Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue

[2020] NSWSC 120

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120
Hearing dates:	1 and 2 October 2019
Date of orders:	26 February 2020
Decision date:	26 February 2020
Jurisdiction:	Equity
Before:	Ward CJ in Eq
Decision:	1.   Set aside the decisions dated 11 August 2015 and 2 December 2016 of the defendant in relation to the Sale of Assets Agreement dated 29 March 2015 (the Lakemba Agreement). 2.   Set aside the decision dated 16 December 2016 of the defendant in relation to the Sale of Business Agreement dated 6 November 2012 (the Menai Agreement). 3.   Revoke in full each of the Duties Assessments issued by the defendant and dated 10 December 2015. 4.   Order the defendant to pay the plaintiff’s costs of the proceedings.
Catchwords:	TAXES AND DUTIES — whether transactions by which plaintiff obtained right to operate two McDonald’s restaurants were dutiable transactions — whether transactions effected transfers of goodwill — transactions properly understood as limited licences — no transfer of goodwill and transactions not dutiable
Legislation Cited:	Administration Act, ss 97, 100(3) Duties Act 1997 (NSW), ss 8, 9 10, 11, 12, 35, Dictionary Petroleum Retail Marketing Franchise Act 1980 (Cth) Stamp Act 1894 (Qld), s 54 Supreme Court Act 1970 (NSW), s 19 Taxation Administration Act 1997 (NSW), s 97 Trade Practices Act 1974 (Cth), s 51AE
Cases Cited:	ACI Australia Ltd v Glamour Glaze Pty Ltd (1988) 11 IPR 269; [1988] ATPR 40-868 AFA v Garendon Investments Pty Ltd (1995) 37 NSWLR 221 Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 Coles Myer Limited v Commissioner of State Revenue (Vic) 98 [1998] 4 VR 728 Commissioner of State Revenue (WA) v Placer Dome Inc [2018] HCA 59; (2018) 93 ALJR 65 Commissioner of State Revenue v Lend Lease Developments Pty Ltd (2014) 254 CLR 142; [2014] HCA 51 Commissioner of Taxation of the Commonwealth of Australia v Murry (1998) 193 CLR 605; [1998] HCA 42 Commissioners of Inland Revenue v Muller & Co’s Margarine Ltd [1901] AC 217 Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 Grain Growers Ltd v Chief Commissioner of State Revenue [2015] NSWSC 925 Kenmir Ltd v Frizzell (1968) 1 All ER 414 Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593, (2019) 370 ALR 371 Llewellyn v Rutherford (1875} LR 10 CP 456 McDonald’s Australia Holdings Ltd v Commissioner of State Revenue (Qld) [2004] QSC 357 PP Consultants Pty Ltd v Finance Sector Union of Australia (2000) 201 CLR 648 at 655; [2000] HCA 59 Ranoa Pty Ltd v BP Oil Distribution Ltd & Anor (1989) 91 ALR 251 Roussos v Commissioner of Stamp Duties (Tas) (1992) 23 ATR 336 Sturt Football Club Inc v Commissioner of State Taxation [2010] SASC 279; (2010) 80 ATR 532 Sun World International Inc v Registrar, Plant Breeders’ Rights (1998) 87 FCR 405 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (NSW) (2011) 245 CLR 446; [2011] HCA 41
Texts Cited:	Butterworths Concise Australian Legal Dictionary (3rd ed, 2004, LexisNexis Butterworths)
Category:	Principal judgment
Parties:	Favotto Family Restaurants Pty Ltd (Plaintiff) Chief Commissioner of State Revenue (Defendant)
Representation:	Counsel: I Jackman SC with D Barlin (Plaintiff) M Richmond SC with AH Rider (Defendant)   Solicitors: Halperin & Co Pty Ltd (Plaintiff) Crown Solicitor for NSW (Defendant)
File Number(s):	2017/00024074
Publication restriction:	Nil

Judgment

1. HER HONOUR: In this matter, the plaintiff, Favotto Family Restaurants Pty Ltd (Favotto), seeks review pursuant to s 97 of the Taxation Administration Act 1997 (NSW) (Administration Act) of two assessments for duty issued by the defendant, the Chief Commissioner of State Revenue (NSW) (the Chief Commissioner), on 10 December 2015 (the Assessments). The Assessments relate to transactions entered into by Favotto in respect of two McDonald’s restaurant businesses, one at Menai and one at Lakemba.

2. Favotto contends that the Assessments should be revoked in whole or part on the basis that the respective transactions did not give rise to a dutiable transaction in respect of the goodwill or other dutiable property of the McDonald’s restaurants at Menai and Lakemba. Rather, it is said that Favotto was merely granted the right to operate the restaurants as franchisee (which is not a dutiable transaction) and that the transfer of plant, equipment and stock to Favotto did not comprise a transfer of dutiable property. If Favotto’s contention is correct, it follows that the interest assessed should be remitted in whole or part.

3. The Chief Commissioner, for the purpose of these proceedings only, accepts that, by the operation of s 8(1)(a) and (b) read with s 11(1)(g) and (j) of the Duties Act 1997 (NSW) (Duties Act), each of the transactions the subject of this dispute will be a dutiable transaction only if there was a transfer (or agreement for the sale or transfer) of goodwill of the relevant restaurant businesses to Favotto. The Chief Commissioner contends that there was such a transfer (and hence that duty is payable on the dutiable value of that goodwill and the dutiable value of the goods (other than stock-in-trade) transferred to Favotto) and that, even if the dutiable value of the goodwill transferred to Favotto is nil or nominal, duty would still in those circumstances be payable on the dutiable value of the relevant goods (i.e., the plant and equipment the subject of each sale other than stock-in-trade). The Chief Commissioner thus contends that the transactions were dutiable; that there is no basis to remit any interest; and that the Assessments should be confirmed.

Relevant principles on a review pursuant to s 97 of the Administration Act

4. I do not understand it to be disputed between the parties that the subject of the present review are the Assessments themselves, as opposed to decisions on the objection (see Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 at [28], [53] per Basten JA, Giles JA and Campbell JA each agreeing; that the proceedings are an appeal for the purpose of the Supreme Court Act 1970 (NSW) (see s 19(2) of that Act and also s 97(4) of the Administration Act); that the review is a de novo review not limited to the material before the Chief Commissioner (see Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (NSW) (2011) 245 CLR 446; [2011] HCA 41 at [12]-[22]; Grain Growers Ltd v Chief Commissioner of State Revenue [2015] NSWSC 925 at [7] per Black J); and that Favotto bears the onus of proving its case on the balance of probabilities (s 100(3) of the Administration Act).

The Assessments

5. The Assessments in question, each issued on 10 December 2015, are:

1. a Duties Notice of Assessment (ID 1624884662), assessing duty ($158,723.50) and interest ($47,872.23) in respect of the sale to Favotto under a “Sale of Business Agreement” executed on 6 November 2012 of the goodwill and other dutiable property of a McDonald’s Family Restaurant business at McMahon Place in Menai (the Menai Restaurant); and

2. a Duties Notice of Assessment (ID 1624884373), assessing duty ($260,974) and interest ($11,898.27) in respect of the sale to Favotto under a “Sale of Assets Agreement” executed on 29 March 2015 of the goodwill and other dutiable property of an existing McDonald’s Family Restaurant business at the corner of Canterbury Road and Chapel Street in Lakemba (the Lakemba Restaurant).

6. The relevant transaction documents (considered in more detail below) in relation to the Menai Restaurant are: a “Sale of Business Agreement” (the Menai Agreement); a “Licence Agreement” (the Menai Licence Agreement); and a “Lease” (the Menai Lease), all executed on 6 November 2012; and, in relation to the Lakemba Restaurant, are: a “Sale of Assets Agreement” (the Lakemba Agreement); a “Licence Agreement” (the Lakemba Licence Agreement); and a “Lease” (the Lakemba Lease), all executed on 29 March 2015.

Background

Menai Restaurant

7. During the period from 2008 until the relevant transaction in 2012, McDonald’s Australia Limited (McDonald’s Australia), a wholly owned subsidiary of McDonald’s Corporation (a Delaware corporation), had operated the Menai Restaurant. McDonald’s Australia had purchased the Menai Restaurant in 2008 (for $2,550,000). In the McDonald’s lexicon, such a restaurant (that is, one owned and operated by McDonald’s Australis itself, as opposed to by a franchisee or licensee) is referred to as a “McOpCo” restaurant business.

8. A “Seller’s Package” document dated 9 July 2012 was prepared by “McOpCo” for the proposed sale of the existing Menai Restaurant business to Favotto; and, during July and August 2012, McDonald’s Australia entered into negotiations with Mr Tony Favotto, a director of Favotto, regarding the proposed “sale” of the Menai Restaurant (or perhaps more precisely the Menai Restaurant “business”). During those negotiations, McDonald’s Australia placed a value on the Menai Restaurant business at $3,300,000 (based on a methodology applying a numerical multiplier to past actual sales) (see the letter dated 19 July 2012 to Mr Favotto and the explanation given in oral evidence by the head of restaurant finance now working for McDonald’s Corporation in the USA, Mr Troy Fahey, as to the valuation methodology used by McDonald’s Corporation – at T 40ff).

9. A “Buyer’s Package” document dated 5 August 2012 was then prepared by McDonald’s Australia for the sale of the Menai Restaurant to Favotto.

10. By letter dated 8 October 2012, McDonald’s Australia wrote to Mr Favotto regarding the handover of the Menai Restaurant, advising that a lump sum payment of $3,120,000 to McDonald’s Australia was required for the “Purchase of the Business”.

11. A document dated 14 October 2012, containing handover details for the then current employees of the Menai Restaurant, was prepared by McDonald’s Australia following which a “Handover File Note” dated 15 October 2012 was also prepared by McDonald’s Australia. That Handover File Note recorded that the Menai Restaurant was “handed over” to Mr Favotto on 15 October 2012 and that various amounts were payable by Mr Favotto (though, strictly speaking, they were payable by Favotto) to McDonald’s Australia, including $3,120,000 plus GST for “Purchase of Business”.

12. McDonald’s Australia issued a tax invoice to Favotto on 25 October 2012, noting a payment of $3,120,000 without GST for “Purchase of Business”.

