PRIMELIFE (GLENDALE HOSTEL) PTY LTD & ANOR v COMMISSIONER OF STATE REVENUE (VIC)
Members:Harper J
Tribunal:
Supreme Court of Victoria
MEDIA NEUTRAL CITATION:
[2004] VSC 214
Harper J
On 12 February 1999, IOOF Community Villages Pty. Ltd. entered into a number of transactions for the sale of aged care facilities in Victoria. The transactions, which were inter-related, involved the disposal not only of the real estate on which the facilities were constructed, but also the businesses that operated them and the ``approved'' or ``allocated'' places by which, under the Aged Care Act 1997, the Commonwealth Government allocates subsidies for the provision of accommodation and residential care for the elderly.
2. This litigation arises from assessments made by the respondent, the Commissioner of State Revenue, in his capacity as Comptroller of Stamps. Two of those assessments are the subject of the present appeals. Each such assessment concerns one of the facilities referred to above: first, the Cumberland View Retirement Village and Hostel, situated at Whalley Drive, Wheelers Hill; and, secondly, the Glendale Aged Care Hostel, situated at Glendale Court Werribee. In each case, a contract was entered into separately for each of the land, the business and the allocated places. The consideration for the Cumberland property was $6,042,500; for the Cumberland business $1,072,500; and for the 131 Cumberland places, $3,930,000.[1]
3. The vendor of the land, buildings and improvements was, in each case, IOOF Community Villages Ltd. That company was also the vendor under each ``Business Sale Agreement''. The purchasers (the present appellants) were, respectively, Prime Life (Cumberland Village) Pty. Ltd. and Prime Life (Glendale Hostel) Pty. Ltd. By contrast, while the vendor of all of the allocated places under both transactions was, again, IOOF Community Villages Ltd., the purchaser of those places was Prime Life Corporation Ltd.
4. There is no doubt that each transaction is subject to Victorian tax. Section 17(1) of the Stamps Act 1958 provides that (to the extent that that Act continues to apply following the enactment of the Duties Act 2000,[3]
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several duties and additional duties specified in that Schedule. Heading VI of the Schedule brings to duty a conveyance of real property[4]5. Each of subsection (3) and sub-section (4) are presently important. They were, at the relevant time, in the following form:
``(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 sold or transferred to the transferee or a person who is related 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 of 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 of encumbrances, in the open market on the date of the conveyance, direction, consent or application;...
...
(4) Notwithstanding sub-section (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.''
[5]
The emphasis has been added so that the later discussion about the meaning of the word ``chattels'' may be more easily understood.
6. It follows that ad valorem duty is chargeable on instruments which effect the conveyance or transfer either of real property alone, or of both real property and such chattels as are (i) included in the real property by reason of s. 63(3)(a); and (ii) not excluded by reason of s. 63(4)(a). In the present case, a business - that of providing accommodation and associated facilities for the elderly - was conducted both at the Whalley Drive property and at the Glendale Court property. Furniture, fittings and equipment were included in each sale. The Commissioner was therefore entitled to assess the duty payable by taking the greater of (a) the consideration for the sale of the land and those chattels and (b) the sum of the amount for which such land and chattels might
ATC 4647
reasonably have been sold if they had been sold, free of encumbrances, in the open market on the date of sale.7. On the other hand, it is the instruments by which transfers of real property are effected that are brought to duty under Heading IV. Anything else is either dutiable under some other heading in the Schedule or not dutiable at all. Liability to duty arises because the dutiable instrument transfers an estate or interest in real property, including those chattels that come within the scope of the legislation; and it is by reference to the value of that which is transferred that duty is imposed.[6]
8. That is the nub of the present dispute. Each side addresses two sides of the argument. The Commissioner asserts, first, that the land, the chattels, the businesses and the allocated places are all to be assessed as part of the real property the subject of the relevant transactions. Alternatively, he argues, both the allocated places and the goodwill of the businesses are chattels the value of which must be brought to duty under s. 63(3). For their part, however, the appellants submit that neither the businesses (in which expression they include the goodwill generated by each business) nor the allocated places should be brought to tax. They are not, the appellants submit, part of the real property acquired by either Prime Life (Cumberland Village) Pty Ltd or Prime Life (Glendale Hostel) Pty Ltd. Nor are they, in any relevant sense ``chattels''.
9. In the present case, the appellants in part rely in support of their position on the fact of the arms-length, separately negotiated, contracts for the sale of the land, the businesses and the allocated places. They therefore sought from the Commissioner assessments of duty based upon a real property value of $705,143 for Glendale and $6,042,500 for Cumberland. These were the amounts shown under the heading ``Consideration'' in each of the relevant instruments of transfer. Statutory declarations made on 21 May 1999 by Robert John Turner, a director of the vendor, asserted that in his opinion the consideration was in each case adequate. Each appellant supported him. On 17 November 1999 (Glendale) and 13 January 2000 (Cumberland) the purchaser executed a ``real property value declaration'' which stated that on 12 February 1999 the value of the land was, respectively, $705,143 and $6,042,500.
