First Master Capital Pty v Chief Commissioner of State Revenue

Legislative Background

1. The legislative starting point is section 8 of the Duties Act 1997. This provides as follows in section 8(1): "This Chapter charges duty on: (a) a transfer of dutiable property, and (b) the following transactions: (i) an agreement for the sale or transfer of dutiable property, (ii) ………"
2. Subsection (2) of section 8 provides that "Such a transfer or transaction is a "dutiable transaction" for the purposes of this Act".
3. Section 11 of the Duties Act, as modified with effect from 1 July 2016 by section 35 of that Act, provides that "dutiable property" comprises, relevantly: 1. "…. land in New South Wales" [1] : and 2. ".. goods in New South Wales, if the subject of an arrangement that includes a dutiable transaction over any dutiable property …. elsewhere referred to on this section …" [2] , subject to certain exceptions including relevantly goods that are stock-in-trade [3] .
4. With effect from 1 July 2016 the definition of dutiable property under section 21 has been modified: 1. section 35(1) of the Duties Act excludes business assets from the definition; business assets comprised, subject to certain territorial and temporal limitations, the goodwill of businesses, intellectual property, and statutory licences or permissions under Commonwealth law; the effect of this change is that business assets (as so defined) have not been dutiable property since 1 July 2016; and 2. section 36(1) of the Duties Act excludes statutory licences or permissions, as well as gaming machine entitlements, from the definition; the effect of this change is, relevantly, that liquor licences are no longer dutiable property.
5. Section 12(2) of the Duties Act provides relevantly that "…. if a transfer of dutiable property is effected by an instrument, liability for duty charged by this Chapter arises when the instrument is first executed".
6. Section 18 of the Duties Act, headed No double duty, provides as follows: "(1) If a dutiable transaction is effected by more than one instrument, one instrument is to be stamped with the duty payable on the dutiable transaction and each other instrument is chargeable with duty of $50. Note: "Instrument" includes a written statement. (2) The duty chargeable in respect of a transfer of dutiable property made in conformity with an agreement for the sale or transfer of the dutiable property is $10 if the duty chargeable in respect of the agreement has been paid".
7. Section 19 of the Duties Act provides that "Duty is charged on the dutiable value of the dutiable property subject to the dutiable transaction at the relevant rate set out in Part 3".
8. Section 21 of the Duties Act provides relevantly as follows, in section 21(1): "The "dutiable value" of dutiable property that is subject to a dutiable transaction is the greater of: (a) the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration), and (b) the unencumbered value of the dutiable property".
9. Section 25, headed Aggregation of dutiable transactions, provides relevantly as follows: 1. In sub-section (1): "(1) Dutiable transactions relating to separate items of dutiable property, or separate parts of, or interests in, dutiable property are to be aggregated and treated as a single dutiable transaction if: (a) they occur within 12 months, and (ab) the transferor is the same or the transferors are associated persons, and (b) the transferee is the same or the transferees are associated persons, and (c) the dutiable transactions together form, evidence, give effect to or arise from what is, substantially, one arrangement relating to all of the items or parts of, or interests in, the dutiable property"; 1. In sub-section (3): "(3) The dutiable value of aggregated dutiable property is the sum of the dutiable values of the items or parts of, or the interests in, the dutiable property as at the time at which each dutiable transaction occurs"; and 1. In sub-section (5): "(5) Duty may be apportioned to the instruments effecting or evidencing the dutiable transactions, or may be charged in accordance with section 18 (1), as determined by the Chief Commissioner".
10. Section 27(1) of the Duties Act provides as follows: "(1) If a dutiable transaction relates to dutiable property and property that is not dutiable property, it is chargeable with duty under this Chapter only to the extent that it relates to dutiable property".

