there can otherwise be no reason now to doubt that the value fixed for the land comprehends the working factory
[7]
22. True goodwill is unrelated to considerations of that practical kind. It is concerned with the (largely abstract) connection of customers to any business which might or might not be carried on at particular premises. Such goodwill ordinarily has a separate existence from the sources from which it is derived, but it can only be sold or transferred as part of the business to which it adheres: see
FC of T v Murry
.
[9]
ATC 4588
present case the vendor's whole business was sold to the respondent, but it does not follow that it was inappropriate to sell the proprietary asset known as goodwill separately and for a specified price, albeit under the umbrella of a general sale. Moreover it does not follow, even if some aspect of the goodwill was related to locality, that the whole of the goodwill of a particular enterprise has to be attributed to the site on which the business is conducted, for, except in a limited class of case, the goodwill of an enterprise cannot be said to have its source solely in the enterprise's place of business. As will be seen, however, the facts of the present case made it almost impossible to argue that any part of the goodwill was derived from or had its source in the site employed by the vendor as the business's factory. As the evidence disclosed, it was merely a manufacturing base which happened to provide a very significant proportion of the products sold by the business, but it had no greater significance than any other physical asset employed by the business, even if one were to ignore factors such as reputation, the business organisation and the various skills of its employees, not merely on the site but those off the site engaged in selling the company's products.23. Much of the fallacy behind the appellant's argument rests in its reliance on certain passages in
Murry
divorced from the context in which that case was decided. The difficulties as to the concept of goodwill have arisen on many occasions and in a variety of contexts. Although it is an idea well known to persons engaged in business, it is not ordinarily their function to identify it precisely save that it seems that they have always been able to give it a value, albeit imperfectly based, in a way which for many years has served them well in relation to the disposal of businesses or interests in businesses. The law has for at least 200 years recognised that goodwill is capable of being protected and sold, although originally the law was more concerned with protecting it, for example in cases when partnership businesses and interests therein changed hands and, in particular, in cases where a new proprietor of a business has wished to protect itself and its potential sources of trade from the activities of the vendor of the business. Much of the law on this subject is usefully and succinctly described in Chapter 8, ``Goodwill'', in Heydon on
The Restraint of Trade Doctrine
.
[10]
24. The dispute in
Murry
, however, was not concerned with that question, albeit implicitly it lay behind the discussion in the vast majority of cases cited. That case dealt with a purported sale of goodwill where only certain assets of a taxi business were sold to another party. It was the Taxation Commissioner who denied, ultimately successfully, that there was in truth any goodwill sold, thereby denying a particular reduction in capital gains taxation pursuant to what was s. 160ZZR of the
Income Tax Assessment Act
1936. Thus, though the parties purported to buy and sell goodwill, a majority of the High Court
[11]
25. The majority of the Court concluded that goodwill was inseparable from the business which created it. As they said:
[12]
``... It may derive from identifiable assets of a business, but it is an indivisible item of property, and it is an asset that is legally distinct from the sources - including other assets of the business - that have created the goodwill.''
For the purposes of the case the majority then sought to identify the nature of goodwill which they agreed was ``notoriously difficult to define''.
[13]
``It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom.''
ATC 4589
Lord Lindley in an equally well known passage, likewise cited in
Murry
,
[16]
``A going business has a value over and above the aggregate value of the tangible property employed in it. Such excess of value is nothing more than the recognition that, used in an established business that has won the favour of its customers, the tangibles may be expected to earn in the future as they have in the past. The owner's privilege of so using them, and his privilege of continuing to deal with customers attracted by the established business, are property of value. The latter privilege is known as goodwill.''
