Morvic Pty Ltd and Ashill Pty Ltd v Commissioner of State Revenue [2002] VSC 171

Supreme Court of Victoria|2002-05-13|Before: PAGONE J

The issue in this case is whether the dutiable value of a conveyance of real estate is to include the value of the goodwill referable to the motel business conducted upon the land and which was sold in a separate, but inter-related, transaction between the same parties. Each side to the proceeding pressed upon me that the case was simple, but they differed significantly in what each saw as the correct analysis and the correct conclusion.

On 28 July 1999 the appellants entered into two contracts with a vendor to purchase the land and property on which the vendor was conducting a motel business. One contract was for the sale of the land and the other contract was for the sale of the business. The two contracts were interdependent. The sale of land contract provided for the purchase of the land and improvements, for $1,500,000, and stamp duty upon the transfer pursuant to that contract was assessed at $199,375. The sale of business contract provided for the purchase of the business and chattels for the sum of $2,125,000 of which the parties agreed to apportion $750,000 to chattels and $1,375,000 to goodwill.

The sale of business contract was conditional upon the parties entering into the contract for the sale of the land. It was agreed that the sale of business contract was to be of no force or effect until the other contract was properly entered into and a deposit was paid pursuant to that contract. Clause 2 of the sale of business contract also made settlement of the sale of the business contract concurrent with settlement of the sale of land contract. Clause 16 provided that failure by the purchaser to make any payment due under, or to settle, the sale of land contract was to constitute a default under the contract for the sale of business. Similarly, the contract for the sale of land was (by special condition 11) made conditional upon the parties concurrently entering into the sale of business contract, and the contract for the sale of land was agreed to be of no force until the sale of business contract was entered into. Special condition 12 provided for the settlement of the sale of land contract to take place concurrently with the settlement of the sale of business contract and that failure by the purchaser to settle the sale of business contract would constitute an act of default under the contract for the sale of land.

The Commissioner contends that the goodwill agreed to be paid under the sale of business contract is properly assessable together with the conveyance of the land. The Commissioner's argument assumes that the sale of business contract is effective to sell and transfer ownership in the goodwill of the business, but he contends that the goodwill has its source exclusively in the land and premises and that, for that reason, its value is properly assessable with the land. The Commissioner contends in the alternative that the goodwill is a chattel and is assessable under the provisions which bring to tax chattels sold with real estate. In contrast, the taxpayers contend that the goodwill was sold pursuant to a separate transaction and that it is not assessable either as part of the sale of the land or as a chattel connected with the sale of the land.

The main arguments by the parties accepted that the sale of business contract was effective to sell and convey ownership in the goodwill. I expressed doubts during the course of the proceedings about the validity of that assumption. Its validity depends upon the view that the sale of land contract did not necessarily pass ownership in the business conducted at the premises upon the appellants' acquisition of the land and improvements. An owner of land, upon which that owner conducts a business, may effectively transfer ownership of land and business separately; however, it does not follow that such an owner may separately convey the goodwill of a business once the premises are themselves transferred to the same buyer without restriction or without prior reservation of an adequate proprietary interest to secure the business and its goodwill. In 888 Casino & Tavern Pty. Ltd. v. Hurlfobe Pty. Ltd.[1] Windeyer J. said:

"The general law is that 'incidental rights such as goodwill of the business carried upon and inseparably connected with the mortgage property follow the security' ... and it was held in Gay v. Johnston (1936) 37 SR (NSW) 454 that prima facie the business passes if the business is a public house and 'if the goodwill of a public house passes so also does the licence authorising the carrying on of the business and consequently if the mortgagee goes into possession he is entitled to call for a transfer of the licence' ..."[2]

Ex parte Punnett; In re Kitchin[3] was cited in the joint judgment in Federal Commissioner of Taxation v. Murry[4] as authority for the proposition that the sale of hotel premises "may involve the sale of goodwill although the contract does not refer to goodwill"[5]. Their Honours, in the context of discussing the transfer of assets which are sources of goodwill, said:

"It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. The sale of hotel premises, for example, may involve the sale of goodwill although the contract does not refer to goodwill ... Similarly, the mortgage of land used as a business may involve the mortgage of the goodwill of the business although the mortgage does not mention goodwill ... But the reason that is so is that, by necessary implication, the sale or mortgage of such a site includes the sale or transfer of the business conducted on the site."[6] (emphasis added)

It seems to me that the sale of land contract entered into by the appellants sold to them the land "accompanied by or carri[ed] with" the right to conduct the business purportedly sold by the sale of business contract.

