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Tax issues : Duty on “things you can’t see”

Every Issue

Cite as: (2003) 77(6) LIJ, p.74

The Supreme Court has further considered the basis for imposing duty on the acquisition of goodwill assets in conjunction with a transfer of real property.

Needless to say, the law on these points is considerably unsettled and in urgent need of clarification.

In Primelife (Glendale) Pty Ltd v Commissioner of State Revenue; Primelife (Cumberland Village) Pty Ltd v Commissioner of State Revenue (unreported, 10 April 2003),* Harper J was given the difficult situation of being asked to endorse, distinguish or overrule his decision one year earlier in Australian Rice Holdings Pty Ltd v Commissioner of State Revenue [2002] VSC 486.

His Honour’s task in the Primelife cases was made all the more difficult given the contrary judgment of Pagone J (as he then was) in Uniqema v Commissioner of State Revenue [2002] VSC 157, and given that both the Australian Rice Holdings decision (Harper J) and the Uniqema decision (Pagone J) are pending appeal to the Court of Appeal.

In Australian Rice Holdings, Harper J held that intangible property comes within the concept of “chattels” in ss63(3) and (4) of the former Stamps Act 1958, so that the value of such intangible business assets can be brought to duty on a conveyance of real property of the business.

The facts

The facts in Primelife were not in dispute. Primelife Corporation Limited (Primelife) is a publicly listed company and the largest developer, builder and manager of senior living facilities in Australia.

By contracts executed in February 1999 and settling in May that year, the Primelife group acquired four retirement villages from the IOOF Society. Three of the villages are located in Victoria. The fourth is located in NSW and therefore was not part of these proceedings.

The acquisitions were concurrent and followed an extensive public tender process by the IOOF Society.

Each village was acquired by a single purpose, wholly-owned Primelife subsidiary. For each village the vendor and purchaser entered into a sale of business agreement relating to the transfer of the business and associated goodwill, and a separate contract of sale for land and buildings.

In respect of the three Victorian villages, the IOOF Society was the holder of a total of 289 approved places under the Aged Care Act 1997 (Cth). Under a separate, single, sale of places agreement, these were sold to Primelife, which is an approved provider under the Aged Care Act.

Briefly, under the Aged Care Act an eligible person may make application to the Department of Health and Family Services and, after a lengthy accreditation process, be declared an “approved provider”.

As an approved provider the person is then entitled to hold approved places under the Aged Care Act. Each approved place entitles the holder to receive commonwealth funding, which is in the form of an annually determined commonwealth subsidy for providing senior living accommodation and other associated senior care services.

The Commissioner did not dispute the weight of evidence presented by Primelife regarding the extent of the market for sales of approved places between approved providers.

While both the Primelife cases and the liquor licence cases (e.g. Creswell Nomineees Pty Ltd v Commissioner of Revenue (unreported, VCAT, 7 November 2001)) concerned intangible property, there is an important point of distinction. A liquor licence is an essential prerequisite to carrying on a business. The publican cannot legally operate a public house without the liquor licence. However, a person does not need to have approved provider status or hold approved places to operate an aged hostel or retirement facility.

Section 63(3)

Prior to 1983 chattels were not brought to duty. The statutory scheme of s63(3) was introduced by the Stamps (Further Amendment) Act 1983. It was motivated by a concern that purchasers were evading duty by understating the value apportioned to real property and overstating the value apportioned to chattels passing with the real property. The explanatory memoranda refers specifically to household chattels being overstated on ordinary residential conveyances, and the statutory cure was to extend the definition of “real property” to include chattels sold in conjunction with the transfer of realty. Primary production chattels were expressly provided for by the new s63(4) so that they did not become “real property” when transferred as part of the realty.

Shortly afterwards, it seems, it was identified that the amendments also caught business chattels, and a further amendment was made to exclude business stock in trade items from the extended definition, but leaving other business chattels (such as plant and equipment) within the extended definition.

Arguably, the Commissioner already had powers to deal with such avoidance practices, but implementing those measures was administratively unwieldy (and politically unpopular) for a large number of routine domestic conveyances.

The Commissioner could call for a Valuer-General’s assessment (at the purchaser’s expense) and on ordinary principles that have applied since the early 1960s then impose duty on the higher of the consideration paid and the unencumbered market value of the realty.

The 1983 reforms are therefore best seen as a secondary anti-avoidance scheme to bolster these general anti-avoidance measures, rather than an all-embracing or sole panacea for the particular duty evasion complained of. That is, they were a revenue-positive, administration-simplifying measure – providing in a majority of cases scope for the Commissioner to assess duty in arm’s length transactions on stated contract values (for realty and dutiable non-realty) without having to call for Valuer-General’s valuations.

The chattels argument

The chattels argument raised in these cases is peculiar to the former Stamps Act and has no relevance under the Duties Act which came into force on 1 July 2000.