The majority in the High Court were cautious as to this concept of added value, however, lest that lead to the conclusion that there is no goodwill where the sale value of a business is no greater than the break-up value of its assets. Consequently they concluded
[20]
26. From these matters and other considerations the majority in
Murry
concluded
[21]
27. It was at this point that the majority considered the sources of goodwill in a manner from which the appellant Commissioner here sought to draw inferences favourable to its attachment of the value of goodwill to the Port Melbourne site, but which on a proper understanding pointed in the opposite direction. Having noted that the goodwill of a business was ``the product of combining and using the tangible, intangible and human assets of the business for such purposes and in such ways that custom is drawn to it'',
[22]
``... However, goodwill is a quality or attribute that derives inter alia from using or applying other assets of the business. Much goodwill, for example, derives from the use of trade marks or a particular site or from selling at competitive prices. But it makes no sense to describe goodwill in such cases as composed of trade marks, land or price, as the case may be.... It is therefore more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements.''
(Emphasis added)
28. Those various sources of goodwill were considered as well as the means whereby the benefit of them might be protected in law. The majority emphasised
[24]
``Care must be taken to distinguish the sources of the goodwill of a business from the goodwill itself. Goodwill is an item of property and an asset in its own right. For legal and accounting purposes, it must be separated from those assets and revenue expenditures of a business that can be individually identified and quantified in the accounts of a business.... That which can be assigned and transferred from the business may, while it is connected to the business, be a source of the goodwill of the business but cannot logically constitute any part of the goodwill of the business.''
There followed then a statement of what might be thought to be obvious, but which was sought in the present case to found a proposition supporting the Commissioner's valuation by cumulation of goodwill to site value. The majority
[25]
``It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. The sale of hotel premises, for example, may involve the sale of goodwill although the contract does not refer to goodwill.''
ATC 4590
It did not follow from that, however, that when a business is sold, the assets would each attract some proportion of goodwill either separately or collectively. The High Court was of course there considering the natural consequences of the sale of a business closely connected with the site on which it is carried on, where the business and goodwill are necessarily attached to that site, especially where the site is a hotel, a corner store or some other business which has no real life except that which is attracted to those premises. As the majority said a few sentences later:
[26]
``... Unless a business is transferred to the person to whom an asset of the business is transferred, the transfer of the asset does not transfer any part of the goodwill of the business.''
29. However, when it is said, as often it has been, that the goodwill of a business adds value to the land if sold with the business, what is really meant is that, if the goodwill is
not
sold, then an asset such as land in the form of a hotel or shop may be worth significantly less, either because the vendor can restrain the purchaser from directly approaching its clients or, more frequently, because the purchaser has no means of preventing the former clients from following the vendor to wherever the vendor chooses to carry on its business thereafter whether near or close to the subject site. So, as was noted by the majority,
[27]
30. In the present case the facts show that one could never identify the goodwill of the business with the factory at Port Melbourne though it was used to produce a significant proportion of the materials sold by the vendor. It was purely a factory and indeed no orders were directed to the factory, for the method of ordering from the vendor business was primarily through its head office in Malaysia or persons reporting to that office. Doubtless part of the vendor company's reputation flowed from its capacity to provide a product of the quality which its customers desired and valued. But the factory was merely a means to an end: it provided no basis for attracting customers beyond that which any factory and any business enterprise would produce. The factory could have been moved to any part of Australia, or perhaps South East Asia, without the business being affected in the slightest, so far as the evidence went. It is unlikely that the factory would have been moved, because it was a large and cumbersome series of buildings and equipment, one part almost five storeys high, but that had nothing to do with the attraction of customers which is central to goodwill. Its situation and its retention were merely a matter of convenience. The factory was useful and remained useful, indeed essential to that part of the business's production. It was said that because there was a useful factory on the site, that in itself provided the goodwill of the business, or at least a significant part thereof. Of course the improvements constituted by the buildings and plant added value to the land because it was improved land, but that is the same with any factory, warehouse, shop, office or paved yard, or any combination of places where a business is carried on. None of them is essential except in a case such as a hotel or corner store, where the customer goodwill is likely to evaporate if the business is moved elsewhere. Moreover it does not follow, merely because there is no competitor at the moment, so it was said, selling this particular class of chemicals, that at some time in the future, perhaps relatively soon, there will not be some other company or business interested to move into the same line of business. It will pay the same price for this very piece of land, if it thinks the factory is truly useful to its purposes, but that will have nothing to do with its goodwill or the goodwill of the present business: the value will rest solely in the land and the factory which is constructed on it as a means to a productive end.