13. Seemingly, it was not until after the handover had occurred that the relevant transaction documents were executed (on 6 November 2012), as set out in due course (see [26]ff below). Clause 25.2 of the Menai Agreement recorded the parties’ agreement that the “sale” of the “Business” by McDonald’s Australia to Favotto was a supply of a going concern for GST purposes. The Chief Commissioner also notes that in McDonald’s Australia’s general ledger a decrease in McDonald’s Australia’s goodwill was recorded in respect of the sale of the Menai Restaurant business to Favotto.

Disclosure Document

14. On 6 November 2012, as noted above, McDonald’s Australia and Favotto executed the relevant transactions documents for the sale of the Menai Restaurant business. Before turning to the terms of those documents, it is also relevant here to note that, at some point during the course of the negotiations, Mr Favotto was provided with a copy of a “Disclosure Document”, being an excerpt of the McDonald’s Franchising Code of Conduct Disclosure Statement 2013 (the Disclosure Document). The Disclosure Document provides information required to be disclosed to potential franchisees (see Annexure 1 of the Franchising Code of Conduct) as prescribed by s 51AE of the then applicable Trade Practices Act 1974 (Cth).

15. Relevantly, the Disclosure Document explains the basis on which McDonald’s Australia operated the relevant restaurant business. Amongst other things, the Disclosure Document discloses that McDonald’s Australia’s restaurants are established and operated using the “McDonald’s System” (which I explain below) and that the McDonald’s System is licensed to McDonalds’s Australia.

16. The Recitals to the Disclosure Document state that:

McDonald’s Corporation (a Delaware Corporation in the United States of America) (McDonald’s Corporation) and McDonald’s Australia Holdings Ltd … (McDonald’s Holdings) entered into a master licence agreement on 1 January 1970 (Master Licence) to grant McDonald’s Holding the right to:

(a)   establish and operate McDonald’s restaurants in Australia using the McDonald’s System (as described in Item 2.3 below), the trademarks (as described in Item 7.1(c) below) and other intellectual property of McDonald’s Corporation (as described in Item 7.1(a) below); and

(b)   sub-licence [sic] that right to other third parties in Australia.

17. The Recitals in the Disclosure Document further state that:

With the consent of McDonald’s Corporation on 1 July 2002 McDonald’s Holdings assigned to McDonald’s Australia Ltd (ABN 43 008 496 928) (McDonald’s Australia) its interest in the Master Licence and all licence agreements with licensees in Australia. McDonald’s Australia is a wholly- owned subsidiary of McDonald’s Corporation. …

On 2 January 2009, McDonald’s Corporation assigned the Master Licence to McD Asia Pacific (a Delaware Corporation in the United States of America) (MAP). All other terms of the Master Licence remained the same.

18. Thus it is recorded that McDonald’s Holdings had assigned its interest in the “Master Licence” and all “Licence Agreements with Licensees in Australia” to McDonald’s Australia (thus McDonald’s Australia having the right to exploit the McDonald’s System in Australia). Pausing here, Favotto’s case is that the effect of the relevant transactions is that McDonald’s Australia has then sub-licensed the McDonald’s System to it as its franchisee.

19. Clause 2.3 of the Disclosure Document provides a description of the kind of business operated under the franchise, namely that:

The licensee is granted the right to operate a business from a specific location using the “McDonald’s System”. The McDonald’s System is a common business format for the establishment and operation of quick service restaurants.

The McDonald’s System has been developed by McDonald’s Corporation and comprises, among other things:

•   procedures and standards for the preparation, assembly, packaging and retail sale of a limited menu of burgers and other food products and beverages for consumption on premises (i.e., “dine-in”) or off premises (i.e., “take-away”);

•   procedures and standards for the retail sale of pre­ packaged food products, beverages and merchandise for consumption on or off the premises;

•   proprietary rights and trade marks, manuals and other confidential business information;

•   operational, real estate, premises design and fit out, marketing and accounting information concepts; and

•   continued development of expertise and know how in elements of McDonald’s System and provision of that information to licensees.

20. Clause 7 of the Disclosure Document states, relevantly, that:

[…]

7.1(b)   details of the franchisee’s rights and obligations in connection with the use of Intellectual Property:

Licensees are granted by McDonald’s Australia a limited, non­ exclusive right to use the trade marks and the confidential business information comprising the McDonald’s System and the other Intellectual Property, in accordance with the terms prescribed by McDonald’s Australia, only in connection with the licensed business and only for the duration of the Licence.

[…]

7.1(e)   if the Intellectual Property is not owned by the franchisor – who owns it:

McDonalds Australia is a registered owner of the Domain Name but that otherwise, McD Asia Pacific or one of its subsidiaries owns all of the Intellectual Property.

21. Clause 9.1(b) of the Disclosure Document states that licensees are restricted as to what products they can sell and what suppliers they can engage.

22. Clause 9.1(d) of the Disclosure Document discloses that McDonald’s Australia dictates to the franchisees the obligation to supply goods or services, and that matters such as the construction and design of specific premises, the list of food and beverage products, ingredients, and packaging and merchandise, the equipment items and the equipment suppliers are directed by McDonald’s Australia with respect to the franchisee.

23. Clause 9.1(f) of the Disclosure Document discloses, generally speaking, that the franchisor will provide to the franchisee the whole range of goods and services under the franchise.

24. Clause 10.1(a) of the Disclosure Document sets out the restrictions on a licensee as to the goods and services that the licensee may supply, stating that the licensee must:

[…]

(i)   offer and sell only the complete range of Menu Items (including pre-manufactured products). The licensee must not offer, sell or supply any food or beverages that are not Menu Items, unless the licensee obtains McDonald’s Australia’s prior written consent;

(ii)   only use Approved Products (including Licensed Products and Licensed Merchandise) to prepare and package the Menu Items;

(iii)   strictly follow the recipes and procedures for preparation and packaging of Menu Items that are required to be prepared on premises;

(iv)   offer and sell the Licensed Merchandise as contained on the Menu or as part of a McDonald’s promotion from time to time;

(v)   use the premises only as a McDonald’s restaurant in accordance with the requirements and restrictions prescribed by McDonald’s Australia; and

(vi)   otherwise conduct the restaurant strictly in accordance with the McDonald’s System and the Licence.

Relevant transaction documents

25. I turn now to the particular documents executed in relation to the respective transactions. Broadly speaking, the relevant transaction documents for the Lakemba Restaurant mirror the relevant transaction documents for the Menai Restaurant (and so I will only set out the relevant provisions contained in the Menai Agreement but, to the extent that there are relevant differences, those will be noted in due course).

Sale of Business Agreement dated 6 November 2012 (the Menai Agreement)

26. Pursuant to the Menai Agreement, McDonald’s Australia agreed to sell, and Favotto agreed to buy, the “Business” (that term being defined to mean “the McDonald’s Restaurant carried on by [McDonald’s Australia] at the Premises”) and “the Assets” (which term was defined to mean specified assets used in the Business other than the “Excluded Assets” – see below) for the “Purchase Price” of $3,120,000 (inclusive of $477,884 for “the written down value of Plant and Equipment”) plus the “Stock Value” (see cl 3.1).

27. The terminology used in the Menai Agreement is that of a “sale” and “purchase” (of the Business and the Assets): Recital B records that the “Vendor desires to sell to the Purchaser, and the Purchaser desires to purchase from the Vendor, the Business and the Assets”; Recital C states that the “Vendor has, at the request of the Guarantor, agreed to sell to the Purchaser and the Purchaser has agreed to Purchase from the Vendor, the Assets and Business on the terms and conditions of this Agreement”.

28. Clause 2 contains a number of conditions precedent. Relevantly, cl 2.1 provides that a condition precedent to the transfer of the Business and the Assets is that franchise documents are provided to the proposed new franchisee (those franchise documents being the relevant licence agreement and the relevant lease).

29. Clause 3.1 provides that:

Subject to Completion and on terms set out in this Agreement, the Vendor sells to the Purchaser and the Purchaser purchases from the Vendor, the Business and the Assets free from Encumbrances, for the Purchase Price.

30. As to the “Business” there being acquired, the term “Business” is defined (cl 1.1(5)) to mean “McDonald’s Restaurant carried on by the Vendor at the Premises”. The term “McDonald’s Restaurant” is in turn defined (cl 1.1(27)) as “a quick service restaurant offering a range of uniform and quality food and beverage products, operated using the McDonald’s Intellectual Property”.

30. The term “McDonaId’s Intellectual Property”, which, as noted, is used in the definition of “Business”, is defined (cl 1.1(26)) as:

McDonald’s Intellectual Property means all trade marks, copyright, patent and design rights and other intellectual property rights owned or controlled under licence by the McDonald’s Group, including all such rights subsisting in, or created during the development of:

(a)   the McDonald’s Confidential Information;

(b)   the McDonald’s System;

(c)   the trade marks (as defined in the Vendor Franchise Agreement);

(d)   all operations manuals, written materials, designs and other marks used in connection with a McDonald’s Restaurant or forming part of the McDonald’s System; and

(e)   the corporate image and trade dress of a McDonald’s Restaurant, including the get-up, lay-out and specifications of premises, goods, labels and packaging;

32. The term “McDonald’s System” (as noted, also used in the definition of “Business”) is defined (cl 1.1(28)) as “the distinctive business system developed by the McDonald’s Group for operating a McDonald’s Restaurant”.

33. As to the “Assets” being acquired under the agreement, the term “Assets’’ is defined (cl 1.1(3)) as:

Assets means the property of the Vendor (other than the Excluded Assets) used in the Business at the opening of business on the Completion Date, comprising the:

(a)   Plant and Equipment and any other plant, equipment, fixtures and fittings used in connection with the Business at the date of this Agreement or acquired or constructed by the Vendor in connection with the Business after the date of this Agreement and prior to Completion;

(b)   Franchise rights intangible;

(c)   Stock;

(d)   benefit (subject to the burden) of the Contracts and the Plant and Equipment Leases; and

(e)   Business Records;

34. The term “[f]ranchise rights intangible” is not defined (whether in the Menai Agreement itself or elsewhere).

35. The “Assets” which are assigned pursuant to cl 3.1 expressly do not include the “Excluded Assets”, which term is defined (cl 1.1(17)) as:

Excluded Assets means those assets not included in the sale and purchase contemplated by this Agreement, comprising the:

(a)   Book Debts;

(b)   cash at hand or at bank of the Vendor;

(c)   McDonald’s Intellectual Property, the McDonald’s Confidential Information and the McDonald’s Goodwill: and

(d)   Records and data relating to the Business which the Vendor is obliged by law to retain;

36. Pausing here, Favotto points out that, therefore, the “Excluded Assets”, which are not transferred pursuant to the respective agreements include the “McDonald’s Goodwill”.