In the Primelife appeals the taxpayers questioned Harper J’s decision in Australian Rice Holdings on the grounds that the decision was inconsistent with the history of ss63(3) and (4) of the Stamps Act 1958 and the evolution of stamp duties legislation cumulating in the Duties Act 2000.

In Australian Rice Holdings, the Commissioner relied successfully on an earlier unreported AAT decision in Re Blazey Farms (1987) 2 VAR 164. In that case, Mr Gibson of the AAT held that water licences under the then Water Act 1958 were dutiable. However, it seems on a careful examination of Mr Gibson’s reasons that the case was wrongly argued (rather than wrongly decided).

In his decision in Re Blazey Farms, Mr Gibson pointed out that it was unfortunate that Parliament chose in its 1983 amendment of the Stamps Act 1958 to use the word “chattels” which is ambiguous because it has both a modern meaning and since Norman times has had a heightened meaning under old forms of action and the old property order in England, which passed away in 1926 (see Blazey Farms (1987) 2 VAR 164 at 171 and reference there to 39 Halsbury’s Laws of England (4th edn), para 303. Originally “chattels” was the Norman word for livestock (“cattle”) and then became more widely used as an expression for goods generally. The tautology “goods and chattels” thus reflects the post-1066 blending of the Old English and Norman languages.

In Re Blazey Farms, after considering relevant historical and dictionary meanings of the word “chattel’’, Mr Gibson concluded:

“One would not, I think, expect to find a sale of book debts or business name or units in a trust caught by s63(3) or exempted by s63(4). In my view, a limitation of chattels to physical chattels in this context is a sensible construction, and one that would not do any harm to the purpose of the relevant provisions. It cannot in my view be said that ‘chattels’ in s63(4) must necessarily have the same meaning as in s63(3) since the context in one is different to the other, although I was informed that the Comptroller takes the view that ‘chattels’ means ‘physical chattels’ for the purposes of both sub-sections.” (at page 173) (emphasis added)

Where the taxpayer in Blazey Farms came unstuck, it seems, is in only arguing the case under s63(4), with the parties and the AAT seemingly taking for granted that the water licences were brought within the enlarged scope of “real property” under s63(3).

Impact of goodwill assets on real property values

The Primelife appeals are also significant because, unlike Australian Rice Holdings where the Commissioner sought to assess duty under the chattels provisions of the Stamps Act, in Primelife the Commissioner, alternatively, sought to justify bringing the value of the approved places to duty on the grounds that their value was part and parcel of and intrinsically attached to the real property that was transferred.

This was an argument that the Commissioner put successfully before Pagone J (as he then was) in Morevic and Ashill Pty Ltd v Commissioner of State Revenue [2002] VSC 171.

In that case, the taxpayer entered into separate real property contracts and business acquisition contracts to acquire, respectively, a motel and the associated business goodwill. The Commissioner argued that any business goodwill, in effect, was automatically carried with the transfer of the real property, and therefore part and parcel of the value of the real property for duty purposes.

Pagone J held that the taxpayer had failed to produce any evidence to support the contrary argument and the result was that all of the goodwill was therefore brought to duty.

Pagone J’s decision in Morevic and Ashill seems consistent with the “goodwill cases”, including the leading High Court decision in FCT v Murray (1988) 193 CLR.

In Murray, the High Court held that, of course, so long as a business is carried on, income may be generated that in a general sense may be regarded as the goodwill of the business by the use of intellectual property rights, but those intellectual property rights are separate and not part of the goodwill of the business because they can be separately dealt with, they can be sold to somebody else.

In Primelife, the taxpayers argued that the approved places were, like industrial property such as patents and trade marks, property separate and distinct from the real property. The value of the goodwill attaching to them was not part of the goodwill attaching to the real property and therefore did not enhance the value of the real property.

In this regard the taxpayers relied on the relevant provisions of the statutory scheme of the Aged Care Act and the Federal Court decision in Corio Bay as establishing that the approved places were property separate and distinct from the real property, and relied on expert valuations and market evidence to establish their value as set out in the sale contract.


The Victorian Duties Act 2000, unlike the current and former stamp duties legislation in every other state and territory, does not contain any general charge of duty on acquisitions of business goodwill and other assets.

It would be surprising if the courts were to find that through the use of the word “chattels” in the 1983 stamp duty amendments, which most commentators understood was merely “corrected” to “goods” in the Duties Act 2000, the Commissioner was for a brief time able to levy duty on business goodwill and other assets.

It would be even more surprising if the courts were to hold that the Commissioner could still levy a de facto business acquisition duty through the valuation principles in the Duties Act 2000, given the very clear intention of Parliament not to create that broad head of duty.

JAMES JOHNSON is a sole practitioner and principal of Sutton Johnson Taxation Lawyers.

* Sutton Johnson were solicitors for Primelife in these stamp duty appeals but were not advisers to Primelife on the purchase of the relevant facilities.


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