The Applicants' position

1. The Applicants' argument is, in summary, as follows: 1. There is no dispute that the Respondent is entitled under section 25 to aggregate the Land Contract and the Business Contract for the purpose of assessing duty; 2. In assessing duty on the aggregated dutiable transactions, however, the Respondent is required to apply section 27 of the Duties Act, which provides that "If a dutiable transaction relates to dutiable property and property that is not dutiable property, it is chargeable with duty under this Chapter only to the extent that it relates to dutiable property"; 3. The aggregated dutiable transactions relate to both dutiable property - in the case of the Land Contract, the Land, and in that of the Business Contract, certain plant and equipment - and in view of section 27 they should together bear duty only to the extent that they so relate; 4. A valuation report dated 23 August 2017 prepared by Mr Scott A Robertson of Robertson and Robertson, Consulting Valuers and provided by the Applicant to the Respondent states that: 1. The value of the Land, without the Licence or the business, at or about the time at which the Land Contract was entered into was $21,250,000; and 2. The value of the hotel business (that is to say, excluding the Land but including goodwill, plant and equipment and the Licence) was at least $9,250,000, of which $9,000,000 is referrable to the goodwill of the business. 1. In view of the relative values of the Land and the business, the Respondent's assessment of duty on the aggregated Land Contract and Business Contract in effect imposes substantial duty in respect of the sale of goodwill, which is not dutiable property; 2. This outcome is contrary to the provisions of section 27 of the Duties Act, which require the Respondent to make a real apportionment in imposing duty on the aggregated dutiable transactions as between dutiable and non-dutiable property; duty should, therefore, be calculated on the aggregate transactions having regard to the true value, as determined by reference to the valuation reports, of the Land, which is lower than the price provided for in the Land Contract, and the assets sold under the Business Contract, which is higher than that provided for under the Business Contract.

The Respondent's position

1. The Respondent's position is in summary as follows: 1. The value of $250,000 attributed by the Respondent to the Licence in assessing duty on the Land Contract was based on the views of the Applicant's own valuer, Mr Robertson, on 23 August 2017. 2. Subsequent statements by the Valuer in a letter dated 15 November 2017 suggesting a higher value for the Licence should be disregarded, because their basis is unexplained. 3. Pre-contractual negotiations concerning the apportionment of value which were not manifested in the Land Agreement cannot be taken into account because of the parole evidence rule. 4. The dutiable value of the dutiable property covered by the Land Contract is, under section 21 of the Duties Act, the greater of: 1. The consideration for the dutiable transaction; and 2. The unencumbered value of the dutiable property. After deducting the allowance of $250,000 attributable to the Licence, this results in consideration of $29,750,000 for the Land, which is greater than the unencumbered value of the Land proposed by the Applicant's valuer. It follows that the dutiable value of the Land is, in accordance with the principle set out in section 21, $29,750,000. 1. The dutiable value of the dutiable property under the Business Contract was determined by reference to the written down value of that plant and equipment. This is an appropriate basis on which to apportion the consideration under the Business Contract as between dutiable and non-dutiable property in the absence of evidence to the contrary. 2. The transactions provided for under the Land Contract and the Business Contract may properly be aggregated by the Respondent under section 25 of the Duties Act, since: 1. They occurred within 12 months of one another; 2. The vendor under both contracts is the same; 3. The transferees - the Trustee under the Land Contract, and Holdings under the Business Contract - are associated persons for purposes of section 25; and 4. The dutiable transactions form, evidence, give effect to or arise from one arrangement relating to all relevant items of dutiable property. 1. The Business Contract provided for the sale of (amongst other property) goodwill, and accordingly it was the consideration provided for under this agreement which was the consideration for the sale of the goodwill, not the consideration payable under the Land Contract (or some portion of it).