The sale of land contract described the property which was sold by that contract as the "land together with any improvements known as "The King Village Resort" at the premises". The contemporaneous and interrelated sale of business contract described the improvements on the land sold by the sale of land contract as "the motel complex comprising central reception, administration, restaurant and function area and three motel and/or apartment buildings". Indeed, what was purportedly sold pursuant to the sale of business contract was the business assets described in clause 4 of that contract being (a) the very substantial chattels described in schedule 1 of that contract and (b) the goodwill comprising "the right to conduct the motel, functions, conventions, and restaurant business from" the land. I have difficulty in seeing what right to conduct the business was left to sell once the appellants had acquired all of the improvements together with the land under the land contract. Such evidence as existed about the elements comprising the goodwill of the business was that all seemed substantially to have passed to the appellants upon their acquisition of the land and improvements. The goodwill elements were identified by Mr Grieve, an expert witness for the appellants, as being: the location of the business; the community infrastructures surrounding the place of the business; the design and the condition of the improvements; the aesthetics of the improvements; the reputation of the business; the history of sales and the marketing of the business; and the proprietor acumen. The benefit of almost all of these elements was necessarily transferred to the appellants upon their acquisition of the land and its improvements. Once the appellants acquired ownership in the land and improvements, there was little (if anything) left of the right to conduct the business capable of separate sale by another contract. That is not to say that the sale of business contract was a sham, only that it was largely redundant. The sale of business contract did contain such provisions as a restraint of trade clause, an obligation to transfer existing liquor licences to the appellants and an entitlement in the appellants to use the business name, but these provisions were ancillary to what the parties seemed to think was the primary objective of the sale of the business. The evidence about the vendor's "business acumen" (and therefore a possible reflection of the value of the restraint of trade secured by the sale of business contract) from trading figures for the years preceding the sale showed decline in profits. The appellants' expert thought that this indicated poor personal performance on the part of the vendor. Thus, if it can fairly be said that the business acumen of the vendor was "acquired" through the restraint of trade provision, it seemed of little value.

A variation of the Commissioner's argument 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. The Commissioner adopted certain passages from the decision of Mr. Nettle QC in Cresswell Nominees Pty. Ltd. v. Commissioner of State Revenue[7]. In the particular passages adopted by the Commissioner in the case before me, it was said:

"12. ... whilst personal goodwill cannot be included in the value of land, local or site goodwill, which is that part of the goodwill of a business which is not depended upon the characteristics of the person or persons conducting the business from time to time, is inseparable from the land on which a business is conducted and therefore in a sense passes with a transfer of land. [...] 17. For present purposes, however, the important point is not that goodwill is not divisible or that it has no existence independently of the business, but rather that, although it is indivisible and without existence independently of a business, some aspects of the goodwill will nevertheless affect the value of the land on which the business is conducted and others will not. 18. In some of the cases which precede Murry there is a tendency to treat goodwill as if it were divisible and thus to pose the question of how much if any of goodwill passes with land. Murry makes plain that a purchase of land is not a purchase of goodwill and, as a matter of law, that the money which is paid for land is not money paid for goodwill. Nevertheless, to the extent that goodwill may be said to be annexed to land it will inform the amount which a potential purchaser is prepared to pay for the land and hence, in the valuation of the land, the value of so much of the goodwill as derives from the land may be considered in point of fact, though not in point of law, to be decisive of the valuation. [...] 20. It is plain, however, that where the question is one of what an arms' length purchaser would have been prepared to pay for the land, an allocation of price of the kind made by the parties cannot be determinative: cf. EIE at p.40. The question of how much of any goodwill inheres in land and thus affects the value of the land is a question of fact. The question is to be answered in terms of how much an objective purchaser of the land would be prepared to pay for the opportunity of exploiting the land and, in turn, that means how much of any goodwill attaching to a business would the purchaser regard as attaching to the land rather than to other factors."

These passages correctly emphasise the importance of the facts of each case to a determination of the question concerning the extent to which goodwill will inform or affect the value of land acquired by a transaction. In this case the appellants have not, in my opinion, discharged the burden of proof which was upon them to establish that the goodwill attaching to the business was not purchased with the land; it is clear, rather, that they acquired through the sale of land contract ownership in both the land and in the improvements through which the business was to be conducted. A different result might have obtained if the right to conduct the business had been secured by a separate leasehold interest rather than flowing from ownership in the land and in the improvements upon the land.