37. The term “McDonald’s Goodwill” is defined (cl 1.1(24)) as meaning “the goodwill attaching to the McDonald’s Intellectual Property” (that term being defined as set out above).

38. It is clear from the above definitions that the “Business” (as also is the case with the “Assets”) the subject of the Menai Agreement relates, relevantly, to the plant and equipment which is used for the McDonald’s Restaurant and the “Franchise rights intangible” (the latter not being a defined term, as already noted).

39. Pursuant to cl 4, title and risk in the Assets passes to Favotto at the opening of the business on the “Completion Date”.

40. Clause 5 makes provision for payment of the Purchase Price. Clause 6 makes provision for the conduct of a full physical stocktake immediately after the close of business on the day prior to the Completion Date and for the provision of a complete list of “Stock” to Favotto on its completion. Clause 7 makes provision for accrued liabilities.

41. Clause 8 provides that, at “Completion”, McDonald’s Australia must deliver the Assets and the Business to Favotto by giving Favotto possession of the Assets and handing to Favotto, among other things, all “Business Records” and all permits, registrations, licences and documents held by McDonald’s Australia which are necessary to enable Favotto legally and effectively to carry on the Business.

42. Clause 9 makes provision for adjustments at Completion for any payments made in advance by McDonald’s Australia prior to the opening of the business on the Completion Date in respect of goods to be supplied and services rendered to the Business for the benefit of Favotto. Clause 11 requires McDonald’s Australia to provide details of all Contracts (entered into in relation to the Business) to Favotto prior to Completion, if requested to do so by Favotto in writing.

43. Clause 12 requires McDonald’s Australia, until the Completion Date, to among other things: carry on the Business in the ordinary and usual course; permit representatives of Favotto to observe the conduct of the Business; introduce the principal of Favotto to the Transferring Employees, key suppliers and other contacts of the Business and to use its reasonable endeavours to ensure that they continue to deal with the Business after Completion.

44. Clause 18 obliges Favotto to make offers of employment to each Employee (i.e., the persons employed by McDonald’s Australia in the Business at the date of the Agreement) on terms which recognise continuity of service from McDonald’s Australia to Favotto.

45. Clause 25.2, as noted above, contains an agreement that each supply under the arrangement involving the sale of the Business by McDonald’s Australia to Favotto is a supply of a going concern for GST purposes.

46. Schedule 1, Item 7, specifies the Purchase Price as the aggregate of $3,120,000 (which included the sum of $477,884 for the written down value of Plant and Equipment) and the Stock Value. Schedule 3 contains the Vendor’s Warranties, including the warranty (at 2) that the Assets comprise (other than the Excluded Assets) all of the material assets used by McDonald’s Australia in the Business.

Licence Agreement dated 6 November 2020 (the Menai Licence Agreement)

47. The second of the relevant transaction documents in relation to the Menai Restaurant is the Menai Licence Agreement, by which McDonald’s Australia granted to Favotto a licence to adopt and use the McDonald’s System in the Menai Restaurant in consideration for: an upfront “licence fee” of $60,000; an ongoing “service fee” of 5% of Favotto’s gross sales; and an advertising contribution of not less than 4% of the Favotto’s gross sales (see cll 2.01, 3.01, 3.02 and 6.04).

48. Recital A of the Menai Licence Agreement provides that: McDonald’s Corporation “has developed and operates a restaurant system” (“the McDonald’s System”); the McDonald’s System includes proprietary rights and certain valuable trademarks, service marks and trade names including the trade names “McDonald’s” and “McDonald’s Hamburgers”, designs and colour schemes for restaurant buildings, signs, equipment layouts, formulae and specifications for certain food products, methods of inventory and operation control, bookkeeping and accounting, and manuals covering business practices and policies; and the McDonald’s System is operated and is advertised widely within Australia and in other countries.

49. Recital B of the Menai Licence Agreement provides that:

The McDonald’s System is a comprehensive Restaurant System for the retailing of a limited menu of uniform and quality food products, emphasising prompt and courteous service in a clean and wholesome atmosphere which is intended to be particularly attractive to families.

The foundation and essence of the McDonald’s System is the adherence by licensees to standards and the policies of McDonald’s and its related corporations providing for the uniform operation of all McDonald’s restaurants within the McDonald’s System including, but not limited to, serving designated food and beverage products; the use of only prescribed equipment and building layout and designs; and strict adherence to designated food and beverage specifications and to prescribed standards of quality, service and cleanliness in restaurant operation. Compliance by licensees with the foregoing standards and policies in conjunction with McDonald’s trademarks, service marks and trade names provides the basis for the valuable goodwill and wide acceptance of the McDonald’s System. Moreover the establishment and maintenance of a close personal working relationship with Licensee in the conduct of his McDonald’s restaurant business, his accountability for performance of the obligations contained in this agreement and adherence to the tenets of the McDonald’s System constitute the essence of the licence provided for herein.

50. Recital C of the Menai Licence Agreement provides that:

McDonald’s Corporation and its subsidiaries own all of the Intellectual Property and have licenced to Licensor the right to operate restaurants using the McDonald’s System in Australia. Licensor’s licence from McDonald’s includes the right in Licensor to sub-licence.

51. Recital D of the Menai Licence Agreement provides that:

Licensee wishes to be granted the right to adopt and use the McDonald’s System in a restaurant at the location specified [...] (“the Restaurant”“) and Licensor has agreed to grant such right in Licensee, subject to the terms [sic] covenants and conditions contained herein.

52. Recital F of the Menai Licence Agreement provides that McDonald’s Australia and the Licensee have also concluded a lease agreement with respect to the land and buildings which constitute the Menai Restaurant. Clause 24 of the Menai Licence Agreement provides that the Menai Licence Agreement is interdependent with the Menai Lease.

53. Clause 2.01 of the Menai Licence Agreement provides that:

In consideration of the payment by a Licensee to Licensor of the licence fee referred to in clause 3.01 hereof and the performance and observance by a Licensee of the obligations referred to in clause 6 hereof, Licensor hereby grants to Licensee the right, licence and privilege to adopt and use the McDonald’s System in the Restaurant subject to the terms [sic] covenants and conditions contained herein.

54. Clause 6 of the Menai Licence Agreement sets out the franchisee’s undertakings. Relevantly, cl 6 provides that the Licensee undertakes to comply with the whole of the McDonald’s System and to adopt and use every such component of the McDonald’s System in the Menai Restaurant.

55. Clause 10 of the Menai Licence Agreement provides that the franchisee cannot assign its interest in the Menai Licence Agreement without prior written consent:

Licensee’s interest in this agreement shall not, without the prior written consent of Licensor, be assigned or otherwise transferred in whole or in part (whether voluntarily or by operation of law) directly, indirectly or contingently. If Licensor gives its written consent to an assignment or transfer, such assignment or transfer shall be made and take effect only in accordance with and subject to the provisions of this clause.

56. Clause 11 of the Menai Licence Agreement provides that the franchisee is not an agent of McDonald’s Australia, and is an independent contractor.

57. Clause 13 of the Menai Licence Agreement deals with material breaches, which include: the Licensee “using any name, trademark, service mark, or other Intellectual Property right of McDonald’s other than and expressly permitted by Licensor” (cl 13(i) of the Menai Licence Agreement); and the Licensee selling food or beverage products other than those recommended by the Licensor which fail to “confirm [sic] to McDonald’s System’s specifications…” (cl 13(j) of the Menai Licence Agreement).

58. Clause 15 of the Menai Licence Agreement deals with the effect of termination of the agreement. Relevantly, cl 15(a) provides that:

(a)   Upon any material breach of this agreement, Licensor shall have an immediate right to enter upon and take possession of the Restaurant in order to maintain continuous operation of the Restaurant, to provide for orderly change of management and disposition of personal property and to otherwise protect Licensor’s interest.

59. Clause 15(b) of the Menai Licence Agreement provides that, upon the termination of the Menai Licence Agreement, all rights conferred on the Licensee cease forthwith, including the right to use the McDonald’s System.

Lease dated 6 November 2012 (the Menai Lease Agreement)

60. The third of the three relevant transaction documents is the Menai Lease Agreement, by McDonald’s Australia to Favotto, of the premises at which the Menai Restaurant is located for a term of 20 years at a monthly rent comprising a base rent of $10,000 and a percentage rent of 12.75% of Favotto’s gross sales (less the base rent) (cll 1.01, 1.02 and 2.01).

61. The Menai Lease recitals record that: McDonald’s Australia (the Lessor) is the registered proprietor of the land on which the Menai Restaurant is carried out (Recital A); Favotto is the owner or hirer of the facilities and equipment from which the Menai Restaurant is conducted (Recital B); Favotto wishes to lease and occupy the premises for the purposes of operating the premises as a restaurant and from which the McDonald’s System is carried out (Recital C); and McDonald’s Australia leases the premises from which the Menai Restaurant is carried on to Favotto (Recital D) .

62. Clause 1.03 of the Menai Lease Agreement (an essential term of the Menai Lease Agreement) provides that the:

Lessee shall use and occupy the Premises only for a McDonald’s System restaurant for the sale in conformity with the terms of the Licence of hamburgers, cheeseburgers, chicken, fillets of fish, apple pies, shakes, soft drinks, orange juice, coffee and French fried potatoes and such other items as may from time to time be permitted by Lessor.

63. Clause 7.03(a)(ii) of the Menai Lease Agreement provides that an “essential term” of the Menai Lease Agreement is that Favotto will “use and occupy the Premises in accordance with Clause 1.03”, such that “the breach non-observance or non-performance of anyone or more of such covenants [sic] terms and agreements shall be deemed to be a breach of a fundamental term of this agreement on the part of the Lessee to be observed and performed”.

Lakemba Restaurant

64. During the period from 1995 until the sale to Favotto in 2015, McDonald’s Australia operated a McDonald’s restaurant at Lakemba. Again, therefore, this was a “McOpCo” restaurant business.

65. As adverted to above, the relevant transaction documents leading up to the transaction mirror in large respects those in relation to the Menai Restaurant transaction, although with some differences.

66. A “Seller’s Package” document was prepared by McDonald’s Australia during 2015 for the proposed sale of the existing McDonald’s restaurant business at Lakemba to Favotto.

67. By letter dated 5 March 2015 from McDonald’s Australia to Mr Favotto, the Lakemba restaurant business was valued by McDonald’s Australia at $4,975,000 (again based on past actual sales times with a numerical multiplier).