Reasoning

1. There was no disagreement between the Applicant and the Respondent that the transactions under the Land Contract and the Business Contract could properly be aggregated under section 25 of the Duties Act: 1. in his submissions, both oral and written, counsel for the Applicant accepted this, notably in paragraph 22 of his written submissions, where he observed that: "Whilst the sale of the business was a separate transaction, relating to a separate interest in or arrangement in respect of the hotel property, Section 25 mandates [emphasis added] that those separate transactions (for sale of land and sale of business) are to be aggregated and treated as a single dutiable transaction for the purposes of determining Stamp Duty"; and 1. in his submissions, counsel for the Respondent affirms, and goes to some pain to demonstrate the basis for, the correctness of the Respondent's decision to aggregate under section 25 the transactions under the two contracts. I accept that this consensus is correct, since there is nothing to suggest that any of the conditions in section 25 are not met.
2. Rather, the Applicant's principal objection went to Respondent's approach to the relationship between sections 25 and 27 of the Duties Act. In essence, it was that if the Respondent chose to aggregate under section 25 the dutiable transactions under the Land Contract and the Business Contract, then it followed that section 27 must be applied to the aggregated dutiable transactions as if they were a single composite dutiable transaction, rather than the aggregation of two separate dutiable transactions.
3. In the present case, the financial result of that approach would put simply be as follows. All amounts are in dollars: (a) Aggregate consideration Land Contract 30,000,000 Business Contract 500,000 Total consideration 30,500,000 Less (b) Adjustment for non-dutiable property Licence [4] 250,000 Goodwill [5] 9,000,000 Total non-dutiable property 9,250,000 (c) Dutiable value 21,250,000 Transfer duty of $1,145,690 would be payable on a dutiable value of $21,250,00 determined in the way proposed by the Applicant. This contrasts with the financial result of the approach in fact adopted by the Respondent, which was to calculate duty on individually for each of the Land Contract and the Business Contract and to aggregate the results of these two calculations. This resulted in a total duty bill of $1,637,586.95. The choice of approach thus produces a significant difference in financial outcome.
4. I do not accept the Applicant's submission. If accepted, it would confer on section 25 a wider scope than the words of the section require and in doing so would transform section 25 from a provision which allows the Respondent to aggregate dutiable transactions for the purpose of calculating transfer duty at a rate determined by reference to the aggregated dutiable value, into one which requires the Respondent to undertake significant financial reconstruction of the transactions which it so aggregates in calculating transfer duty. Such a transformation is not, in my view, consistent with the words of the section.
5. The starting point is section 25(1) which provides that, if certain conditions are met, "Dutiable transactions relating to separate items of dutiable property, or separate parts of, or interests in, dutiable property are to be aggregated and treated as a single dutiable transaction ...". The detailed conditions need not be considered for present purposes; suffice it to say that as discussed above both parties accept that they are satisfied in the present case and there is no reason to disagree with this consensus.
6. The direction that the aggregated transactions "… are to be …. treated as a single dutiable transaction" might, if read in isolation, possibly support the Applicant's contentions. If multiple aggregated transactions are to be treated as a single transaction, then one might conclude that section 25's direction that they be so treated requires the Respondent to give effect to the direction in section 27, that a dutiable transaction ".. is chargeable with duty under this Chapter only to the extent that it relates to dutiable property" on an aggregated basis, by aggregating the value of non-dutiable property included in the relevant dutiable transactions, and excluding the aggregate value of consideration referrable to those non-dutiable transactions from the aggregate consideration for the transactions, so as to produce a dutiable value for the aggregated dutiable transactions.
7. Section 25(1) does not however exist in a vacuum. It is supplemented by section 25(3), which provides that: "The dutiable value of aggregated dutiable property is the sum of the dutiable values of the items or parts of, or the interests in, the dutiable property as at the time at which each dutiable transaction occurs".