10. This was a position that found no favour with the Commissioner. He took the view not only that the appellants had incorrectly failed to include as dutiable the value of the businesses and the allocated places, but also that the consideration for each of the Glendale and Cumberland transactions was less than the open market value of either. He therefore declined to assess duty on the basis put forward by the appellants.
11. The Commissioner's view about the adequacy of the consideration expressed in the instruments of transfer is supported by a number of valuations. The earliest of these was carried out by First Pacific Davies Pty. Ltd. The valuer's reports are dated 19 May 1999 (in respect of the Glendale property) and 20 May 1999 (relating to Cumberland). In the case of both properties, the valuation was for mortgage security purposes, assuming (among other things) a hypothetical sale as a going concern on a walk-in, walk-out basis as at 29 April 1999. The result was an assessment of $16,500,000 as the value of Cumberland and of $6,100,000 as the value of Glendale. The Cumberland valuation, signed by J.E. O'Grady, was expressed to reflect ``the current market value of the respective vendor related interests in the subject freehold property for mortgage security purposes''. That for Glendale, signed by David Way as well as Mr O'Grady, looked separately at (a) land, (b) buildings, (c) licences and goodwill, and (d) furniture, fittings and equipment. Their values were assessed as being, respectively, $1,150,000, $4,300,000, $570,000 and $80,000 (which of course total $6,100,000). No specific mention was made in this context of the allocated places. The suggestion that they were worth $30,000 each was, it seems, put aside.
12. The Commissioner accepted each valuation. He assessed duty accordingly: $907,500 in the former case and $335,500 in the latter. These sums have been paid, albeit under protests which, on 4 February 2000 (Glendale) and 25 July 2000 (Cumberland), were translated into objections by each purchaser. The relevant appellant submitted (in effect) that, even accepting the values arrived at by First Pacific Davies, the Commissioner had incorrectly included in the assessable amount the value of that which was not subject to duty under Heading VI of the Schedule. It was said that the correct basis of assessment in the case
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of Glendale was to omit from the calculation the sum of $570,000 allowed in the transaction for ``licences and goodwill''. There remained $1,150,000 (being the purchase price nominated, in the relevant contract, for the land) + $4,300,000 (buildings) + $80,000 (furniture, fittings and equipment) = $5,530,000. From that amount should be subtracted $3,600,000, being 120 places @ $30,000 per place. The result, according to the appellants, is a taxable sum of $1,930,000. On that figure, the appropriate amount of duty is $105,941, which (again, according to the appellants) should properly be reflected in a refund of duty in the sum of $229,559. In the case of Cumberland, the appellants submit that the dutiable amount is $12,540,000. This is calculated by taking the First Pacific Davies valuation of $16,500,000 (which, of course, included the contribution made by the value of both the goodwill and the allocated places) and, inconsistently with the approach adopted in relation to the Glendale valuation, subtracting from that amount the value of not both, but only the latter. In performing this exercise, the appellants (repeating the original mistake) put the number of such places at 132 instead of 131. The result was the subtraction of $3,960,000 (i.e. 132 × $30,000) from $16,500,000, leaving a balance of $12,540,000. On this figure, the appropriate amount of duty is $689,700. If so, Prime Life (Cumberland Village) Pty. Ltd. is entitled to a refund of $217,800.13. The Commissioner disallowed the objections. He did not query the value placed by the appellants on the allocated places; but, given his position, he did not need to. He simply re-iterated his view that ``the amount for which the real property might reasonably have been sold if it had been sold in the open market on the date of sale... [included] the value of the goodwill and the places as an enhancement to the value of the property''.[7]
14. The dispute not having been earlier resolved, each matter was on 29 April 2002 referred to the Court. On 24 May 2002, each appellant filed in the Court a summary of its grounds of objection. The two documents are relevantly identical. They read as follows:
``The appellant relies on the following as a summary of its grounds of objection:
- 1. Being a sale at arm's length, the consideration for the sale shown in the transfer(s) of the real property is for the purposes of s. 63(3)(b) of the Stamps Act 1958, the amount for which the real property might reasonably have been sold, free from encumbrances, in the open market on the date of the sale.
- 2. The allocated places under the Aged Care Act 1997 (Cwth.) did not enhance the value of the real property, or alternatively, to the extent that they did, their value was incorporated in the consideration for the sale shown in the transfer(s).
- 3. The allocated places under the Aged Care Act were separate and distinct from the real property.
- 4. The allocated places under the Aged Care Act were not `chattels' within the meaning of s. 63(3)(a) of the Stamps Act.
- 5. The goodwill acquired by the appellant was connected with, and inseparable from, the business which was conducted at the... Hostel utilising the allocated places under the Aged Care Act.
