Failure to take into account Income Tax and GoodS and Services Tax (Ground 8)
62 The appellants argued that, when arriving at his valuation of the shares in the company on the basis of a hypothetical realisation of its assets his Honour erred by not taking into account income tax payable on the assumed realisation of the company's real estate assets and the goods and services tax that it would attract. The appellants did not at trial adduce evidence directed to these issues. That forensic election, we infer, was made with full knowledge of the existence of the issues. During the course of his opening at the trial, senior counsel for the appellants informed his Honour that his clients were making an open offer of about $156,000 per share. This was a radical change from their previous offer of $50,000 per share. The open offer, itself, demonstrated the gross inadequacy of the offers and issue prices proposed in around May 2007. That open offer placed a value on Territory Realty's shares of about $2.5 million. That value, according to senior counsel for the appellants had, in turn, been based on Mr Mooney's valuation.
63 When cross-examined about how he and his associates had arrived at the open offer of about $156,000 per share, Mr Garraway admitted that it had been put on his instructions as the fair value based on Mr Mooney's valuation of the company's land assets. Mr Garraway was asked whether, in arriving at this offer, he had made a net asset calculation based on a hypothetical balance sheet of assets and liabilities. He replied: "No, you've got to take into account goods and services tax, income tax, these sorts of issues". And he said that they had just signed off on the final 2007 accounts. However, those accounts did not reveal any significant sums for income tax or goods and services tax.
64 In re-examination, Mr Garraway was asked to explain what he had meant by the above answer. He asserted that the impact of goods and services tax and income tax on the proceeds of realisation of the land had to be taken into account in valuing shares. He stated that one-eleventh of the sale price would represent goods and services tax. He mentioned that the company was entitled to use the margin scheme in respect of its holdings of the land and then said:
"So you would have to do those calculations, and that's one of the things that I also, in August, asked Mr Mooney to address the - so that all parties were aware of the value of the stock of land."
65 It was contended for the appellants that this evidence then allowed them to rely on calculations as to how the treatment for income tax, capital gains tax or goods and services tax would apply to the different transactions involved in realising the company's assets for the purposes of a valuation exercise. There was no evidence from expert accountants on these matters. Instead, in written submissions made before final address at the trial, counsel for the appellants provided his Honour with an asserted calculation of what these sums would be which was later varied by small adjustments in further submissions in reply.
66 In submissions on this appeal, the appellants put forward new figures based on his Honour's valuations in the reasons below, asserting that it was a matter for the Full Court simply to refer to the legislation, do a calculation and apply the results of the calculation to determine the amounts of goods and services tax, capital gains tax and income tax that would be payable by the company were it to have realised all of its relevant assets as at 30 June 2007. The appellants argued that this would result in amounts to use in determining what a hypothetical willing, but not anxious, fully informed vendor and purchaser would have agreed was the value of the shares.
67 This submission cannot be accepted. First, Mr Garraway's evidence demonstrated that he considered it to be an essential part of the appellants' case that these allowances had to be made to arrive at a valuation. If these questions were truly issues in the trial, the correctness of each accounting step in this process of valuation would be, as Mr Garraway appropriately asserted, part of the valuation process. There was no attempt to address these matters as real issues at the trial despite Mr Garraway's assertion that Mr Mooney had been instructed on them. We were not taken to any material to suggest that Mr Mooney ever provided an expert opinion in evidence dealing with the impact of any taxes the subject of ground 8.
68 His Honour found that these questions of the impact of goods and services tax and income tax had not been addressed in the evidence and emerged only in final submissions. At the trial, Territory Realty accepted that the liability of $206,804 for income tax provided for in the 2007 accounts of the company should be taken into account for the purposes of arriving at a valuation. His Honour refused to make any further adjustments as sought by the appellants. As he noted, the realisation of much of the real estate of the company would depend on questions of timing and expenditure involved in that disposition. He said:
"I consider it is too speculative to make such a deduction, particularly in the absence of clear evidence from the valuers that such an allowance was an appropriate one or how it would be calculated. It appears to depend upon the particular valuation method chosen."
69 The primary judge observed that he had adopted 30 June 2007 as the date of valuation of the shares in the company and used the values for its assets and liabilities disclosed in the June 2007 accounts, apart from those for its real estate. Those figures had included provision for income tax, although how it was arrived at had not been made clear in the evidence. He said that the appellants' submission seeking a further adjustment for potential income tax liability was not sufficiently founded in the evidence to be accepted. He found that similar considerations applied to the submissions on goods and services tax. He said that the evidence was not clear enough to make any deduction in fact. He found, among other things, that it was unclear whether ultimately such a liability or deduction would be passed on to a purchaser or purchasers. Again, he noted that the way in which it should be treated would depend upon the valuation method chosen. As he said, he was not prepared to make the deduction suggested on a hypothetical basis without it having been explored sufficiently in the evidence and without being satisfied that it was appropriate to do so.
70 We see no error in his Honour's approach. Indeed, as was apparent during the course of argument before us, a developer who purchased the real estate held by the company would be purchasing it with a view to re-sale. The goods and services tax liability which that purchaser would ultimately incur would be the net liability, if any, after the purchaser deducted what it had paid to the company for the land from what it received from its purchasers, netting that liability to goods and services tax off against any credits and debits that arose in the course of developing the land.
71 The appellants' argument involved the specious contention that a developer would be affected in the amount for which it would purchase the land because it would have to pay an additional 10% goods and services tax. The argument conveniently overlooked that, when selling the land, in some, if not all cases, the developer might receive a price that included goods and services tax. Any detriment suffered by the developer in paying goods and services tax in the initial acquisition could be offset on resale. But there was no evidence whether, and to what extent, that receipt on resale would be realised. Any assessment of the appropriate amount, if any, to allow for these contingencies required the appellants to adduce evidence before his Honour which they deliberately chose not to do.
72 Calculations of liabilities for goods and services tax, capital gains tax and income tax necessarily depend upon the assumptions that are employed. It would be unrealistic for a developer to buy land from the company for the purposes of re-sale without factoring in that it could afford to pay the goods and services tax component of the price, since it would, or might, recover that tax on any resale it planned to make at a profit. Hence, no deduction in value would be appropriate for that purpose if no evidence had been directed to the issue at trial. The primary judge was correct to have refused to make the hypothetical and unproven adjustments for which the appellants argued.