31. The point contrary to the Commissioner's submissions was emphasised by the majority in
Murry
. As their Honours stated,
[28]
ATC 4591
assets that inhere in other property interests of a business. That contradicted a number of accepted premises, the first of which was that ``goodwill has no existence independently of the conduct of a business and that goodwill cannot be severed from the business which created it''. [30]``... [ A]lthough the value of the site goodwill of a business may be a persuasive guide to the value of the land on which a business is conducted, it is the potential use of the land and not the goodwill deriving from the use of the land that is valued in compensation cases...''
32. Finally the appellant placed considerable weight on the following proposition which appeared in the joint judgment:
[33]
``Where the goodwill of a business largely derives from using an identifiable asset or assets, the goodwill of a business, as such, when correctly identified, may be of small value. That is because the earning power of the business will be largely commensurate with the earning power of the asset or assets.''
The majority then pointed
[34]
33. Even if some part of the goodwill could be attributed to the land, then contrary to the submissions of the Commissioner, it did not require explicit proof of each relevant factor making up the vendor's goodwill to deny the proposition that the whole of the value of the goodwill should be attributed to the site on which the factory was placed. Nor was there any evidence to support the Commissioner's alternative contention that a part of the value of the goodwill inhered in the Port Melbourne land and ought to be taken into account by increasing the value of the land for stamp duty purposes over and above the prices stated in the transfer and fixed by the contract for the land and improvements. There is no reason to think that the value agreed upon between the parties, in the course of an arm's length transaction, did not appropriately reflect the true value of the land, together with the separately stipulated value of the plant and equipment which have been held to be fixtures. Clearly enough the land price in the transfers was fixed on a ``bare land'' value but equally clearly the affixed machinery owned and used by the vendor company was given a value by the parties which must have reflected its usefulness to the purchaser company. The total fairly reflected the ``improved value''.
34. On the other hand, in the case of a factory at a particular site, its ``usefulness'' to a manufacturing enterprise is far removed from goodwill as it is properly understood. Of course, the factory and other fixtures on the site, all other plant and equipment, including such mundane things as vehicles, computers and office furniture, are all means to an end, namely the running of a profitable business enterprise. But so in their varying ways are the raw materials used and the company staff, both individually and as an efficient structure, whether those staff work on the factory site itself, in the Malaysian office or in other places seemingly spread around Australia. So is the site itself, but merely as a place where some, indeed a significant number, of the company's
ATC 4592
activities are carried on and yet it is only a means to an end.35. Thus a successful business may generate goodwill inasmuch as it is the source of the goodwill, and yet at the same time that goodwill in a sense produces that success. As the majority in Murry reiterated, goodwill is different from its sources, although in different enterprises particular aspects of the business enterprise may more obviously contribute to goodwill than others. It is a dangerous simplification, nevertheless, to conclude that it is necessary to look at each aspect of the enterprise to try rationally to apportion the good will of the enterprise among those sources. Such a division could never be accurate for each aspect of the enterprise must to a greater or lesser extent contribute to that intangible concept of goodwill which has no real existence except the value which the parties or others may put upon it either for selling, accounting, revenue or other like purposes. As the High Court recognised, even the ``corner pub'' or the fashionable restaurant gain and lose custom, which is fundamental to goodwill, in unpredictable and unmeasurable ways. The danger of picking on certain passages in the majority judgment in Murry therefore is that one can wrongly make generalisations out of particular examples. If the Commissioner were right in his analysis of the case, then every business which was carried on on a site (perhaps including even a website) which was in any way adapted to its particular uses, even to the extent of having its name painted on the window or using a specific office layout, would have to concede that when sold with the business the site somehow had an increased value by virtue of the vendor's goodwill, albeit that it would be impossible to attribute a specific part of the agreed goodwill price to that or any other asset or attribute of the business.