- 6. The goodwill acquired by the appellant was not part of the real property or alternatively, the goodwill acquired by the appellant did not have its source exclusively in the real property by reason of the fact that it depended in the utilisation of the allocated places under the Aged Care Act.
- 7. The goodwill acquired by the appellant was not a `chattel' within the meaning of s. 63(3)(a) of the Stamps Act.''
15. The difference in approach between the Commissioner and the appellants gives rise to important issues of principle. The relationship between, on the one hand, the allocated places and the goodwill and, on the other, the Glendale and Cumberland premises, is one of them. The
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meaning of the word ``chattels'' in ss. 63(3) and 63(4) of the Stamps Act is another. If it embraces goodwill and allocated places, or either of these intangible assets, then the Commissioner is vindicated. If it does not, the Commissioner will only succeed if, and to the extent that, either forms part of the real property the subject of either transaction.16. The proper construction to be given to the word ``chattels'' in ss. 63(3) and 63(4) was considered by me in Australian Rice Holdings Pty Ltd v Commr of State Revenue[9]
17. Australian Rice Holdings concerned the assessment of duty on an instrument of transfer of land used for growing rice. The parties to the transfer sought to include with it certain water rights: a diversion licence which authorised the holder to draw water from the Goulburn River, and an annual permit to do likewise from a nearby creek. If the water rights were not ``chattels'' within the meaning of s. 63(3)(a), then that would be the end of the matter. But, in assessing the duty payable on the instrument of transfer, the Commissioner took the water rights into account on the basis that they were ``chattels'' as so defined. Their value was therefore to be included in the assessment of duty. At the same time, the Commissioner also proceeded upon the basis that ``chattels'' in s. 63(3)(a) had a wider meaning than it had in s. 63(4)(a). In the latter, the word was confined to chattels such as stock and implements, and did not include licences or permits of the kind comprised in the water rights. Ex hypothesi, therefore, such rights were not chattels held or used in connection with the use of the real property for primary production. That being so, s. 63(4)(a), required their value to be included pursuant to s. 63(3)(a) in ascertaining the value of the land for the purpose of the assessment of duty.
18. I agreed with the Commissioner. The Court of Appeal was of a different opinion. In Australian Rice Holdings v Commr of State Revenue, the first of the appeals to be determined, the Court settled one, but only one, point about the proper construction of the word ``chattels'' as that word is used in ss. 63(3) and 63(4) of the Stamps Act. The Court held that the word had the same meaning in both provisions.[13]
19. I have already noted that the decision in the Uniqema appeal was handed down on 8 May 2004. There, the Court looked generally at whether the value of the goodwill of a business carried on at Ingles Street, Port Melbourne, formed part of the value for duty purposes of that land when the property and business were sold to the taxpayer, Uniqema Pty Ltd. The total consideration was $US22,839,761. Of this, the contract allocated the sum of $US7,368,000 to the Port Melbourne site. Slightly less - $US7,344,707 - was attributed to goodwill. Plant and equipment were valued for the purposes of the contact at $US9,032,708. Instruments of transfer of the land, expressed in the Australian dollar equivalent (at the time) of $9,600,000, were submitted for assessment of duty. On that basis, $491,288 was payable. The Commissioner demurred. He brought to duty the Australian dollar value not only of the land
ATC 4650
but also of the plant and equipment, certain tenant's ``fixtures'' - and the goodwill. This returned him an additional $2,437,201.65. It was rather more than that to which Uniqema thought he was entitled.20. The business conducted by the vendor on the land was that of processing tallow to produce oline, glycerine, sterine and distilled fatty acids. The market for those products was to be found not only in every Australian State apart from Tasmania, but also abroad: Japan, China, Malaysia, India and many other countries in Asia, Africa and the Middle East. Indeed, the vendor's regional headquarters were located in Malaysia. Its sales staff reported to that office, although some three representatives worked from Port Melbourne. Customers did not come to Ingles Street; and it seems that no sales were made directly to the public. Rather, the oline, glycerine, sterine and fatty acids were purchased by other manufacturers who transformed them into soap, cosmetics and lubricants.
21. In these circumstances, Uniqema contended before Pagone J at first instance and before the Court of Appeal that the location of the factory was a matter of singular indifference in the generation of goodwill. Sydney or Sydenham, Kuala Lumpur or Kota Baharu, would have served as well.
22. For his part, the Commissioner submitted on the appeal that the goodwill of the business had the land as its only source. Given that this was so, it was proper to bring to duty the whole of the agreed value of that goodwill. And, were it to be thought that this submission put the case a little too high, at least there was here a business that was conducted in a purpose-built factory. Accordingly, the Commissioner argued, the value of the land must be adjusted to reflect this fact. Such adjustment was not reflected in the value ascribed by the contract to the real property element in the transaction. In any event, the goodwill of the oleo manufacturing business conducted on the land was a ``chattel'' which was sold with the land. Section 63(3)(a), therefore, required the inclusion of the value of that goodwill in the assessment of the value of the real property for stamp duty purposes.