68. By letter dated 24 March 2015, McDonald’s Australia wrote to Mr Favotto regarding the handover of the Lakemba Restaurant, advising that McDonald’s Australia required a lump sum payment of $4,975,000 to it for “Purchase of Business”.

69. On 29 March 2015, McDonald’s Australia and Favotto executed the following documents (again, in broadly similar terms to those relating to the Menai Restaurant transaction, though with a number of differences that are, as relevant, noted below) for the sale of the Lakemba Restaurant business to Favotto:

1. a “Sale of Assets Agreement” (to which I have previously referred as the Lakemba Agreement) (I note here the change of descriptor from the earlier “Sale of Business Agreement”) by which McDonald’s Australia agreed to sell and Favotto agreed to buy the “Business” (defined to mean “the McDonald’s Restaurant carried on by [McDonald’s Australia] at the Premises”) and “the Assets” (defined to mean specified assets used in the Business) for the “Purchase Price” of $4,975,000 (inclusive of the written down value of Plant and Equipment) plus the “Stock Value” (cl 3.1);

2. a “Licence Agreement” (to which I have previously referred as the Lakemba Licence Agreement) by which McDonald’s Australia granted to Favotto a licence to adopt and use the McDonald’s System in the Lakemba Restaurant in consideration for an upfront “licence fee” of $60,000, an ongoing “service fee” of 5% of Favotto’s gross sales and an advertising contribution of not less than 4% of Favotto’s gross sales (cll 2.01, 3.01, 3.02 and 6.04); and

3. a “Lease” (to which I have previously referred as the Lakemba Lease) by McDonald’s Australia to Favotto of the premises at which the Lakemba Restaurant is located for a term of 20 years at a monthly rent comprising a base rent of $38,000 and a percentage rent of 14% of Favotto’s gross sales (less the base rent) (cl 1.01).

70. Relevantly, Recital F of the Lakemba Agreement (not mirrored in the Menai Agreement) records that the “[p]arties acknowledge and agree that any goodwill (including the McDonald’s Goodwill) is that of the McDonald’s Group and will not be sold to the New Franchisee.”

71. The definition of “Business” (cl 1.1(5)) in the Lakemba Agreement also provides (and, again, this does not appear in the Menai Agreement) that:

For the avoidance of doubt, any goodwill referable to the McDonald’s Restaurant (including, but not limited to the McDonald’s Goodwill) is that of the McDonald’s Group and will not be sold to the New Franchisee.

72. The term “[f]ranchise rights intangible”, as provided for in cl 1.1(3)(b), is again (as in the Menai Agreement) not defined in the Lakemba Agreement. There is, however, a similar provision to that in the Menai Agreement to the effect that the “Assets” which are assigned pursuant to cl 3.1 do not include the “Excluded Assets” defined in the same way as the Menai Agreement.

73. The term “McDonald’s Restaurant” is defined in the Lakemba Agreement with an additional sentence to the definition, being “[t]he right to operate the McDonald’s Restaurant is granted to a franchisee by the McDonald’s Group”.

74. Although on slightly different terms, cl 2.1 of the Lakemba Agreement again requires Favotto to enter into “such documentation as is required by McDonald’s”, being a licence and a lease.

75. On 1 April 2015, McDonald’s Australia prepared a “Handover File Note” for the Lakemba Restaurant, noting that it was handed over to Mr Favotto on 1 April 2015 and that various amounts were payable by Mr Favotto to McDonald’s Australia, including $4,975,000 without GST for “Purchase of Business”. On the same date, McDonald’s Australia prepared handover details for the current employees of the Lakemba Restaurant.

76. The Chief Commissioner notes that McDonald’s Australia’s general ledger recorded a decrease in McDonald’s Australia’s goodwill following the sale of the Lakemba Restaurant business to Favotto.

77. On 22 April 2015, McDonald’s Australia issued a tax invoice to Favotto, noting a payment of $4,975,000 without GST for “Purchase of Business”.

The Assessments

78. On 18 December 2014, the Chief Commissioner issued a “Notice of Investigation” to Favotto regarding state taxes, including stamp duty.

79. On 11 August 2015, the Chief Commissioner sent a letter to Favotto setting out the Chief Commissioner’s view as to why the Lakemba Restaurant transaction was dutiable and requesting further information from Favotto regarding the transaction.

80. On 28 September 2015, Favotto sent submissions to the Chief Commissioner regarding its stamp duty position on the Lakemba Restaurant transaction.

81. On 10 December 2015, the Chief Commissioner issued the Assessments to Favotto, in respect of the following dutiable transactions effected in whole or part by: the “Sale of Business Agreement” executed on 6 November 2012, being an agreement for the sale or transfer to Favotto of dutiable property including goodwill of the existing McDonald’s restaurant business at Menai as a going concern for $3,120,000; and the “Sale of Assets Agreement” executed on 29 March 2015, being an agreement for the sale or transfer to Favotto of dutiable property including goodwill of the existing McDonald’s restaurant business at Lakemba as a going concern for $4,975,000.

78. On 19 February 2016, Favotto lodged objections to the Assessments (the Objections).

79. On 2 and 16 December 2016, respectively, the Chief Commissioner disallowed the Objections in relation to the Lakemba Restaurant and Menai Restaurant Assessments.

Issues for determination

84. As noted above, the principal issue that arises in the present proceedings is as to whether there is dutiable property and, specifically, whether the transactions effected a transfer (or agreement for the sale or transfer) of the goodwill of the existing McDonald’s restaurant businesses at Menai and Lakemba to Favotto (which, in effect, the Chief Commissioner contends is the case) or merely the non-dutiable grant of new franchise rights to enable Favotto to continue the operation of the existing restaurant businesses at Menai and Lakemba (which, in effect, is Favotto’s case).

85. The Chief Commissioner has identified the following questions as arising for the purposes of determining that issue:

1. whether [McDonald’s Australia], as the person conducting the business of each restaurant at the time of the sale, owned goodwill in respect of that business;

2. if the answer to question (1) is yes, whether there was a transfer of that goodwill to [Favotto];

3. if the answer to question (1) is yes, whether the purchase consideration apportioned to the “Franchise Rights Intangible” was in reality an amount paid for the goodwill; and

4. If the answer to question (3) is no, whether duty is still payable on the transfer of the goodwill and goods (other than stock-in-trade).

86. Although Favotto identifies the issues in a somewhat more confined compass (that is, whether there is a transfer as such and whether, if so, it is a transfer of goodwill), there is in substance no dispute as to the proposition that if there is a transfer of goodwill to Favotto in respect of the Menai Restaurant and Lakemba Restaurant businesses then there is a dutiable transaction; and, if so, there is no challenge by Favotto to the interest component of the assessment (hence it is unnecessary here to consider the Chief Commissioner’s submissions as to the interest component of the Assessments).

Relevant legislation

87. At the time of the relevant transactions, s 8 of the Duties Act (which provides for the imposition of duty on certain transactions which relate to dutiable property) relevantly provided as follows:

8.   Imposition of duty on certain transactions concerning dutiable property

(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,

[…]

88. Pursuant to s 9, the duty charged on a dutiable transaction referred to in s 8(1)(b) “is to be charged as if each such dutiable transaction were a transfer of dutiable property.” Pursuant to s 10, the form of the dutiable transaction is immaterial such that the duty charged is payable “whether or not a dutiable transaction is effected by an instrument or by any other means.”

89. Dutiable property is defined in s 11, relevantly, as follows:

11.   What is “dutiable property”?

(1)   “Dutiable property” is any of the following:

(a)   land in New South Wales,

…

(g)   a “business asset” being, at any relevant time:

(i)   the goodwill of a business, if the business has supplied goods in New South Wales, or provided services in New South Wales, to a customer of the business during the previous 12 months […]

(h)   a statutory licence or permission under a New South Wales law,

[…]

(j)   goods in New South Wales, if the subject of an arrangement that includes a dutiable transaction over any dutiable property (other than intellectual property) elsewhere referred to in this section, not including the following:

(i)   goods that are stock-in-trade,

[…]

(I)   an interest in any dutiable property referred to in the preceding paragraphs of this section,

90. Sub-section 11(3) of the Duties Act provides that in the definition of “business asset” in s 11, “a reference to services provided to a customer includes a reference to anything done for a customer pursuant to a contractual obligation”.

91. Pursuant to s 12 of the Duties Act, a liability for duty charged by the Chapter arises when a transfer of dutiable property occurs but, if a transfer of dutiable property is effected by an instrument, then liability for duty charged arises when the instrument is first executed.

92. In the Dictionary to the Duties Act, “interest” is defined to include “an estate or proprietary right”; and “transfer” is defined to include “an assignment and an exchange”.

93. At the time that the relevant transaction documents were executed (the Menai Restaurant documents on 6 November 2012 and the Lakemba Restaurant documents on 29 March 2015), “business assets” (as defined in paragraph 11(1)(g) of the Duties Act) fell within the definition of “dutiable property”. Since 1 July 2016, a “business asset” is not dutiable property (see s 35 of the Duties Act). However, since the relevant transaction documents were executed prior to 1 July 2016, the issues in this proceeding are, of course, to be determined according to the legislation prior that amendment (and see s 35(2) of the Duties Act).

Relevant authorities

94. First, as to the concept of “goodwill”, Favotto has referred to the definition of the term in Butterworth’s Concise Legal Dictionary (3rd ed) and the explanation given by Lord Macnaghten in Commissioners of Inland Revenue v Muller & Co’s Margarine Ltd [1901] AC 217 (Muller) (at 223-224) as to “goodwill” being:

… the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. it is the one thing which distinguishes an old established business from a new business at its first start.

95. Both parties have had regard to the principles to be drawn from the decision of the High Court of Australia in Commissioner of Taxation of the Commonwealth of Australia v Murry (1998) 193 CLR 605; [1998] HCA 42 (Murry), confirmed in Commissioner of State Revenue (WA) v Placer Dome Inc [2018] HCA 59; (2018) 93 ALJR 65 (Placer Dome). In Murry, the issue had arisen as to whether an amount received on the disposal of a taxi licence was the proceeds of disposal of goodwill. By majority, Kirby J dissenting, the High Court held that it was not. Insofar as the plurality there found that a licence that allowed a person to carry on a business was not a source of goodwill, Favotto says that Murry is directly analogous to the situation in the present case (as to the agreement and the relationship between it and McDonald’s Australia).