36. The cases of hotels and trademarks referred to by the majority in Murry are to be confined to their particular circumstances. A trademark, after all, is a trade -mark and has a special value because of the monopoly right to use that which is intended to designate a product or business. In most cases it would be almost impossible to separate the relevant goodwill from the value of the trademark itself. As to hotels, one must keep clearly in mind that local goodwill only becomes relevant when the goodwill consists in the capacity to attract customers directly to come to the premises and because it is implicit in many sales of hotels that the vendor can be restrained from seeking directly to canvas the former customers. Doubtless a similar right exists in the present case but the canvassing would have nothing to do with the site on which this business was carried on. A hotel is only valuable if it can attract customers physically to return to the premises. That is why the premises may have added value which cannot be ignored in the valuation process but that is only because a term is implied in those few cases, such as in the sale of hotels, where it is not even necessary to sell the business or goodwill explicitly in order to say that there is implicit obligation on the vendor not to canvas customers. If one goes beyond that very special group of cases, no similar conclusions can be drawn and no value can fairly be attributed to site as contrasted with any of the many other factors which go to make up the successful enterprise which is sold.
37. In the present case the actual business of selling the vendor's product was conducted away from the factory, not merely in terms of contact with customers but because no part of the selling of the product either took place on or was organised from the site.
[35]
38. In consequence neither the whole nor any part of the goodwill sold to the respondent formed part of or should have been added to the improved value of the land transferred.
ATC 4593
Whether goodwill a ``chattel'' within s. 63(3)
39. The next alternative contention put by the Commissioner was that the goodwill could be described as a chattel within the meaning of s. 63(3)(a) of the Act so as to form part of the real property for the purpose of that section. The learned judge held that the expression ``chattels'' in that section was confined to corporeal property and thereby declined to follow a decision of Harper, J. in
Australian Rice Holdings Pty Ltd v Commr of State Revenue (Vic)
,
[36]
2004 ATC 4193
;
[
2004] VSCA 17. For this purpose it may be conceded that goodwill is property and that, within the meaning of the relevant paragraph of s. 63, it was ``held or used in connection with the business carried on or in connection with the real property''.
40. In the course of argument we were taken to a considerable number of authorities and discussions in learned works as to the nature of a chattel in law which were said to provide some indication of the wide scope of the expression as found in the Stamps Act . It was moreover said that in the course of a budget speech the Treasurer of the time had used the expression ``personal property'' when describing the subject of the vice which the amending section was intended to overcome when later passed in 1983. It seems that at that time vendors had a habit of dividing up the consideration for the sale of properties between the land value and that of associated chattels by inflating the value of ``chattels'' and thus not paying any stamp duty on any part of their artificially high value. Although the Commissioner by that time had a power to assess according to the value of the property and not merely the consideration, the mechanism instituted by this section was one which operated automatically and thus avoided the need for a valuation, unless circumstances otherwise required it.
41. There must, however, be a real doubt as to whether the kind of personal property such as goodwill was ever intended to be included in the legislation in this way. Chattels have been given an extended meaning in recent years, largely I would think for convenience' sake, rather than on any basis of logic.
[37]
42. If one looks at the cases in which the word ``chattels'' has been held to include choses in action or other intangible property rights, there has usually been a good reason for considering that the word should be construed as comprehending all that can be characterised as personal property. Sometimes there is an obvious dichotomy between moveables and immovables in the provisions overall, sometimes it is easy to conclude that what was intended was all personal property though excluding (in most cases) chattels real. I have a strong inclination in the present case to believe that this anti-avoidance mechanism, for so it was described, was intended to catch a specific and limited group of potential stamp duty evaders. The conventional contract of sale of land more often than not referred also to ``fixtures and fittings'' or preferably to a specific list of named movable chattels. The object to be achieved by the section was to prevent an artificial figure being given to the value of the latter, thereby reducing the value of the land for duty purposes. It could, perhaps, be argued that, if shares or other intangibles were sold with real property, there was a similar risk. Marketable securities ordinarily have an easily calculable value (although the same could not necessarily be said of other property which was, from time to time, sold with realty), but transfers of them were already separately charged with duty. No mention was made of any ``scam'' involving the overvaluing of goodwill, although one may concede that a combination of land and goodwill was not as frequent as the inclusion of specified chattels. If goodwill and the like were to be included, then it is difficult to see why the Treasurer's preference in the first place for ``personal property'' should not have been repeated in appropriate terms in the legislation as put before Parliament. It was not and at the same time there was an exemption for holders of land
ATC 4594
used for primary production which excepted those kinds of chattels, which included stock, farm implements and ``other chattels'', presumably of a similar kind, used by farmers for the purposes of their primary production activities: see s. 63(4) of the Act.43. There is no reason why the word ``chattels'' should be interpreted differently in two sub-sections not merely of the same Act, not merely of the same section, but of a section inserted by way of amendment at the very same time.
