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Duty payable

Feature Articles

Cite as: (2008) 82(7) LIJ, p. 58

Two recent decisions on arm’s length sale transactions have implications for state taxation and valuation in Victoria.

By Chris Furnell

In Victoria transfer duty is imposed on dutiable transactions (such as transfers) with respect to dutiable property.

Dutiable property includes fee simple estates. It also includes goods in Victoria the subject of an arrangement that includes a transfer of a fee simple estate (not being goods such as stock in trade).

The amount of transfer duty payable with respect to a dutiable transaction is a function of the dutiable value of the dutiable property the subject of the transaction.1

The dutiable value of property is the greater of the consideration (if any) for it and its unencumbered value.

The consideration for dutiable property includes the value of non-monetary consideration and any encumbrances subject to which the relevant dutiable property is transferred.2 In a stamp duty context it also includes anything which passes to the transferor (assuming the relevant dutiable transaction to be a transfer) for the relevant transaction. It is “ ... the money or value which moves ... ” the transaction.3 The focus is on what the transferor receives,4 rather than on the worth to the transferor of the purchaser’s monetary and non-monetary promises.5 Hence, for example, the consideration for a transfer of shares (while no longer dutiable property in Victoria) has been considered to include not only the price paid by the transferee but also the amount received by the transferor by way of dividend from the company whose shares were being transferred (a dividend funded using borrowings from the share transferee).

The unencumbered value of dutiable property is, subject to certain qualifications,6 the amount for which the property might reasonably have been sold in the open market (assuming it to be free of encumbrances). That amount is assessed using the test applied in the context of determining compensation for compulsory acquisitions.7 As such, the unencumbered value of an item of dutiable property equates to the price which a willing but not anxious owner would require in order to agree to a sale of the relevant asset.8 Its assessment involves a “ ... hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together”.9

The price at which hypothetical parties would come together reflects the most valuable use to which the relevant item of dutiable property can be applied: its highest and best use.10 This requires valuing property for various uses with the most valuable use then being identified.11 In this regard, the Victorian duty authorities appear to have a preference for valuing property on the basis of its existing use. In the context of a land and business transfer, they purport to require that taxpayer valuations include a statement that the effect on the unencumbered value of the relevant land of any business conducted from the land has been taken into account in determining that value and, in relation to owner occupied land, is based on the land’s potential market rent, taking into account any enhancement in that rental “ ... derived from the going concern operations, including ... permits etc. associated with the land”.12

Look behind parties’ apportionment of sale price?

In the context of a sale of dutiable and non-dutiable assets and an apportionment by the parties of the sale consideration among those assets (such as often occurs in sale of business transactions), an issue arises as to the circumstances in which the duty authorities might look behind that apportionment. This was addressed in Super Cheap Auto and Commissioner of State Revenue13 (Super Cheap), a decision of Chaney J in the Western Australian State Administrative Tribunal.

Super Cheap concerned a sale of a business operated in three Australian jurisdictions, including Western Australia and Victoria. The sale agreement provided for a significant component of the sale price to be attributed to intangible assets in Victoria. In Western Australia goodwill is dutiable property while in Victoria intangible assets are not.

The Western Australian duty authorities rejected the apportionment provided for by the parties to the business sale. Instead, they assessed duty on the basis that the amount attributed to Victorian intangible assets was properly attributable to goodwill in Western Australia. They did this by first calculating a value for goodwill and then apportioning that value among the relevant jurisdictions.

In accordance with a method of valuation which the Western Australian duty authorities had declared in a practice note to be acceptable, the value of goodwill was said to equal the result of deducting the amount that might properly be attributed to identifiable assets from the total consideration (including assumed liabilities) (at [67]). As there was no dispute about the value attributed to identifiable tangible assets, the value of goodwill was said to equal the amount attributed to intangible assets less the sum of the value of brands and registered trademarks (the only identifiable intangible assets, other than goodwill).

The brands were found to have no value. While, on the basis of a “relief from royalties” assessment, the brands had value in theory, they did not have value in fact because the business did not have a capacity to pay a notional royalty for their use. This was because the business did not generate a return above its cost of capital. As for the registered trademarks, their value could not be assessed on the basis of the evidence led. Nevertheless, whatever value they had served to reduce duty. Their transfer did not attract Western Australian duty as they were considered to be locally situated outside Western Australia.

Once determined, the value of goodwill had to be apportioned among the jurisdictions in which the relevant business operated.

The duty authorities’ assessment had only a small portion of the goodwill value being apportioned to Victoria (where its transfer was free of duty), with most of that value being apportioned to Western Australia (where its transfer attracted duty). This was said to have been done largely because the Victorian side of the business had not been a financial success.

On the other hand, the taxpayer sought to have goodwill apportioned in a way consistent with the apportionment of intangible asset values found in the business sale agreement (an apportionment which had been based on relative store numbers in each state).

The duty authorities had not led evidence that the true value of the goodwill in Western Australia was other than as specified. Hence, the only complaint of the duty authorities was, in essence, that the expressed consideration for the Western Australian goodwill was not the true consideration for that asset (at [93, 94]). While extrinsic evidence was admissible to identify the true nature of the parties’ arrangements, the Tribunal noted that the transaction was an arm’s length one and there was no evidence to suggest the true consideration was other than as expressed in the sale agreement.