96. In Murry, it was recognised (see at [22]ff per Gaudron, McHugh, Gummow and Hayne JJ) that the legal concept of goodwill has three different aspects (property, sources and value) and that “[w]hat unites [those] aspects is the conduct of a business” (noting, at [24], by way of example that much goodwill “derives from the use of trade marks or a particular site or from selling at competitive prices”). The High Court noted (at [25]) that “[m]any of the sources of goodwill are not themselves property” (for example, “the efficient use of the assets of the business, superior management practices and good industrial relations with employees”) though others (for example, the location of the business) will be; and (at [20]) that the attraction of custom is central to the legal concept of goodwill. The existence of goodwill thus depends (see at [12]) “upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.”

97. Relevantly, the High Court noted (at [23]) that goodwill is an asset of the business “because it is the valuable right or privilege to use the other assets of the business as a business to produce income … the right or privilege to make use of all that constitutes ‘the attractive force which brings in custom’”; that goodwill is “correctly identified as property … because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it”; and (at [30]) that goodwill is a right or privilege that is “inherently inseverable from the business to which it relates”. It was therefore concluded that the taxi licence was merely an item of property the value of which was not dependent on the present existence of a business; and, therefore, the majority held that the taxi licence contained no element of goodwill (see at [68]).

98. At [51], the plurality said:

Where the goodwill of a business largely derives from using an identifiable asset or assets, the goodwill of the business, as such, when correctly identified, may be of small value. That is because the earning power of the business will be largely commensurate with the earning power of the asset or assets. If the goodwill of a business largely depends on a trade mark, for example, and the trade mark is fully valued, the real value of goodwill can only reflect a value that is similar to the difference between the business as a going concern and the true value of the net assets of the business including the trade mark. A purchaser will not pay twice for the same source of earning power. The purchaser will not pay a sum that represents the earning power of the trade mark and also a sum that represents the earning power of the business….

99. Thus, the High Court said (at [24]) that the “goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it”; that “goodwill is a quality or attribute that derives, inter alia, from using or applying other assets of the business”; and (at [30]) that “[t]hat which can be assigned and transferred from the business [for example, a trade mark] may, while it is connected to the business, be a source of the goodwill of the business but cannot logically constitute any part of the goodwill of the business”.

100. Similarly, Barwick CJ observed in Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 that goodwill “cannot be dealt with separately from the business with which it is associated”.

101. In Placer Dome, the High Court confirmed (see at [52]-[76]; [91]) the approach taken in Murry, distinguishing the legal definition of goodwill from the accounting concept of goodwill. A plurality of the High Court (Kiefel CJ, Bell, Nettle and Gordon JJ) in a joint judgment, there rejected the contention that goodwill for legal purposes should be treated as synonymous with going concern value. Gageler J (agreeing in the result) also distinguished between “goodwill” and “going concern value” (see at [171]). At [91], the plurality concluded that goodwill for legal purposes:

... extend[s] to those sources which generate or add value (or earnings) to the business by attracting custom, whether that be from the use of identifiable assets, locations, people, efficiencies, systems, processes, or techniques of the business, or from some other identifiable source. And those sources of goodwill for legal purposes have a unified purpose and result – to generate or add value (or earnings) to the business by attracting custom. [Emphasis in original]

102. Finally, I note that in Sturt Football Club Inc v Commissioner of State Taxation [2010] SASC 279; (2010) 80 ATR 532 (Sturt), White J said (at [35]) that “the distinctive nature of goodwill is that it cannot be dealt with separately from the business with which it is associated … [though this] does not necessarily mean that the means by which goodwill is transferred from one person to another must be exactly the same as the means by which the other assets of the business are transferred”. It was there noted (at [37]) that “the question of whether one person has taken over or succeeded to the business or part of the business of another is a mixed question of law and fact” (citing PP Consultants Pty Ltd v Finance Sector Union of Australia (2000) 201 CLR 648 at 655; [2000] HCA 59); (at [47]) that, “[i]n determining whether one person has taken over the business of another courts generally look to the reality of what was achieved by the agreement”; and (at [47], quoting Widgery J in Kenmir Ltd v Frizzell (1968) 1 All ER 414) that, in deciding whether a transaction amounts to a transfer of a business, “regard must be had to its substance rather than its form, and consideration must be given to the whole of the circumstances, weighing the factors which point in one direction against those which point in another.” Widgery J (at 417) emphasised (and which the Chief Commissioner here emphasises) that “the vital consideration is whether the effect of the transaction is to put the transferee in possession of a going concern, the activities of which he could carry on without interruption”.

103. In Sturt, it was held (at [54]) that “the very nature and extent of the assets transferred … [indicated] that even without an express transfer (or licensing) of the goodwill, or the use of the business name, [the purchaser] had acquired the business …”; and (at [57]) that “[t]he fact that the parties agreed on the payment of a substantial licensing fee [did] not alter the validity of the conclusion that goodwill was transferred.” It was said (at [57]) that the parties cannot by their agreement “deny the reality of what had occurred …nor is the question to be determined only by reference to the particular means adopted by the parties for payment of consideration…”.

104. Second, as to the nature of the rights under a franchise agreement, reference was made to the decision of the Full Court of the Federal Court (Lockhart, Wilcox and Gummow JJ) in Ranoa Pty Ltd v BP Oil Distribution Ltd & Anor (1989) 91 ALR 251 (Ranoa), a matter involving a franchise governed by the Petroleum Retail Marketing Franchise Act 1980 (Cth). In Ranoa, it was held that, on the expiry or termination of a franchise agreement, the franchisee has no right to continue operating the business and no right (in the absence of specific provision in the agreement to the contrary) to any goodwill that may have accrued to the business whilst it was operated by the franchisee. Their Honours noted (at 256) that, under the general law, “the benefit of goodwill built up by reason of a tenant carrying on a business from the leased premises enures to the benefit of the landlord at the expiration of the term” (citing Lord Coleridge CJ in Llewellyn v Rutherford (1875) LR 10 CP 456 at 467) and that, “in the absence of any special covenant and any other applicable statute, upon the tenancy coming to an end, the benefit of any goodwill of that character would be lost to the tenant and would enure to the benefit of the lessor” (see at 257).

105. Third, as to the concept of “transfer”, emphasis is placed by Favotto on the decision of the Victorian Court of Appeal in Coles Myer Limited v Commissioner of State Revenue (Vic) 98 [1998] 4 VR 728 (ColesMyer), where consideration was given as to whether a transfer from a shareholder to a company as a result of a share buy-back transaction was a “transfer of shares” for the purposes of the revenue legislation there being considered. The majority (Winneke P and Ormiston JA, Phillips JA dissenting) held that there was no “transfer”.

106. At 730, Ormiston JA said:

… There are two parties to every transfer, the transferor who disposes of all rights in the transferred property and the transferee who receives or acquires them so as thereafter to have the power to exercise effectively the same rights in the future. For an instrument properly to be characterised as a “transfer” one must be able to find that the property has passed from the transferor to transferee so that the property is vested in a transferee who for all practical purposes is then capable of exercising the same rights as were capable of being exercised by the transferor before the transfer was executed. [Emphasis added]

107. At 740, his Honour said:

Although the word “transfer” is not a term of art and is a word of wide connotation, to my way of thinking it is the passing of rights to another, so as to vest them in that other person, which is essential to a transfer, properly understood. It is not a mere disposition, a ridding oneself of the right or interest, it is the vesting in the transferee of that right or interest, precisely or substantially, which is necessary to effect a transfer, as ordinarily understood in the law.

[…]

Thus, however broadly the word “transfer” be defined, it requires at least that the transferee should, at the end of the transaction, have substantially the same right or interest in the subject matter as did the transferor before the transfer took place… [Emphasis added]

108. The decision of Chesterman J in McDonald’s Australia Holdings Ltd v Commissioner of State Revenue (Qld) [2004] QSC 357 (McDonald’s Australia Holdings) is also of relevance in this context. There, what might be said to be the reverse of the current situation was considered (that was, being the position on termination or cessation of the licence or franchise arrangement). The issue was whether duty was payable under the Stamp Act 1894 (Qld) on the termination of a licence to use the McDonald’s System and lease of the premises for two McDonald’s restaurants in Queensland. Following the termination, the taxpayer commenced to operate each restaurant itself at the same premises with the same employees. One of the provisions relied on by the Commissioner was s 54A of the Stamp Act which applied to a transaction if a person acquired or agreed to acquire a business. Each termination was effected by a “Deed of Extinguishment of Rights” of the licence and a “Deed of Termination” of the lease, by which the licensee’s right to use the McDonald’s System in each restaurant was extinguished (rather than transferred to the taxpayer) (see particularly at [88]).

109. Chesterman J held that the transaction did not involve the transfer of the business or the assets of the business held by the licensees which allowed them to carry on the business. At [61], his Honour said:

It follows that the applicants cannot have become the transferee of the licensee’s goodwill, or have otherwise acquired the goodwill, unless it acquired those assets which the licensees held prior to 31 January 1994 and which allowed them to carry on the business, which is said to have given rise to the goodwill. In practical terms that means the licences, or rights, to use the McDonald’s System’s trademarks, trade names and service names. Without these licenses the licensees would not have conducted their businesses which were McDonald’s Restaurants. They may have needed other things as well, but the licenses were the essential ingredient. Customers are attracted to a McDonald’s Restaurant because of the reputation of the McDonald’s name and the fact that enforced compliance with the detail of the McDonald’s System means that on the occasion of every visit and in every McDonald’s restaurant the quality and choice of food and the quality of service and standard of fit-out will be the same. There is a uniformity· of product, service and milieu in every McDonald’s restaurant. This uniformity, which the public confidently expects to experience at a McDonald’s restaurant, comes from the adherence by each restaurant proprietor to the McDonald’s System including the use of trademarks, trade names and service names. It is the right to use these items of intangible property which generates goodwill. For this reason it is not necessary to decide whether the licensees had any goodwill capable of transfer.

110. At [70], his Honour said that “[t]he applicants can only have acquired the businesses if they acquired the licensees’ rights to use the McDonald’s [s]ystem. That was the essence and basis of the businesses.” Chesterman J concluded that no acquisition of the licensee’s business had occurred because the taxpayer did not acquire the licensee’s rights to use the McDonald’s System (as those rights were extinguished rather than transferred) (see [70]-[71]).