23. None of the Commissioner's arguments was accepted. He himself conceded that the transaction in question was in no sense a sham. It followed that there was no reason to think that the amount allowed for the land was pitched either too high - opening the possibility of excessive stamp duty - or too low - with the exposure to capital gains tax correspondingly increased. Consistently with this, it was unnecessary to make any further upward adjustment so as properly to allow for the fact that an income-producing business operated on the land. In the words of Ormiston, J.A., in a judgment with which the other members of the Court agreed:
``... There is no reason to suppose that the land itself was not valued fairly and... there can otherwise be no reason now to doubt that the value fixed for the land comprehends the working factory on its site. What amount should have been added for that purpose must have depended on the additional value a purchaser might have seen in the existing buildings and factory complex. A proper value would reflect the possibility that a prospective purchaser of the site might wish to manufacture the same or similar materials at the factory, but it would also have to take account of the real possibility that the factory would be of no use to some purchasers, at least at some time in the future.... The `value added' by reason of the factory had nothing to do with goodwill, merely with its usefulness as the means of manufacturing certain chemical products.''
[14]
(Emphasis added) at 4587 [21]; [2004] VSCA 82 at [21]. 2004 ATC 4579
24. It seems to me that it is appropriate to speak of goodwill that has its source, or part of its source, in the land, as enhancing the value of the land if (and to the extent that) it increases the capacity of the land to produce income. It is true to say that the value of land on which (for example) the business of an hotel is conducted is enhanced by the goodwill of the licensee's business. It is equally true that the worth of the land on which stands a large mid-city commercial building is enhanced by the collective value of the goodwill, so far as its source is the building, of the many separate businesses carried on within it. But goodwill is not the only factor. The land is valuable (or not) because it is (or is not) attractive to prospective and actual tenants, and therefore likely (or unlikely) to generate correspondingly attractive (or less than attractive) rental income.
25. The Court of Appeal in Uniqema did not have to consider the relevance, for the assessment of stamp duty, of the goodwill of a
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business conducted on land where a portion of that goodwill had its source in the land and another portion had its source elsewhere. In Uniqema the Court, in agreeing with Pagone J, held that no part of the goodwill of the oleo manufacturing business had its source in the Port Melbourne premises. In the words of Ormiston, JA ``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... [I]t provided no basis for attracting customers beyond that which any factory and any business enterprise would produce.''[15]``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. It was merely the place at which most of its products were manufactured, excluding products which were bought [sic] in from other manufacturers. It was an entirely wholesale business so that it seems that it had neither trademarks or [sic] any other get-up which was of significance to producers and thus in attracting trade to it. Perhaps that was because it effectively had a monopoly in this specialised field of chemicals but it appears that no attempt was made to use the factory as a basis for advertising its wares for that in effect would have been pointless. There was thus no aspect of the business which was peculiar to the site. The site was merely the place where most of its products were made, and so was no different from that used by wholesaler [ sic], a chain retailer or any other business enterprise which would likewise see little purpose in selecting a specific office or other site in order to attract business.''
[16]
Ibid, ATC at 4592 [37]; VSCA at [37].
26. The Court accordingly concluded that, when assessing the value of the land for duty purposes, the Commissioner was wrong to include, as part of that value, the value of the goodwill of the chemical manufacturing business. Given that the existence of that goodwill owed nothing to the location of the premises out of which the business operated, the Commissioner was not entitled to include its value in his assessment of the applicable duty.
27. This, it seems to me, is relevant - at least in principle - to the proper resolution of the problem with which I am confronted. The Court of Appeal in Uniqema has declared that it is right to exclude from the calculation of duty under Heading VI the value of goodwill the sources of which are wholly divorced from the land the subject of the relevant instrument of transfer. Take, then, goodwill which has a multiplicity of sources - some in the land and some not. Assume that to be the position in respect of each of the businesses conducted at, respectively, Wheelers Hill and Werribee. It must also be right to exclude from that calculation at least so much of the value of that goodwill as does not have its source in the real property at either location. Indeed, there is authority to this effect. In E.I.E. Ocean B.V. v Commr of Stamp Duties (Qld) Pincus, J.A. said:
``The question whether, when a business is conducted on a particular piece of land, the value of the goodwill of the business should be taken to be included in the value of the land on which it is conducted has arisen surprisingly often, in various contexts. It cannot be pretended that there is any simple principle to be derived from the cases... But one point which seems clear is that what is called personal goodwill cannot possibly be included in land value. The authorities discriminate between local or site goodwill and personal goodwill, the former being that part of the goodwill of a business which is not dependent upon the characteristics of the person or persons conducting the business from time to time, and the latter is the rest of the goodwill.''