8. This provision, in my view, requires that when section 25 applies to require the aggregation of two or more dutiable transactions, the dutiable value of the dutiable property which is the subject of the aggregated transactions is simply the sum of the dutiable values of each element of dutiable property in each individual dutiable transaction determined in each case in accordance with the Duties Act at the time at which the relevant underlying dutiable transaction occurred. It does not either require or allow a reassessment of aggregate dutiable value determined by reference to the principles set out in sections 21 and 27; rather, it authorises and requires only the aggregation of the underlying dutiable transactions' respective dutiable values, individually determined at the times required (and in accordance with the calculational principles set out in) the Duties Act. What follows is that section 27 is to be applied in relation to each underlying dutiable transaction in calculating its dutiable value, and before their respective dutiable values are aggregated under section 25.
9. It preserves in all respects but one the independence for duty purposes of each underlying dutiable transaction. The one respect in which it does not do so is that, by aggregating multiple transactions, it allows the scale of duty rates provided for in section 32(1) of the Duties Act to be applied to the aggregate dutiable values of the underlying dutiable transactions, rather than on a transaction by transaction basis to the individual dutiable values of the underlying transactions. The consequence of doing so is to eliminate any potential reduction in the overall duty payable in respect of multiple but related dutiable transactions which might result from the adoption of multiple transactions, some of which may individually attract duty at a lower rate than that which would apply if the multiple transactions were but a single one.
10. Applying these principles to the Land Contract: 1. The Land Contract provides for a consideration of $30,000,000. 2. It provides for the sale and purchase of the Land. 3. The Land which is agreed to be sold under the Land Contract is dutiable property under Section 11 of the Duties Act. 4. The Land Contract is thus a dutiable transaction within the meaning of section 8 of the Duties Act. 5. Special condition 51 of the Land Contract sets out a process to be undertaken by the Vendor to procure the transfer to Applicant of the Licence, and special condition 56 contains a supplementary warranty, that the Licence will be in operation at completion of the purchase and a supplementary undertaking by the Vendor to take all steps required to maintain the licence. It is, however, the Business Contract which provides in clause 2.1 for the sale and purchase of the Assets which, as summarised above, include the Licence. The consequence is that the agreement between the parties for the Licence's purchase and sale is contained in the Business Contract, not the Land Contract. The only property, therefore, which appears to be the subject of the agreement for sale and purchase contained in the Land Contract is the Land. 6. The Respondent thus erred, albeit on the side of generosity towards the Applicant, by treating the Licence as non-dutiable property which ought, in the apportionment process under section 27, to be excluded from calculating the transfer duty payable in respect of the Land Contract. 7. The dutiable value of dutiable property that is subject to a dutiable transaction is, under section 21 of the Duties Act, the greater of the consideration for the dutiable transaction and the unencumbered value of the dutiable property. The consideration provided for in the Land Contract for the purchase and sale of the Land is $30,000,000, while the Applicant's own evidence, in the form of Mr Robertson's valuation advice dated 23 August 2017, is that the unencumbered value of the Land is $21,250,000. 8. The only conclusion which can be drawn consistently with the clear rule set out in section 21 of the Duties Act is that the Land Contract is assessable with duty calculated at the rates provided in section 32 of the Duties Act on a consideration of $30,000,000. 9. This, it should be noted, is consistent with the Purchaser/Transferee Declaration dated 5 August 2017, signed on behalf of the Applicant by its authorised officer, Mr Xin He, and attested to in a statutory declaration of the same date by Mr Xe. 10. Moreover, it is consistent with the principle expressed by the High Court in several cases: 1. Dixon CJ observed in Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) [6] , that in assessing duty in connection with sales and purchases of property made under agreements for sale, it is the consideration expressed in the relevant contract which determines the value by reference to which duty is determined: ""But here, for their own purposes the parties have given the transaction the form of a sale at a price … would the consideration moving the transfers - the consideration 'upon' which the transfers are made - be anything but the price the parties chose to adopt? After all we are dealing with a transfer on sale"? 2. Although this approach was adopted in relation to predecessor legislation to the Duties Act, its continuing applicability to the circumstances of dutiable transactions under the Duties Act was confirmed by Gleeson CJ and Callinan J in the High Court in Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Limited [7] . 3. In that same case, the High Court majority (Gummow, Kirby and Hayne JJ) approved [8] in the context of the Duties Act an observation by Dixon J (as he then was) in an earlier case, Archibald Howie Pty Limited v Commissioner of Stamp Duties (NSW) [9] that: "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". That is, as his Honour went on to say, "the consideration is rather the money or value passing which moves the conveyance or transfer".