Favotto’s submissions

111. Favotto’s principal contention is that s 8 of the Duties Act is not engaged upon the execution of the relevant transaction documents because: there is no “transfer”; and there is no “goodwill” that was transferred to Favotto. Favotto contends that: the goodwill subsists in the McDonald’s System, which itself is owned by McDonald’s Corporation; that McDonald’s Corporation has licensed that goodwill to McDonald’s Australia, which then sub-licensed the goodwill (via each of the licence agreements) to Favotto as the franchisee. It is said that the relevant transaction documents do not contemplate a transfer of “goodwill” and that at no point was goodwill “transferred” from the vendor (McDonald’s Australia) to the purchaser (Favotto).

112. Favotto points to Recital B of the respective licence agreements, which it says contemplates that the “‘goodwill’ is with the McDonald’s System” (again, which “system” is licensed by McDonald’s Corporation, to McDonald’s Australia, and in turn sub-licensed to the franchisee – see cl 2.01 of the licence agreements). Favotto points to cl 10 of each of the licence agreements and says that, if anything is to be assigned or transferred by the franchisee, it is the rights under the licence agreements and nothing more.

113. Favotto argues, quoting Muller, that the transaction documents recognise that the “advantage of the good name, reputation and connection of a business” (that is, the “McDonald’s goodwill”) is held by McDonaId’s Corporation; and says that that goodwill is never “transferred” to any other party; rather, it is licensed (again, by McDonald’s Corporation to McDonald’s Australia) and then sub-licensed (again, by McDonald’s Australia to the franchisee). In other words, Favotto contends that there is a licence, but no transfer, of goodwill. Favotto argues that the business of “McDonaId’s” is that of McDonaIds Corporation (as licensed to McDonald’s Australia), and not that of the purchaser under the respective agreements, such that the vendor (McDonald’s Australia) has no goodwill that is transferred when the restaurant business and assets are transferred to it.

114. It is said by Favotto that, here, the franchise agreement is a licence authorising the franchisee to conduct a “Business” (that being of McDonald’s Corporation) pursuant to the respective franchise agreement; that such a licence is not “goodwill”, but a separate asset; and that the term “Franchise rights intangible” is appropriate to describe that (separate) asset.

115. Favotto argues that the relevant franchise documents (namely, the respective leases and the licences) give the source of the rights for the (proposed) new franchisee to carry on the particular McDonald’s Restaurant. Favotto says that there is no “transfer” of the respective licence agreement as between the outgoing and the new franchisees; and that the only transfer pursuant to the agreements that occurs is in relation to the “Business” and the “Assets”.

116. As to the “transfer” argument, viewing the relevant transaction documents as a whole, Favotto submits that there is no “transfer” of any “goodwill” pursuant to those documents; rather, there is an agreement to transfer plant and equipment, and then the entry into a new franchise agreement in favour of the incoming franchisee (here, Favotto). Meanwhile, the Chief Commissioner submits that the terms of the respective transaction documents were designed to ensure that Favotto would be put in possession of the existing McDonald’s restaurant businesses as going concerns, the activities of which it could carry on without interruption, and hence there was a transfer of the goodwill associated with the business.

117. Favotto argues that all the licences allow are for it, as franchisee, to operate under the McDonald’s style (at each of the two restaurants), using the McDonald’s System. Favotto draws a comparison between the trade mark example that was posited in Murry and the McDonald’s System in the present case, arguing that here (as with the trade mark in the High Court’s example, where the value of the goodwill in addition to the trade mark was minimal), in relation to the franchise rights, much of the value paid by it is referrable to the contractual rights that are being created as between McDonald’s Australia and any incoming franchisee (those rights allowing a purchaser to carry on, and use, the McDonalds’ System at the relevant restaurant).

118. Emphasis is placed on the recognition in Murry that, although goodwill may have several different sources, it is a unified and indivisible item of property (see Murry at [37]; [54]); that it has no existence independent of the conduct of a business and cannot be severed from the business that created it (see at [36]); and that it has been considered a right or privilege to use all of the assets of a particular business (see at [23]).

119. Favotto argues that even if the Menai Restaurant and the Lakemba Restaurant over which the franchises were granted by McDonald’s Australia had “going concern value”, representing the ability of a business to generate income without interruption (referring to Placer Dome at [98]) or “the continuity of organisation of the business” (referring to Placer Dome at [176]), it is a separate asset from goodwill.

120. As to what in fact McDonald’s Australia did transfer under the Menai Agreement and Lakemba Agreement, Favotto says that there is no evidence that the personnel taken over by Favotto generated or added value (or earnings) to the business by attracting custom to the business (referring to the similar position in relation to personnel considered at [110]-[111] and at [142] in Placer Dome).

121. Favotto argues that value should not be attributed to goodwill if it actually inheres in a separate asset which is a source of goodwill, such as a trademark or another intangible asset (referring to [81] and [83] of Placer Dome); and says that, in the case of a McDonald’s restaurant, the value inheres in the contractual right to use the McDonald’s owned trade marks and systems for food quality, preparation and delivery, which create the reputation and expectations that draw in the customers.

122. In that regard, Favotto contends that the “goodwill” which subsists in the McDonald’s “Restaurants” (which the McDonald’s franchisees operate) subsists in the McDonald’s System, which is licensed by a franchisee from McDonald’s Australia, pursuant to the particular licence agreement. It says that the “attractive force that brings custom and adds value to the business” is merely licensed by the franchisees; that there is no “transfer” of such force (that is, goodwill); rather, the goodwill is retained by McDonald’s Corporation.

123. Favotto says that the requirements for a transfer (as explained in Coles Myer and outlined above) are here not satisfied for two principal reasons: first, because the present case is not one in which there is a transfer of existing rights; rather, it is the creation of new contractual rights (referring to Sun World International Inc v Registrar, Plant Breeders’ Rights (1998) 87 FCR 405 (Sun World International) at 406 per Burchett J for the proposition that a sale involves a transfer and to AFA v Garendon Investments Pty Ltd (1995) 37 NSWLR 221 (AFA) at 230 where Sheller JA referred to a sale as involving a transfer of some pre-existing property, not a transaction in which the interest the subject matter of the contract comes into existence); and second, because there is no equivalence of rights as between McDonald’s Australia and Favotto (see T 10).

124. As to the first, it is said that there was no pre-existing franchisee for either of the two restaurants and that what occurred was that McDonald’s Australia decided to sub-licence the rights it had from the McDonald’s Corporation by way of a fresh transaction in favour of a franchisee (here, Favotto). It is submitted that this is not the transfer of existing rights; but rather the creation of a new set of rights by way of a franchise or sub-licence from McDonald’s Australia.

125. As to the second, it is submitted that Favotto does not acquire any goodwill but that, even if it were assumed that there was some kind of transfer of goodwill, there is no equivalence of rights to make this a transfer at law (referring to Ranoa). Favotto argues that there is a “very fundamental asymmetry” in the position between it and McDonald’s Australia in this respect, in that it says that if it has “acquired” anything by way of goodwill, it will be lost on expiry or earlier termination of the respective franchise agreement, and the goodwill will then remain in the franchisor (McDonald’s Australia). It is noted that there is no “countervailing right” which gives Favotto any goodwill beyond the existence of the particular licence agreements (and that the two licence agreements expressly rule out such a possibility).

126. As a result, it is submitted that the relevant transaction documents do not evidence or effect a transfer of dutiable property, with the result that the Assessments ought to be revoked.

Chief Commissioner’s submissions

127. The Chief Commissioner places significance on the fact that Favotto’s position in these proceedings regarding goodwill conflicts with the position of McDonald’s Australia (the vendor under both restaurant transactions) in that McDonald’s Australia recognises an increase in its goodwill when it purchases a restaurant business from a franchisee and a decrease in its goodwill when it sells a restaurant business to a franchisee. It is noted, in this regard, that McDonald’s Australia’s financial reports state that “[t]he Company’s goodwill primarily results from purchases of McDonald’s restaurants from franchisees”.

128. The Chief Commissioner emphasises that goodwill may be derived from more than one source. The Chief Commissioner says that it does not follow from the fact that goods or services are sold under a well-known brand which is protected by a registered trade mark that the only source of the goodwill is the registered trade mark (and that, on a sale of the business without the registered trade mark, the goodwill referable to other sources will be transferred to the purchaser).

129. Reference is made, by way of example, to Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593, (2019) 370 ALR 371, which concerned the sale of the Kraft peanut butter business but without the Kraft brand (which was a registered trade mark). O’Callaghan J refused an application to restrain the purchaser from using the get-up or trade dress associated with the Kraft peanut butter product (an unregistered trade mark) on the basis (accepting that there were a number of sources of goodwill, not only the Kraft brand) that the sale of the business to Bega had carried with it the goodwill associated with the “trade dress” (the unregistered trade mark comprising the get-up) even though the registered trade mark was not transferred.

130. In contrast to the case considered by Chesterman J in McDonald’s Australia Holdings, the Chief Commissioner says that, in the present case, Favotto did acquire, through the relevant transaction documents, all the assets which McDonald’s Australia held prior to the execution of those documents in the conduct of the business of each restaurant, including the rights to use the McDonald’s System, trade marks and other intellectual property.

131. The Chief Commissioner argues that where a business is sold, its goodwill is also sold even though not expressly mentioned; and that a purported exclusion of the goodwill from the assets transferred to the purchaser will be ineffective (referring to ACI Australia Ltd v Glamour Glaze Pty Ltd (1988) 11 IPR 269; [1988] ATPR 40-868, where Lockhart J considered the effect of a provision of that kind in a sale of business agreement and held that the purported exclusion provision was ineffective).

132. The Chief Commissioner notes that, where there has been a transfer of goodwill of a business, this enables the purchaser to represent to the world that he or she is the successor of the business of the vendor (reflecting the fact that goodwill is the legal right or privilege to conduct a business in substantially the same manner and by the same means that have attracted custom to it); and further, that because the vendor will not be permitted to derogate from his or her grant, the purchaser will be able to restrain the vendor, through an express or implied covenant, from soliciting the customers of the business.

133. In the present case, the Chief Commissioner argues that, on a review of the relevant facts and the relevant transaction documents, all forming part of the one overall transaction, the business conducted at each restaurant and its associated goodwill was transferred by McDonald’s Australia to Favotto.

134. The Chief Commissioner refers to the relevant transaction documents (which I have outlined above), and other documents in evidence, by which it is said that Favotto was put in possession of the existing McDonald’s restaurant businesses as a going concern, the activities of which it could carry on without interruption. The Chief Commissioner says that, while there is no express transfer of goodwill of the Business to Favotto, as a consequence of the terms of the respective agreements and the very nature and extent of the assets acquired, it follows that (even without an express transfer of goodwill) Favotto acquired the “Business” and the associated goodwill of the “Business” in respect of each of the restaurants.