[17]
at 4022; [1998] 1Qd. R. 36 at 47. 97 ATC 4013
28. The assumption that the goodwill of the Cumberland and Glendale businesses has, in each case, a multiplicity of sources, is justified in theory as well as in fact. As was said by Ormiston, J.A. in Uniqema, ``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''.[18]
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report which is in evidence before me, ``IOOF Community Villages... [was] a major developer of retirement villages with an excellent reputation.''[21]29. Of course the location of the land and quality of its improvements will add to or detract from the desirability of particular premises as a place at which to live in one's old age. If that land is well served by public transport, encompasses pleasant gardens and well-built units, and offers a multiplicity of recreational facilities, it will attract more interest from prospective residents than a retirement village without these attributes. But other factors will play their part. The level and sophistication of medical and para-medical services, for example, will be important considerations for those about to decide in which retirement village they will reside. A well-earned and widely known reputation for sound and sympathetic management would also be reflected in the level of goodwill generated by the businesses.
30. To say this, however, is to leave open the possibility that the assessment of duty under Heading IV should include the value of so much of the goodwill of a business as has its source in the land. On this point, it is tempting to resort again to the words of Pincus, J.A. from which I have already quoted: ``It cannot be pretended that there is any simple principle to be derived from the cases''. In Morvic Pty Ltd & Anor v Commr of State Revenue (Vic),[22]
31. The Commissioner contended that the goodwill agreed to be paid pursuant to the contract for the sale of the business was ``properly assessable together with the conveyance of the land.''[24]
``... appeared to be that the goodwill of this business was assessable because its source was the land and premises. In other words, that the assessment could be justified irrespective of the fact that the appellants acquired both the land (with improvements) and the right to conduct the business in which the goodwill inhered, and irrespective of the fact that the right to conduct the business had no separate proprietary interest, like a lease, to give it a foundation independent from the freehold and its location.''
[25]
Ibid, ATC at 4462 [7]; VSC at para. [7].
32. Pagone, J. found for the Commissioner. This was so despite the fact that several elements of the goodwill of the business in question were not attributable to the land: for example, ``the reputation of the business; the history of sales and the marketing of the business; and the proprietor acumen.''[26]
33. Goodwill which has its source in land is, in a sense, inseparable from the land. It is also, and perhaps in a more relevant sense, inseparable from the business with which it is associated. When a business changes its location, the ``local'' or ``site'' goodwill does not remain with the land on which the business was formerly conducted; it disappears. The business continues at its new address with whatever goodwill remains to it - without the ``site'' goodwill it had before the move, but perhaps with new ``site'' goodwill, having its
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source in whatever advantages the new address has in attracting custom.34. It is also true that, when a business is sold to the purchaser of the land on which it operates, its goodwill ``in a sense passes with a transfer of [the] land.'' That is what happened in Morvic; and it was this circumstance which, as I understand it, formed the basis for his Honour's conclusion that the contract for the sale of the business was largely redundant. His Honour went on to hold that, because there was no need for a separate contract for the sale of the business, the Commissioner was entitled - in the absence of any evidence to ``displace [the amount] adopted by the Commissioner in the assessment''[28]
35. The latter proposition may be so. A number of authorities, both English and Australian, are to the effect that all or at least substantially all of the goodwill which attaches to the business of a public house is ``site'' goodwill; and it is settled law that the sale or mortgage of hotel premises may involve the sale or mortgage of goodwill despite the absence in the contract of any reference to that subject. This may affect such issues as the burden of proof, although if it does his Honour cited no authority to support that conclusion.
36. A more important point is that, even if ``local'' or ``site'' goodwill may ``in a sense'' pass with the land without the need for an explicit contractual provision to that effect, there can be no such passing where the purchaser of the business is independent of the purchaser of the land; and in any event, it does not logically follow that merely because goodwill passes with the land, it is to be included in the amount brought to tax pursuant to Heading VI of the Third Schedule of the Stamps Act. Even when goodwill and land are transferred together, the former does not lose its character as personal property and become part of the transferred real estate.
37. In his Honour's opinion, it was critical that the purchasers acquired both the land and the business. Without the acquisition of both, ``it might not have been possible to conclude... that the [purchasers] had acquired all of the goodwill that had its source in the land''. Thus:
``... if the vendor had sold the freehold to one person and had sold the business to another with a lease...the source of the goodwill of the business, albeit ultimately at root in the location, would have its proximate legal and commercially factual derivation from the leasehold interest protecting the business. The proximate source of the goodwill of the business would thus be the leasehold interest rather than the reversionary title of the freehold's owner.''
[30]
Ibid, ATC at 4463 [8]; VSC at para. [8].
38. I accept at once that, in the circumstances postulated, the proximate source of the goodwill would be the lease. I am, however, troubled by the proposition that, without the acquisition of both land and business, the purchasers of the land might not have acquired all of the goodwill that had its source in the land. In my opinion, those purchasers would have acquired no goodwill at all. The goodwill - in its entirety - would have been transferred to those who bought the business. As such, it could not have been brought to duty as it was in Morvic. But what is the justification for the difference? Why should duty be assessed by different criteria according as to whether land and business are, in the one case, sold together and, in the other, sold separately?