11. Turning now to the Business Contract: 1. It provides, as indicated above, for the sale and purchase of goodwill, plant and equipment, stock-in-trade, the Licence and certain intellectual property, for a consideration of $500,000. 2. The evidence provided by the Applicant in the form of: 1. Mr Robertson's valuation advice dated 23 August 2017, and 2. The Fixed Asset Summary for the year ended 30 June 2017 attached to Signum Business Advisers Pty Limited's letter dated 13 November 2017 suggests, however, that this consideration is significantly less than the true value of the assets which form the subject of the Business Contract. 1. Rather, this evidence indicates that the relevant values are as follows: 1. Goodwill $9,000,000 2. Plant and Equipment $293,338 3. Licence $250,000 Total $9,543,338
12. For the reasons outlined above, however, the only dutiable property agreed to be sold and purchased under the Business Contract is the plant and equipment. Section 27 of the Duties Act then applies to require the apportionment of the consideration under the Business Contract as between dutiable and non-dutiable property agreed to be purchased and sold under the Business Contract. The proportion of the consideration applicable to the plant and equipment, which is the only relevant dutiable property, is the proportion derived by applying to the total consideration of $500,000 the fraction 293,338/9,543,338 (being a numerator equal to the value of the plant and equipment, and a denominator equal to the aggregate value of all property the subject of the Business Contract, both determined according to the Applicant's evidence). This result is that the proportion of the consideration under the Business Contract applicable to the plant and equipment is $15,368.73.
13. This, however, is less than the unencumbered value of the plant and equipment which, according to the Fixed Asset Summary provided under cover of Signum Business Advisers Pty Limited's letter dated 13 November 2017, had a written-down value of $293,338 at 30 June 2017. Since this value was established only 7 weeks before the date of the Business Contract it was, in my view, convincing evidence as to the value of the plant and equipment as at the date of the Business Contract.
14. Section 21 applies to establish the dutiable value of the plant and equipment. Since: 1. the portion of the consideration under the Business Contract referrable to the plant and equipment determined pursuant to section 27 is substantially less than the unencumbered value of the plant and equipment determined by reference to the Fixed Asset Summary, and 2. section 21(1) says that the dutiable value of dutiable property that is subject to a dutiable transaction is the greater of the consideration for the transaction and the unencumbered value of the dutiable property, it follows that the dutiable value of the plant and equipment is $293,338, being its written down value, and that transfer duty should be assessed in respect of it accordingly.
15. At this point section 25 comes into play, to require the aggregation of both dutiable values for the purpose of calculating the transfer duty payable in respect of them. Transfer duty calculated at the rates prescribed under section 32 of the Duties Act on the aggregate dutiable values for the Land contract and the Business Contract, a sum of $30,293,338, is $1,651,623.59.
16. This can only sensibly be apportioned as between the Land Contract and the Business Contract according to the proportion which their respective dutiable values bear to the aggregate dutiable value: in the case of the Land Contract, the fraction representing its portion is 30,000,000/30,293,338 and in that of the Business Contract the fraction is 293,338/30,293,338. That apportionment results in: 1. The Land Contract being liable to transfer duty of $1,635,630.51; and 2. The Business Contract being liable to transfer duty of $15,993.08.

Orders

1. Pursuant to section 63(3)(b) of the Administrative Decisions Review Act 1997, I therefore: 1. Vary the assessment of duty in respect of the Land Contract, by substituting for the amount of $1,621,895.05 in it the amount of $1,635,630.51; and 2. Vary the assessment of duty in respect of the Business Contract, by substituting for the amount of $15,991.95 in it the amount of $15,993.08.

Endnotes

1. Section 11(1)(a)
2. Section 11(1)(j)
3. Section 11(1)(j)(i).
4. This assumes the value used by the Respondent in its assessment.
5. This assumes the value for goodwill proposed by the Applicant's valuer on 15 November 2017.
6. (1958) 100 CLR 392 at 408
7. [2005] HCA 3, at 10.
8. [2005] HCA 3, at 23
9. [1948] HCA 28 I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar

Amendments 11 March 2019 - Coversheet representation: counsel for the respondent's name corrected. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 March 2019