[38]
44. It is that popular, straightforward meaning which I think should here be given to the word ``chattels'', whatever it may mean in other circumstances. I would therefore reject counsel's arguments to the contrary and their attempts to apply the reasoning of Harper, J. in Australian Rice Holdings . With respect, his Honour's conclusions were appropriate neither to that case, nor to the present. Doubtless his reasoning may be applicable in other circumstances where the word ``chattels'' has to be considered, but, as this Court sought to show in Australian Rice Holdings , the particular provisions of s. 63(3) should be viewed in their context and as showing that a more limited meaning here should be given to that word. It is unnecessary to repeat here what was said by Callaway, J.A. and me in that case but that reasoning shows why ``chattels'' should here be read restrictively.
45. I therefore reject the appellant's contentions as to the inclusion of the value of goodwill, in whatever form, as part of the value of the land sold by Unilever to the respondent, as defined by s. 63(3)(b).
Whether Co-Gen's plant and equipment were fixtures which formed part of the real property transferred
46. The final set of issues relates to the appellant's claim that the plant and equipment erected by Co-Gen on the land leased to it for the purpose of providing steam and electric generation for the vendor's factory should be considered to have been attached to the land by way of fixtures, thus forming part of the real property transferred by Unilever to the respondent. A number of issues are wrapped up in that question, namely, (1) whether the degree and object of annexation of that plant and equipment was sufficient to make all its constituent elements fixtures and part of the realty according to the common law, (2) whether, assuming them to be fixtures, the ``property'' in them remained with the tenant Co-Gen by reason of s. 28(2) of the Landlord and Tenant Act 1958 and (3) whether those fixtures were taken out of s. 28(2) by reason of the fact that they were ``erected or put in [ by the tenant] in pursuance of some obligation in that behalf''.
47. The first finding challenged by the appellant was that the plant and equipment set up by Co-Gen on the leased land were not sufficiently attached as to have become fixtures and so formed part of the realty. Counsel contended that the mode of attachment, the duration of the proposed use thereof, the unlikelihood that any part would be removed in the foreseeable future and the tenant's use of the plant and equipment for the better enjoyment and use of the leased land all pointed
ATC 4595
to a conclusion that the plant and equipment had become fixtures by the time of the sale to the respondent. A large number of authorities were cited and it may be said that a number of them pointed to the conclusion which the Commissioner urged. There were indeed considerable similarities with the terminal equipment which was the subject of Vopak , but that was a case in which the parties agreed that, but for the provisions of s. 28(2), the terminals would have been fixtures which formed part of the land there in question. The terminals were even larger than the present plant, but there was nevertheless evidence that they could have been detached and removed by sophisticated equipment for use elsewhere. The concession made in that case was consistent with decisions such as In the matter of Starline Furniture Pty Ltd (in liq) ; [43]48. Nevertheless, what distinguishes the present case is not the extent of annexation of the chattels which seemed on the surface to be not insubstantial, albeit that methods for removal were clearly built into them, but the object of annexation which on this occasion appears to be unusual. The land was leased for a purpose largely unrelated to the tenant's own business and its needs. Although Co-Gen had a right to sell off the balance of its electricity into the state grid, the primary purpose of the lease was solely to enable it to generate steam and electricity for the landlord's own use on land adjacent to the tenant but which formed part of the whole of the subject land. No case of that kind was to my knowledge cited to us, but the relationship between landlord and tenant in this case is significant in several ways. First, although the original term is extensive in duration, any renewal depends upon agreement between the parties - it is not simply a commercial choice for the tenant. Secondly, the terms of the lease (set out above in para. [ 9]) were such as to make it abundantly clear that not only did the tenant have the right to remove the plant and equipment at the end of their commercial arrangement, but that it was under an obligation to do so. In terms of intended permanence, or the contrary, there could be no more emphatic statement of the parties' objects in allowing the plant and equipment to be brought onto the land than their mutual desire to see it removed at the end of that relationship. Thirdly the landlord agreed that all improvements and fixtures remained property of the tenant, regardless of the degree of annexation. Fourthly, the object of annexation was not related to any enjoyment of the land for the tenant's own purposes: rather the plant and equipment was brought on solely to produce power for the landlord. I shall not examine the matter further, for, even assuming that the question of annexation be answered differently, there are other reasons why the appellant cannot succeed on the fixtures issue. Nevertheless, in my opinion, in the very special circumstances of this case, the Co-Gen plant and equipment were not fixtures, nor were they part of the real property sold to the respondent.