39. Where the land on which a business is conducted is sold to one purchaser and the business to another, the entity that bought the land but not the business acquires none of the goodwill of the business. As the High Court demonstrated in FC of T v Murry,[31]
40. If this is true, then the ``duty'' implications for a transaction in which real property is sold to one purchaser, and the business conducted on it is sold to another, are clear. The instrument of transfer of the land is to be assessed for duty on the value of the land. That value will be affected, and doubtless in most cases be increased, by reason of the fact that a business is being conducted on the land,
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that the business is profitable, that it generates goodwill, and that the goodwill has its source at least partially in the land. The benefit of any increase in value will accrue to the Commissioner to the extent that the amount payable as duty will be increased by the appropriate proportion. But the ownership of the goodwill is inseparable from the ownership of the business. The one passes with the other, not in ``a sense'' but in every sense. The goodwill cannot therefore be brought to duty as if it were ``inseparable'' from the land, in the sense that it forms an element in or is a constituent part of the land. Goodwill cannot be dealt with in this way. Accordingly, its value cannot merely be cumulated with the value of the land.41. It seems to me, with respect, that in Morvic, Pagone, J. did not deal with these realities. Rather, his Honour accepted a proposition that informed the Commissioner's submissions in that case and this. It is that, at least when land and business are sold in the same transaction to the same purchaser, the value of so much of the goodwill of the business as has its source in the real property should in the assessment of stamp duty be incorporated into the value of the land as if the goodwill were an element of the land itself. In other words, in assessing to duty an instrument of transfer of land, the value of so much of the goodwill of a business sold with the land as has its source in the land should simply be cumulated with the value of the real property and any assessable chattels.
42. This proposition is in my opinion too glib to serve as a statement of principle. Such cumulation may, in point of fact though not in point of law, be appropriate in some cases. It is certainly not appropriate in all. In calculating the amount payable upon an instrument of transfer of real property, the fact that a business is being conducted on the land is indeed relevant. At the same time, the value of the goodwill of that business is not, in the calculation of stamp duty, to be regarded in itself as a component of the value of the land.
43. There is, it seems to me, a fundamental reason why not. Goodwill is an asset of a business. A business is a species of personal property. So, therefore, is goodwill. Land is a species of real property. It is real property or, rather, instruments of transfer of real property, which are subject to assessment for duty under Heading VI of the Third Schedule of the Stamps Act. Personal property, unless it falls within the relevant category of chattels, is not.
44. By s. 4 and Schedule II of the Stamps Duties Act 1898 (NSW), ad valorem duty was payable on the amount or value of the consideration for a transfer or conveyance of property on sale. Thus, as was held by the High Court in Rosehill Racecourse Co v Commissioner of Stamp Duties (NSW),[32]
45. The structure of the transaction therefore resembled that in Morvic. In Rosehill Racecourse, however, the High Court held that the undertaking, business and goodwill were severable from the land. Accordingly, they did not pass with the conveyance. The ad valorem duty was therefore payable only on the consideration for the land - in other words, only on £10,000. Yet it seems clear that the goodwill which was transferred with that contract had the racecourse itself as one of its sources.[33]
46. Most businesses have an attachment to real property. That is because most businesses are conducted from, and have their address or addresses at, a particular location or locations. Many generate some or all of their goodwill
ATC 4655
from that location or those locations. The proprietors of many businesses also own the premises from which the businesses are conducted. The owners of many other businesses lease those premises. Lessees often sell businesses of which they are the proprietors. They do so on the basis that their lease will, by agreement with the lessor, be assigned to the purchaser. But the contract of sale is not subject to duty under Heading VI, no matter how valuable the goodwill of the business might be.47. It is likewise in another common situation. A vendor of a business may wish to sell the business, including its goodwill, while retaining the ownership of the land on which the business is conducted. Heading VI of the Third Schedule of the Stamps Act would have no relevance to such a transaction. It would, on the other hand, apply if the business is retained but the land is sold. If the business is profitable, and its goodwill correspondingly valuable, the capacity of the land to generate income will be correspondingly enhanced - and the price of the land will reflect those facts. Given an arms- length transaction, that price will be that which (after proper marketing following which each party acted knowledgeably, prudently and without compulsion) a willing buyer will pay, and a willing seller accept, for an income- producing asset. But that price, and the assessment of duty on the instrument of transfer, will also reflect the circumstance that the business itself is not part of the transaction. Nor is the goodwill of the business. On this hypothesis, both remain the property of the vendor of the land. And the value of neither will be assessable under Heading VI, if at all. As the High Court has emphasised, the sale of an asset of a business does not involve any sale of goodwill unless (which is not the case in the present example) the sale of the asset is accompanied by or carries with it the right to conduct the business.[34]
48. The question is whether a proper assessment would be any different if the vendor sold both the land and the business, but to different purchasers. I can see no reason in principle why the assessment should not, in each case, be the same. The fact that, in the one case, the vendor of the land retains the proprietorship of the business while in the other the business is acquired by a third person, seems to me to be, for present purposes, irrelevant. What is relevant I will discuss in more detail shortly.