It is critical in this case that the appellants, as purchasers, acquired both the land and the business, because without the acquisition of both it might not have been possible to conclude, as the Commissioner contended, that the appellants had "acquired all of the goodwill which had its source in the land". Such a conclusion as contended for by the Commissioner could probably not be reached, at least not without qualification, if the vendor had sold the freehold to one person and had sold the business to another with a lease. In such a case 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. Indeed, that would accord with the expert opinion of Mr. Grieve whose valuation report adopted a methodology assuming a separation of property and business values as if the owner of the business had had a lease. His conclusion about the value of the goodwill attributable to the business might more readily be accepted if the appellants could be said not to have acquired the goodwill of the business by the same legal instrument by which they acquired the land and its improvements. His analysis was essentially directed to apportioning goodwill between the respective owners of freehold and leasehold. It demonstrated the effect of trading upon the value both of a lessor's interest and a lessee's interest. It showed that "a portion of the increased goodwill value [in his example] ... flowed to the lessor and a portion to the lessee," and his methodology provided a means of apportioning goodwill between the two interests. This depended, however, upon an hypothesis that has not been established to apply to the facts in this proceeding.

It might seem artificial that a different result could obtain by what might be thought to be a device of separating values by the creation of a proprietary interest in addition to the ownership of the freehold. The concern about artificiality disappears when it is remembered that the creation of a leasehold interest is an important and valuable commercial interest. A consequence of its creation is to separate rights in respect to land, and to alter, or diminish, the rights in and over land which the freehold owner enjoyed before the creation of the leasehold interest. It is neither surprising nor artificial, therefore, to see that some rights residing in location may have different legal sources, and therefore different factual sources, once separate proprietary interests are created. The goodwill of a business conducted pursuant to a lease may enhance the value of the land owner's reversion. Whether it does or not, and the extent to which it may, depends upon all the facts. In separate arms length dealings with leased freehold and a business secured by a lease, it may be expected that any value of the goodwill of the business (whether positive or negative) will be reflected in the consideration which a purchaser agrees to pay for either interest. Where, however, the parties have elected to allocate the value of goodwill between different transactions, the Commissioner is not bound to accept their allocation and may assess under s.63(3)(b)(i)(B) of the Stamps Act 1958 to reflect what an open market transaction should achieve. In this case the relevant question to ask is what would an open market price be for the sale of this land and its improvements. The problem for the appellants is that they have not established an amount to displace that adopted by the Commissioner in the assessment.

It is conceivable that some part of the goodwill was not acquired with the land and its improvements but none has been established. In supplementary written submissions filed by the appellants it was contended:

"In the present case, had there been no second transaction, the sale of the business interest, then the purchaser would not have acquired the right to conduct the business which was operated on the subject land. The purchaser could operate a motel business but it would not be the business ..." (emphasis in original)

What the appellants do not establish is what right in "the" business had not already been acquired by them from the acquisition of the land and its improvements, and which (as the submissions correctly acknowledge) gave the appellants a right to operate "a" business of that kind. The value of the goodwill as determined by Mr. Grieve was based upon a methodology which assumed a leasehold interest separate from the landlord interest; it did not seek to determine any identifiable or distinct value for the business name, the RACV rating, the restrictive covenant or any other like entitlement which would distinguish "the" business from "a" business of like character.

The other issue in contention was whether the goodwill of the business was nonetheless intangible property constituting a chattel within the meaning of s.63 of the Stamps Act 1958. The effect of s.63(3) is that the dutiable value of land is defined as being the greater of (a) the sum of the consideration for the sale and the consideration for the transfer of chattels included in the real property by reason of s.63(3)(a), or (b) the sum of the amount for which the real property and the amount for which the chattels might reasonably have been sold in the market on the date of the sale. The particular question raised by the alternative argument for the Commissioner is whether "chattels" in these provisions should be construed to include goodwill. In my opinion it does not for the reasons which I have set out in the decision in Uniqema Pty. Ltd. v. Commissioner of State Revenue[8]. An additional argument advanced in this case was that I should construe the meaning of the words in the Stamps Act by reference to the provisions in the Duties Act 2000 which replace the earlier Act. The appellants contend that a consideration of the Duties Act 2000 will support their contention about the meaning of the word "chattels" in the Stamps Act 1958. It is not clear to me what conclusions may safely be drawn from the terms of the subsequent Act about the meaning of the terms of the previous Act[9], although the care which needs to be exercised in such a task is great[10]. In the event it is unnecessary for me to undertake that task in view of my conclusion.

Accordingly I dismiss the appeal and affirm the assessment. I will hear the parties on the question of costs.

[2] Ibid at 15508; see also Burns Philp Trustee Co. Ltd. v. Ironside Investments Pty. Ltd. [1984] 2 Qd.R. 16

[7] Cresswell Nominees Pty. Ltd. v. Commissioner of State Revenue (unreported, VCAT, 7 November 2001)

[9] See Hepples v. Federal Commissioner of Taxation [1992] HCA 3; (1991) 173 CLR 492 at 539 per McHugh J.

[10] See Allina Pty. Ltd. v. Federal Commissioner of Taxation [1991] 91 ATC 4195 at 4202-3

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