135. The Chief Commissioner, in particular, points to the following matters about the transactions.

136. First, that the definition of “Assets” (see cl 1.1(3) in the Menai Agreement) excludes the “Excluded Assets” (which are defined in cl.1.1(17) to include, relevantly, the “McDonald’s Intellectual Property”, the “McDonald’s Confidential Information” and the “McDonald’s Goodwill”). The Chief Commissioner notes the definitions of “McDonald’s Intellectual Property” and “McDonald’s Confidential Information” and says that these are the subject of the licence conferred under the licence agreements (see, in particular, cl 5.02 and 5.03). The Chief Commissioner argues that the “McDonald’s Goodwill” (defined in cl.1.1(24)) is not a reference to the goodwill of the “Business” (that is, “the McDonald’s Restaurant carried on by the Vendor at the Premises”); but rather, to the “goodwill” included in the “McDonald’s Intellectual Property”.

137. The Chief Commissioner accepts that it is not uncommon to refer to the goodwill, in the sense of the reputation, attaching to a registered trade mark. However, it is said to be a misnomer to refer to goodwill attached to other property, because goodwill attaches only to a business (as the High Court explained in Murry). Hence, it is said that “McDonald’s Goodwill” is not, and cannot be, a reference to goodwill of the business in which the relevant intellectual property is used.

138. Second, the Chief Commissioner says that the grant of the “franchise rights” was facilitative of McDonald’s Australia transferring each of the relevant businesses and attendant goodwill to Favotto as going concerns. It is noted that it was a condition precedent under cl 2 of the respective agreements that the sale and purchase of each of the “Business[es]” and “Assets” was subject to Favotto entering into such documentation as was required in connection with the McDonald’s franchise, being each of the licence agreements and leases.

139. In this regard, it is submitted that all the documents effected a “single, integrated and indivisible” (quoting Commissioner of State Revenue v Lend Lease Developments Pty Ltd (2014) 254 CLR 142; [2014] HCA 51) transaction, the effect of which was (as already noted) to put Favotto in possession of the existing McDonald’s restaurant business at each location conducted by McDonald’s Australia as a going concern, the activities of which it could carry on without interruption, such that (the Chief Commissioner argues) the goodwill of that business was transferred (and not merely licensed) to Favotto.

140. Relevantly, it is said that the goodwill of McDonald’s Australia’s business was: the product of combining and using the tangible, intangible and human assets of the business such that custom was drawn to it, including, for example, the location of, and facilities at, the restaurant, the systems used in the business and the employees who served customers; and evidenced by the business generating earnings before and after its sale. Reliance is placed on Mr Favotto’s affidavit in which he deposes that :

... the lease and licence from [McDonald’s Australia] under the franchise allow me to combine [McDonald’s Australia’s] site, systems, intellectual property and goodwill (its widespread public recognition and reputation that attracts customers), with my management expertise and experience, to generate much higher cash flows

[…]

[and that] by substantially improving the sales turnover and cutting costs [...] Favotto enjoys approximately 60% of the higher cash flow after paying [McDonald’s Australia] service fees (under the licence) which are calculated as a percentage of gross sales and rent (under the lease) which includes a turnover rent component calculated as a percentage of gross sales minus base rent ...

141. It is submitted that these statements relevantly illustrate the important dichotomy between McDonald’s Australia as: licensor of the McDonald’s System in Australia to third party operators of McDonald’s restaurants (such as Favotto), from which it derives an upfront fee as well as ongoing fees (or royalties) based on a percentage of the restaurant’s future sales; and as vendor of site-specific McOpCo-operated restaurant businesses to third party operators (such as Favotto) for a lump sum purchase price based on the restaurant’s past actual sales. That is, the Chief Commissioner argues that, at the date of each transaction, McDonald’s Australia operated two distinct types of businesses in Australia, each type having its own separate and distinct goodwill, those being: the business of licensing the McDonald’s System to franchisees who operate McDonald’s restaurants; and the operation of McDonald’s restaurants at specific sites (such as Menai and Lakemba), with each site, it is said, being a separate business with its own goodwill.

142. It is noted that those restaurants are not uniform in their features, as illustrated in the present case by the differences between the Menai Restaurant and Lakemba Restaurant. The Chief Commissioner says that both the franchisee and franchisor are conducting separate businesses each having its own, separate goodwill. It is submitted that Favotto has the onus of proof in relation to whether McDonald’s Australia owned goodwill in connection with the restaurant business which it operates, and that it has failed to discharge that onus.

143. Third, it is said that the Menai Agreement and Lakemba Agreement each leave a substantial portion of the purchase price for the “Assets” unallocated. The Chief Commissioner notes that Favotto’s financial statements attribute it to “Franchise Intangibles” (not to “goodwill”). The Chief Commissioner says that it is not clear what comprises the “Franchise rights intangible” nor in what sense they are properly capable of being owned by McDonald’s Australia and transferred to Favotto.

144. The Chief Commissioner says that the meaning sought to be attributed to the item by Favotto (in correspondence responding to a request for particulars and in its submissions on the present hearing) takes the matter no further. In the response to the request for particulars, Favotto stated that:

The taxpayer is a franchisee. It enters into a franchise agreement with the franchisor, McDonalds Australia. The franchise agreement gives the franchisee the intangible right to operate (ie licence/franchise) a McDonalds Restaurant for the term of the franchise.

The franchisee’s intangible franchise right under the franchise agreement leads to it being granted certain other intangible rights under a suite of franchise documents from the franchisor (which you have) as well as acquiring other rights at law, such as pursuant to the Franchising Code of Conduct (which we hope the Chief Commissioner would be aware of).

Significantly, there is no “transfer” of “goodwill” when a franchise agreement is entered into. A franchise is equivalent to a licence.

145. In submissions on the present application, Favotto submits that the reference to “Franchise rights intangible” describes the licences authorising the franchisee to conduct a “Business” pursuant to the respective agreements.

146. The Chief Commissioner submits that the above and other statements to like effect do not take the matter any further for two reasons.

147. First, the Chief Commissioner says that each of the Menai Licence Agreement and Lakemba Licence Agreement, which documents were executed contemporaneously with the respective Menai Agreement and Lakemba Agreement, contain all the “franchise rights” conferred on Favotto and, by its terms, sets out exhaustively (see cl 18.10) both what those franchise rights are and the consideration payable by Favotto for those rights. It is emphasised that the consideration is an upfront licence fee for the “grant” of the respective licences (see cl 3.01) and an ongoing “service fee” of a percentage of gross sales revenue (see cl 3.02). The Chief Commissioner contends that, “the parties having deliberately agreed the terms on which the rights relating to the franchise are conferred in the [licence agreements], including what consideration is payable for those rights, and [Favotto] cannot now resile from the consequences of those terms in seeking to characterise the payments under the [respective agreements].”

148. Second, it is emphasised that, “[i]n reality, there was no item of property owned by [McDonald’s Australia] as operator and vendor of the [two restaurant businesses] comprising a ‘Franchise Rights Intangible’ which was transferred (or capable of transfer) by [McDonald’s Australia] to [Favotto] under [the agreements]”. It is said that the licence agreements are, by their terms, a grant of new rights and is the sole source of Favotto’s right to adopt and use “the McDonald’s System” (a term defined comprehensively in the recitals to cover all the proprietary rights in relation to the McDonald’s brand and system); and that the agreements when they purport to transfer something called “Franchise Rights intangible” are in fact transferring “nothing and [are] a nullity”. It is said that what is left is “a very significant unallocated part of the purchase price which should be seen as referable to an asset which is actually transferred and to which no consideration has been allocated” (being the goodwill of the two restaurant businesses). The Chief Commissioner emphasises that that amount was consideration paid for the goodwill because it was received by McDonald’s Australia so as to move the transfer of the business, and therefore the goodwill, to Favotto.

149. It is submitted that the allocation of part of the purchase price to the “Franchise rights intangible” does not change the fact that the transaction effected the transfer of the goodwill of the existing McDonald’s restaurant businesses. The Chief Commissioner contends that the parties cannot, by their agreement, deny that reality; nor is the question to be determined only by reference to the particular means adopted by the parties for the payment of consideration. The Chief Commissioner argues that, given the absence of any adequate explanation as to that to which the so-called “Franchise rights intangible” relates, this should be treated as a surrogate for the goodwill of the Business.

150. Further, it is said that even if no consideration was paid for the transfer of goodwill, it would not follow that no duty is payable. It is noted that goodwill will be transferred on the sale of a business even if there is no consideration paid for it and it has nil or nominal value. The Chief Commissioner says that there would, in this situation, be a dutiable transaction comprising the transfer of goodwill and goods (relevantly, the Plant and Equipment) and that duty would be payable on the dutiable value of those items of dutiable property.

151. Finally, it is said that nothing turns on the accounting treatment of the purchase price in the Favotto’s financial statements (which allocated an amount to franchise intangibles, as opposed to “goodwill”); rather, that the “‘Purchase Price’” (plus Stock Value) was the consideration which moved the dutiable transaction in respect of the “‘dutiable property’” (including goodwill, but not stock-in-trade), such that duty was chargeable on that amount.

152. Therefore, it is submitted that the Chief Commissioner correctly assessed the respective transactions for duty on the basis that they effected a “dutiable transaction” in respect of the “dutiable property” of the existing McDonald’s restaurant businesses, comprising the goodwill, goods (plant and equipment but not stock-in-trade) of the business; and that the duty assessed under the Assessments should be confirmed.

153. Insofar as the Lakemba Agreement is concerned, the Chief Commissioner points to the following further matters about the transaction.

154. First, that the label the parties gave to the “Sale of Assets Agreement” (as compared to the “Sale of Business Agreement” for the Menai Restaurant) is not conclusive of its nature. It is submitted that this label is inconsistent with the substance of that agreement as effecting the sale of an ongoing business and that the label should be rejected (it being said to be contradicted by cl 3.1 of that Sale of Assets Agreement).

155. Second, that the Sale of Assets Agreement purported to exclude the sale of goodwill. In this regard, reference is made to Recital F of the agreement by which the parties acknowledged and agreed that any goodwill (including the “McDonald’s Goodwill”) “is that of the McDonald’s Group and will not be sold to the New Franchisee”. Further, it is noted that under cl.1.1 (5) of the agreement, “Business” was defined to mean “the McDonald’s Restaurant carried on by the Vendor at the Premises”; and went on to state “[f]or the avoidance of doubt, any goodwill referable to the McDonald’s Restaurant (including, but not limited to the McDonald’s Goodwill) is that of the McDonald’s Group and will not be sold to the New Franchisee”.