49. There is, of course, the possibility that both the land and the business will be sold together to the same purchaser. That was the position in Morvic, and in Rosehill Racecourse; as it was in each of the Cumberland and Glendale transactions. In all four instances, separate contracts dealt with separate aspects: one for the land and improvements, another for the business and goodwill. Of each, what was said by Isaacs and Rich, JJ. In Minister for Home Affairs and Territories v Lazarus[35]
``If the goodwill of a business is personal only, it adds nothing to the value of the land. If it is attributable wholly or partly to the land, it pro tanto enhances its value, and that value is recoverable, not as goodwill eo nomine but as part of the value of the land.''
50. Lazarus was a compensation case. The land in question was to be compulsorily acquired as part of the seat of the Federal Parliament. On that land, Mr Lazarus had since 1905 carried on the business of a licensed victualler. The Court was therefore concerned to ensure that he received as compensation an amount equal to ``the value to the seller of the property in its actual condition at the time of expropriation with all its existing advantages and with all its possibilities, excluding any advantage due to the carrying out of the scheme for which the property is compulsorily acquired''.[36]
51. This and the other applicable principles are, it seems to me, to be found in the more recent High Court decision of FC of T v Murry.[37]
ATC 4656
characteristics, goodwill cannot be included, for the purposes of the assessment of stamp duty, in the value of real property as if it were an element of that real property. I am therefore also of the opinion that it is wrong to cumulate the value of goodwill in the dutiable value of land merely on the basis that the two have been transferred in the one transaction, albeit by separate contracts.52. The judgments of the Court of Appeal in Uniqema were of course delivered after those of the High Court in Murry. It seems to me that there is nothing in the reasoning of the Court of Appeal which contradicts the proposition that, of itself, goodwill - even goodwill which has its source in the land - is not in the calculation of stamp duty to be taken as forming a component of the value of real property; or, in other words, to be taken as supporting the Commissioner's argument to the effect that assessment to duty was to be by cumulation of goodwill to site value. Certainly, in compensation cases concerned with the acquisition of land, the position is clear. Although in such cases the site goodwill of a business may be a persuasive guide to the value of the land on which the business is conducted, it is the potential use of the real property and not the goodwill deriving from it that is taken into account.[41]
53. For these reasons, it is in my opinion wrong for the Commissioner to calculate the stamp duty payable in relation to either the Glendale or the Cumberland transactions by including in the value of the real property any element of goodwill. I add, out of what I hope is an excess of caution, that the Commissioner is entitled to take into account the effect on the value of the land of the business that is being conducted on it; or, to be more precise, the income-generating capacity of the land.
54. This, it is true, does not dispose of the contention that goodwill may be brought to duty as a ``chattel'' for the purposes of s. 63(3) but not for the purposes of s. 63(4). But, having demonstrated in the Australian Rice Holdings appeal that the same word did not have different meanings in the different sub-sections, the Court of Appeal in Uniqema turned to the task of definition. At ATC 4594 [43]; VSCA paragraph [43] of his judgment, Ormiston, J.A. concluded that it was confined to that which is movable; and, ``[h]aving regard to the difficulties inherent in the use of the word `movable' in the law, the meaning here to be given to `chattels' is that of `tangible or physical things'.''
55. The places allocated by the Commonwealth authorities under the Aged Care Act, being neither tangible nor physical, cannot be brought to duty as chattels either. Nor, in my opinion, can they properly be assessed as being an element of real property. It follows, therefore, that their value cannot for assessment purposes simply be cumulated with the value of the land. They are not an element of real property. They may add to the value of the land; but, as with goodwill, that added value is not to be assessed for duty purposes by cumulating the value of the allocated places with the value of the real estate. Rather, the allocated places are to be brought to account by calculating their benefit in monetary terms to the owner of the land as an element in the income-generating capacity of the land. That benefit then becomes an element in the value of the property.
56. As I understand the valuation evidence before me, two of the valuers, Messrs Bice and Lister, attempted to assess the value of both properties as if each was for sale, with their respective businesses to be included in each transaction as going concerns (``Method One''). On this basis, Mr Bice put a figure of $9,200,000 on the value of Cumberland. Mr Lister assessed the value of that property as $9,150,000; but then deducted $3,930,000, representing 131 allocated places at $30,000 each, from that amount. The corresponding results for Glendale were $8,075,000 (Bice) and $7,450,000 (Lister). Again, Mr Lister deducted the estimated value of the allocated places: $3,600,000 being 120 such places $30,000 each, giving an end result of $4,150,000.