49. The second and third issues relating to fixtures arise out of the application of s. 28(2) of the Landlord and Tenant Act . The proper interpretation of that section was discussed by the Court in Vopak where the terms of the section were fully set out (see ATC 4161 [ 22]; VSCA para. [ 22]), but a further issue as to its meaning has been raised, so that the principal terms may be conveniently repeated:
``If any tenant holding lands by virtue of any lease or agreement... at his own cost and expense erects any building either detached
ATC 4596
or otherwise or erects or puts in any building fence engine machinery or fixtures for any purpose whatsoever ( which are not erected or put in in pursuance of some obligation in that behalf ) then, unless there is a provision to the contrary in the lease or agreement constituting the tenancy, all such buildings fences engines machinery or fixtures shall be the property of the tenant and shall be removable by him during his tenancy or during such further period of possession by him as he holds the premises but not afterwards, notwithstanding the same consist of separate buildings or that the same or any part thereof may be built in or permanently fixed to the soil...''(Emphasis added)
50. The respondent, not surprisingly, relied on what the Court said in Vopak . In essence it was held there that, notwithstanding the common law rules as to fixtures, the Parliament of this State had by s. 28(2) reformulated the principles relating to property in tenant's fixtures by explicitly providing that, whenever fixtures are erected or put in by the tenant, ``property'' shall ordinarily remain in the tenant, until he or she gives up possession. In other words, contrary to the appellant's submission, tenant's fixtures (of the widest description, whether trade, ornamental or whatever) do not become property of the landlord and thus part of the realty, but remain chattels capable of removal at any time by the tenant and incapable of being dealt with by the landlord as part of the land, until the tenant has departed. It may be an unusual provision, but the reasons for accepting a literal meaning were set out in detail in Vopak : see especially ATC 4161-4167 [ 21]- [ 44]; VSCA paras. [ 21]- [ 44].
51. Counsel for the appellant was so bold as to suggest that this Court, constituted by only three judges (no formal request for a court of five was made), should refuse to follow this recent decision. In substance they said that
Vopak
had been decided per incuriam. A number of reasons were put forward for taking that course, expressed with customary care, but none, it must be said, had not been considered by the Court in
Vopak
. Though the consequences of that decision may be seen to extend to and affect the rights of a proprietor of an estate in land to which chattels are affixed, there are several reasons for not reconsidering the decision in
Vopak
. By chance it is not a case where a specific party, who is affected by a decision handed down in the course of the Court's consideration of another case, had no opportunity to put detailed arguments to the Court. The Commissioner himself was a party to
Vopak
and this specific issue was raised and argued in great detail on his behalf only last year, in fact by the very same counsel who appeared in the present appeal.