In essence, therefore, Super Cheap suggests that an arm’s length apportionment of consideration should be accepted absent the duty authorities establishing that the apportionment was a sham, or leading evidence that the amount of the consideration for an asset apportioned to a jurisdiction did not reflect the true value of the asset in the jurisdiction.

Levy duty on unencumbered value rather than sale price?

In the context of an arm’s length sale of a dutiable asset (whether or not with other assets), an issue arises as to the circumstances in which the duty authorities may assess duty based on unencumbered value rather than on sale consideration. This was addressed in Symex Holdings v Commissioner of State Revenue14 (Symex), a decision of Mandie J in the Victorian Supreme Court.

The fact that a transfer of dutiable property occurs in the context of an arm’s length sale transaction does not necessarily mean that the sale consideration equates to unencumbered value.

For example, where the circumstances suggest that the amount of the consideration for a transfer is influenced by factors other than hard bargaining, a court may decline to treat the amount of the consideration as the relevant property’s unencumbered value. Where “ ... there are patently factors influencing the fixation of the price stated in the contract other than the hard bargaining between a prospective vendor and purchaser at arm’s length, then ... the price in such circumstances does not necessarily reflect the value of the land”.15

Nevertheless, consideration will often equate to unencumbered value in an arm’s length sale.

In particular, “ ... if parties to a contract or sale of land are at arm’s length and after hard bargaining arrive at a price which was introduced into a contract, then it would be extremely difficult for any court to say, even in the face of a battery of expert testimony to the contrary, that at the precise time of the contract, the value was any different to this price ... ”.16

This suggests that a court should accept that sale price equates to unencumbered value in an arm’s length sale situation in the absence of patent evidence of non-hard bargaining factors affecting sale price.

Despite Mandie J in Symex citing authority in support of this suggestion with apparent approval, his Honour in fact adopted a different approach.

In particular, the onus on the duty authorities which adoption of the foregoing suggestion would imply was shifted to the taxpayer, with his Honour finding that it was for the taxpayer to establish that the sale price was not influenced by factors other than hard bargaining, given valuation evidence suggestive of the relevant sale price being less than unencumbered value (at [102]).

Symex would suggest, therefore, that where the duty authorities assess on the basis that unencumbered value exceeds sale price, it may not be enough for the taxpayer simply to establish that the sale was negotiated at arm’s length, especially in the face of expert evidence adduced by the duty authorities suggestive of the sale price being a “bargain”.

Among other things, a taxpayer may wish to adduce expert valuation evidence.

CHRIS FURNELL is a Victorian barrister with extensive commercial law experience. He has practised in state taxation for around 20 years and is a member of the LIV State Taxes Committee and the Law Council of Australia’s Financial Services Committee.

The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

1. Duties Act 2000 (Vic) s18.

2. Duties Act 2000 (Vic) ss20, 21.

3. DKLR Holding (No 2) v Commissioner of Stamp Duties (1982) 149 CLR 431 at 477.

4. CSR v Dick Smith [2005] HCA 3 at [79]. In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152, Dixon J (as he then was) said: “ ... the word ‘consideration’ should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts ... the consideration is rather the money or value passing which moves the conveyance or transfer”. Similarly, in Shop and Store Developments Ltd v Commissioner of Inland Revenue [1967] 1 AC 472 at 503, Lord Wilberforce commented that: “In the first place, the phrase ‘consideration for the transfer or conveyance’ seems to me to refer clearly and naturally to that which passed to the transferor company ‘for’ the transferred properties ... ”.

5. The majority in CSR v Dick Smith focused on what the transferor received for the relevant shares (at [79]), whereas the minority focused on the worth to the transferor of the purchaser’s monetary and non-monetary promises (including the promise to ensure that the company had sufficient funds to pay the relevant dividend) (at [41]).

6. The Duties Act 2000 (Vic) ss22 and 22A require that encumbrances be disregarded, that any interests (including equitable interests) or arrangements granted or made with respect to land or goods that have the effect of reducing their value (unless the duty authorities are satisfied that an interest or arrangement was not granted or made as part of an arrangement having a collateral purpose of reducing duty payable on the transfer of the land or goods) be disregarded and, in the case of land, that the value of any tenant’s fixtures be included (unless the duty authorities are satisfied that the fixtures are not transferred or sold to the purchaser or transferee of the land, or any associate of the purchaser or transferee).

7. CSR v Pioneer Concrete (2002) 209 CLR 651 at [44].

8. Spencer v Commonwealth (1907) 5 CLR 418 at 432, 436 and 440, as recently elaborated on in Roads Corporation v Murdesk [2008] VSCA 16 and Walker Corporation v Sydney Harbour Foreshore Authority [2008] HCA 5.

9. CSR v Pioneer Concrete, note 7 above, at [44].

10. Stubberfield v Valuer General (1991) 1 Qd R 271 at 283-284; Symex at [58]; Trust Company of Australia v Valuer-General [2007] NSWCA 181.

11. Symex Holdings v Commissioner of State Revenue, [2007] VSC 159, at [58].

12. State Revenue Office Revenue Ruling DA.029: “Transfers of land and business”. The statutory provision in relation to which the authorities’ ruling is issued (s273 Duties Act 2000) speaks only of competent valuers, and does not vest in the authorities a capacity to dictate the basis of any valuation.

13. [2006] WASAT 326.

14. Note 11 above.

15. Re Marriott deceased [1968] VR 260 at 269.

16. Note 15 above, at 268, cited with approval in Symex at [101].


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