57. As I further understand the valuation evidence, both valuers (by way of comparison with the assessment just mentioned) also separately assessed both what was termed the ``freehold'' and what was termed the ``leasehold'' component of each of the Glendale and the Cumberland properties (``Method Two''). Proceeding in this way, Mr Bice assessed the ``freehold component'' of Cumberland at $5,750,000 and its ``leasehold component'' (with deferred management fees) at $9,660,000 - a total of $15,410,000. One notes with surprise the difference in Mr Bice's results depending on his adopted approach: in
ATC 4657
one case, $9,200,000; in the other, $15,410,000. Mr Lister arrived at a figure of $6,000,000 as the value of the ``freehold component'' of Cumberland. He attributed a value of $3,400,000 to the ``business component'', and accepted Mr Bice's figure of $5,500,000 as accurately representing the deferred management fees attributable to the Cumberland retirement village (as opposed to the Cumberland hostel apartments which, for reasons I do not understand, were not included). He thus came to an amount of $8,900,000 as representing the Cumberland leasehold component, including deferred management fees. When added to the value of his ``freehold component'', the result is a ``Method Two'' total of $14,900,000; with which is to be contrasted his ``Method One'' figure of $5,200,000.58. Given similar approaches to the ``Method Two'' valuation of Glendale, the results may be set out without elaboration. Mr Bice arrived at an amount of $5,125,000 for the ``freehold component'' and an amount of $3,675,000 for the ``leasehold component'': a total of $8,800,000 (which contrasts with his ``Method One'' figure of $8,075,000). The corresponding results for Mr Lister were, respectively, $4,900,000 and $2,625,000: a total of $7,525,000 (his ``Method One'' amount being $4,150,000).
59. My understanding of the two methods is not assisted by the account given by Mr Lister of the purpose of each of his valuations:
``This valuation is prepared on two alternative methods:
- 1. Assessment of the market value of the property's `freehold' component, as at 12 February 1999, if sold for its continued use as a retirement village... by deducting the market value of the allocated places from the property's market as a `going concern'.
- 2. Assessment of the market value of the subject property's `freehold' and `business' components, as at 12 February 1999, if sold for its continued use as a retirement village... providing 131 allocated places.''
[42]
Report and valuation by Robert Lister dated 28 November 2002 in relation to Cumberland View Retirement Village & Hostel, p. i. A relevantly identical passage appears in Mr Lister's valuation of Glendale, again at p. i.
60. There is a difficulty here in distinguishing between what must be two different meanings of the expression ``freehold component''. Despite this, the assessments of each of Messrs Bice and Lister under what Mr Lister refers to as ``Method Two'' seem to me to conform closely with what in my conception are the appropriate legal principles. Thus, ``Method One'' has Mr Lister (but not Mr Bice) making a straight deduction of the value of the allocated places. In my opinion, that is not the correct approach. Their value should never have been cumulated in the first place. Another and stronger reason for my thinking that ``Method Two'' conforms to principle is to be found in Mr Lister's reports and valuations in relation to each property. In his Cumberland report, in words which are echoed in that for Glendale, Mr Lister says, under the heading ``Assessment of Value - Method Two'':
``As stated in our definition of `freehold value', our assessment of value reflects the fact that the property benefits from the allocated places under the Aged Care Act 1997. If those allocated places were not present, the property's value could be determined by assessing its value as an unfunded hostel, ie a supported residential service. On that basis, after having regard to its location, number of beds and quality of accommodation, we consider its value would have been $5,250,000.00 to $4,900,000.00.''
[43]
Ibid, p. 31, para 8.2.
61. I take it from this that, in calculating the value of the ``freehold component'' for the purposes of ``Method Two'', Mr Lister took into account the benefit of the allocated places to the owner of the freehold. But the very fact that the approach as described by him above appeals to me as being at least broadly correct creates a difficulty. Both sides submit that ``Method One'' is to be preferred over ``Method Two''. Given that, in relation to Cumberland, the methods as adopted by both valuers produce strikingly different results (and that the same can be said about Mr Lister's valuations of Glendale), it is not surprising that the appellants have a leaning towards the method which is likely to cause the least damage to their pockets. But it may be that their fears are groundless. In my opinion, duty should be assessed on the ``freehold component'' as calculated using ``Method Two'', or whatever like method is most closely aligned to the principles that I have in this judgment endeavoured to articulate. If ``Method Two'' is adopted, the relevant amounts would, for Cumberland, be $5,750,000 (Bice) or
ATC 4658
$6,000,000 (Lister) and for Glendale $5,125,000 (Bice) and $4,900,000 (Lister).62. In the circumstances, I propose to accept the invitation, jointly tendered, to refer the question of valuation back to the parties, to be dealt with in accordance with this judgment. I will, of course, reserve liberty to apply.
63. For the reasons set out above, the assessment of duty on the relevant instruments of transfer has not proceeded in accordance with law. The appeals must, therefore, be allowed. I will hear counsel on the appropriate consequential orders.
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