[48]
52. Out of courtesy to counsel's carefully expressed arguments I will, nevertheless, canvass a few of the matters since raised. Counsel relied heavily on three matters. First they said that the decision in
Vopak
meant that in Victoria alone, but nowhere else in Australia, tenant's fixtures do not form part of the realty and are ``excised'' from the title which a vendor can pass on transfer. Of course that is so,
[49]
ATC 4597
practice can be transferred, but the Torrens system has found no easy solution. The rights of a tenant in possession are expressly recognised in s. 42 of the Transfer of Land Act 1958, but, whatever the correctness of Vopak , a purchaser will inevitably find it hard to divine whether attached chattels are fixtures or not. It may, under the Torrens system, have been desirable to confine the question to be asked to the ``degree of annexation'', as it is called, for the ``object'' and the other relevant circumstances, howsoever they be identified, are primarily known only to landlord and tenant. If Vopak be correct, purchasers will know that tenant's fixtures within s. 28 are not capable of being transferred and so they should make special provision for them in any contract of sale.53. Thirdly, it was reiterated by counsel that s. 28(2) was intended only to deal with the relationship of landlord and tenant but was not intended to affect the landlord's estate or interest in the land nor to affect the landlord's dealings with third parties with respect to the title. I cannot accept that contention. Any change to the property rights of landlord and tenant vis- à -vis each other relating to fixtures will ordinarily have further consequences. To the extent that the tenant's rights are expanded, so also are the landlord's rights as proprietor of the land diminished. Even assuming that the section did no more than extend the tenant's time to take away the fixtures to the moment he or she actually gave up occupation, so also the landlord's power incidentally to transfer the fixtures as part of the real property was restricted. That which at common law forms part of the realty is extracted upon severance by the tenant, so that the landlord's practical rights in and over the land are diminished, as are those of any purchaser who takes subject to the rights of a tenant in possession. In other words the ``right of removal'', referred to by counsel, necessarily affects the interest of the holder of the reversionary estate in the land. The change effected by s. 28(2) may have been greater than some thought, but the change was one which affected ``property'' in the fixtures. By permitting that property to remain with the tenant in unqualified form, that which the landlord could otherwise have claimed, particularly in his or her dealings with other parties, must, pursuant to the sub-section, be treated as no greater than a right to claim those affixed chattels as part of the realty after the tenant has departed without removing them pursuant to his or her rights.
54. Finally, it is necessary to mention the Commissioner's argument in his supplementary outline that on the facts these fixtures were ``erected or put in by
[
Co-Gen] in pursuance of some obligation in that behalf'', which would thereby make s. 28(2) on its face inapplicable. The prime difficulty facing the appellant was that he was unable to identify any term either in the lease or in the Energy Services Agreement (assuming it to be relevant) which imposed directly ``obligations'' of the kind described. Doubtless the parties assumed that steam and electricity generation plant and equipment would be brought upon the lease premises. So much appears from the recital previously referred to
[50]
55. Although it is no longer relevant, I also consider that the Commissioner's method of valuation of the land and the tenant's fixtures was incorrect, essentially for the reasons stated by Pagone, J. The appellant sought to support an assessment based on a value fixed by taking the consideration for the land and adding the written-down value of the tenant's fixtures. Section 63(3)(b) gives the Commissioner a choice between taking the consideration and, on the other hand, valuing the subject land. As the respondent correctly argued, he cannot combine the two for what is effectively the one parcel of land. By adding the value of fixtures which were not sold (as the appellant sought incorrectly to do), he was obliged to value the transferred land as a whole. The value may not have been very different so far as the land element was concerned, but the method adopted was not that prescribed. However, having regard to the Court's conclusions as to fixtures, it is not an exercise which has to be carried out.
56. For the reasons stated the appeal must be dismissed. Pursuant to the judge's order the matter must be remitted to the Commissioner, but of course any further assessment must be made in light of the reasons of this Court,
[51]
ATC 4598
Footnotes
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[7]
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[14]
[15]
[16]
[17]
[18]
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[20]
[21]
[22]
[23]
[24]
[25]
[26]
[27]
[28]
[29]
[30]
[31]
[32]
[33]
[34]
[35]
[36]
[37]
[38]
[39]
[40]
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[42]
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[44]
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