156. The Chief Commissioner contends that the purported exclusion of goodwill under the Lakemba Agreement was ineffective, as a matter of law, as goodwill cannot be dealt with separately from the business with which it is associated. In this regard, it is said that the terms of cl 3.1 show a clear intention to sell the “Business” and that this (and the very nature and extent of the assets acquired, as a matter of substance), in all of the circumstances, had the effect of putting Favotto in possession of the Lakemba Restaurant as a going concern (the activities of which it could carry on without interruption) such that that the goodwill of the business was necessarily transferred (and not merely licensed) to Favotto, even without an express transfer of the goodwill of the “Business”.

157. Third, the Chief Commissioner says that nothing turns on the accounting treatment of the purchase price in Favotto’s financial statements (which allocated the sum of $3,615,913 to “franchise intangibles”, as opposed to “goodwill”). Rather, the Chief Commissioner says that the “Purchase Price” under the Lakemba Agreement of $4,975,000 (plus Stock Value) was the consideration which moved the dutiable transaction in respect of the dutiable property (including goodwill, but not stock-in-trade), such that duty was chargeable on that amount.

Determination

158. As adverted to above, the dispute between the parties in the present proceedings is, in substance, a relatively confined one. Again, there is no dispute as to the proposition that the relevant transaction documents in each case are to be considered together as part of a single transaction for each restaurant, not as three separate transactions (see T 9.10). That is, a single transaction concerning the Menai Restaurant and a single transaction concerning the Lakemba Restaurant. Nor does there seem to be any dispute as to the proposition that the label that the parties have put on their transaction agreements is not conclusive.

159. The nub of the dispute, as it emerged in oral submissions, is as to whether there has been a relevant transfer (that is, a transfer of goodwill). The position of Favotto, quite simply, is that there has been no transfer at all (in the sense that the concept of transfer was explained in Coles Myer and other cases) because a transfer requires that there be the same rights as held by one party being passed to and vested in another party so that the second party holds the same right or interest as the first party did (see T 9.49).

160. Favotto’s argument is that a sale of business, in legal terminology, is indefinite in its time frame but that, after completion, the purchaser of the business is not subject to the control and direction of the vendor; whereas, that is not the case here. Hence, it is said that what has occurred is to be properly characterised, not as a transfer or sale, but as the creation of new rights where there is a fundamental difference in the nature of those rights as between the two parties (see T 10).

161. Even if, contrary to its principal contention, there is a “transfer”, Favotto says that it is a misunderstanding of the nature of franchising to say that there is any transfer of goodwill. Favotto maintains that McDonald’s Australia does not here part with any goodwill - it simply licenses the franchisee to use the goodwill that remains in McDonald’s Australia (see T 11). It is said that the going concern value which Favotto paid (some $3m in the case of Menai, and some $5m in the case of Lakemba) is the price that it pays for the expectation of a future income stream to be earned by using the McDonald’s System and the McDonald’s Intellectual Property but that it does not represent the value of goodwill. It is said that Favotto does not acquire goodwill; rather, it acquires, in an economic sense, an expectation of earning future revenue from using the McDonald’s System. Reference was made to Roussos v Commissioner of Stamp Duties (Tas) (1992) 23 ATR 336 where it was held that a licence authorising Roussos to operate and conduct the relevant restaurant business, including a right to use the business name, did not involve the transfer of goodwill.

162. By contrast, the import of the Chief Commissioner’s argument is the emphasis placed on the notion of “Franchise rights intangible” to which reference is made in the two agreements. In essence, the submission is that, in the absence of anything else to which it can be said to relate, this must relate to the acquisition of goodwill.

163. In the course of oral argument, what was put for Favotto (see at T 12.37) was that “Franchise rights intangible” means the right to operate a franchise (that being the right that Favotto obtains under the licence); or the right to conduct the franchise (see T 51.48). Favotto accepts that the item “Franchise rights intangible”, as so understood, overlaps with the rights granted under the licence (see T 51.49) but says that the overlap is not surprising since the relevant transaction documents, in the case of Menai and that of Lakemba, comprise single overarching transactions. Thus it is said that the consideration for the licence is the combination of the purchase price under the sale agreements (less the value of the plant and equipment) plus the licence fees that are payable (see T 52.1).

164. The Chief Commissioner, who accepts that those documents must be read together in the case of each restaurant, says that it is clear as to what consideration is being paid for the rights conferred under the each of the licence agreements and that the payment for “Franchise rights intangible” under a different agreement is for something else and not for the grant of rights for which the licence fee has already been allocated (see T 13/14). What is submitted is that the payment under the Menai Agreement and/or Lakemba Agreement is a payment for something other than the grant of the rights under the respective licence (and respective lease) and that the only thing it can be for is the goodwill of McDonald’s Australia in the business it is conducting at the restaurant. The submission was put as follows (see T 13):

… In particular, the agreement is carefully drafted to express the assets that are being transferred, including this thing called the franchise rights intangible, as my friend has put, there is actually no such thing as the franchise rights intangible which McDonald’s had to sell. They have rights under the licence agreement with the parent company, which entitled it to grant sublicences, but it didn’t have an asset which it was capable of selling to the purchaser.

So the proper construction of the agreement is that it’s to be seen as consideration for what it was capable of transferring, which was the goodwill of the business being operated at that restaurant by it, MAL [McDonald’s Australia], at the time of the sale and we say that there was - I mean, there was a preliminary question, as we point out, as to whether there was goodwill but, for reasons that we explain in our written submissions, there clearly was a business being conducted by MAL at the restaurant at each place and that that business operation had a goodwill and, on the basis that you can’t find anything else for which that part of the consideration is paid for, it should be seen as being paid for the goodwill of that business which is transferred by reason of the transaction under the sale of business agreement or sale of assets agreement.

Bearing in mind, in particular, apart from what actually happened, that the sale of business agreement and the sale of assets agreement clearly state that MAL is transferring a business. Clause 3.1 of each agreement states what is being transferred as the business and the assets.

[…]

… We say that at each McDonald’s restaurant, whether it’s operated by McDonald’s Australia Limited or by a franchisee, there is a business being conducted there and in the case of these two businesses which were being run by McDonald’s Australia Limited itself, it’s that business which is transferred to the purchaser, together with its goodwill, as part of a transaction under which the purchaser is conferred with all the rights necessary for it to continue that business as a franchisee.

165. During cross-examination of the head of restaurant finance working for McDonald’s in the USA, Mr Troy Fahey, the basis on which the purchase price under the respective transactions was calculated was elucidated (it being calculated by reference to annual gross sales revenue for the previous year from which a percentage uplift was applied, various expense items then deducted, the owner’s estimated draw then deducted, and a numerical multiplier then applied) (see T 40ff). That, however, simply explains the basis on which McDonald’s Australia set the proposed purchase price.

166. The decision of Chesterman J in McDonald’s Australia Holdings, which as I have indicated considered the reverse situation (where the franchisee had ceased the business and McDonald’s Australia had taken over the business), is instructive insofar as it indicates that nothing can have been transferred as such at the time of the initial franchise agreement (because, it if had, it would have been necessary for there to be some transaction by which the business was transferred back to McDonald’s Australia on termination of the franchise arrangements).

167. There was some contention as between the parties as to whether McDonald’s Australia has separate goodwill in each particular McDonald’s restaurant (which I understand to be the Chief Commissioner’s contention – see T 16.35) or whether the position is that there is no separation of goodwill restaurant by restaurant (that is, the goodwill is indivisible and has only one source, being the McDonald’s System and the uniformity which that imposes throughout Australia in all McDonald’s restaurants, as Favotto contends - see T 17.1).

168. In cross-examination of Mr Favotto, the different features of the Menai Restaurant and Lakemba Restaurant were explored (see T 28ff). I would accept that it is conceivable that the value that might be attributed to the goodwill of a McDonald’s restaurant business carried out in a particular location might differ from that at another (by reference to location or staffing or the like) even though there is uniformity of the McDonald’s System. Similarly, I accept that there are different sources that may give rise to goodwill in the operation of any particular business, though I find it difficult to see how any material value would be attributed by a purchaser of a McDonald’s business to goodwill wholly separate from sources attributable to the McDonald’s System and intellectual property (i.e., it is not obvious that there is a separate value attributable to goodwill sourced to the location or staff at a particular McDonald’s restaurant that could be separated from the value attributable to the goodwill sourced from the McDonald’s “brand” itself). In this regard, there is force to the argument for Favotto that the high turnover of staff suggests that this is not an identifiable source of goodwill separate from that of the McDonald’s System itself (see, for example, at T 62.43).

169. However, even assuming different sources of goodwill in existence in the present case, that does not of itself assist in determining what is captured, in the respective agreements by “Franchise rights intangible”. To some extent, the difficulty in attaching weight to the precise text of the contracts in that regard is that it seems, by reference to the Seller’s Package and Buyer’s Package prepared by McDonald’s Australia in each case, that the form of the documentation (and structure of the agreements), if not the content itself, is likely to have been something put forward by McDonald’s Australia (about which there may have been little scope for negotiation if this followed whatever structure was part of the overall McDonald’s System worldwide). In any event, whatever may have been the understanding within McDonald’s Australia as to the meaning of “Franchise rights intangible” is not to the point.

170. As Favotto submits, I consider that what is revealed on a consideration of the respective transaction documents read as a whole is that Favotto has acquired a limited licence to use the respective premises and the McDonald’s System for the purpose of running a McDonald’s restaurant (for a limited time and on strict conditions) at each of the premises. I consider it significant that, on the termination of the licence arrangement, there is no goodwill that enures to the benefit of Favotto; and, thus, Favotto has the temporary enjoyment of the goodwill of the relevant businesses (whether that be separate goodwill by reference to each business or an overall goodwill relating to the use of the McDonald’s System as a whole) but there is no transfer as such to Favotto of the goodwill in the sense that it would be free to deal with or dispose of this at the end of the licence arrangements. Relevantly, there is no provision in the agreements that contemplates that Favotto is required to transfer back to McDonald’s Australia anything that represents goodwill in respect of the business. Rather, in effect, Favotto’s right to make use of that goodwill simply comes to an end.

171. In that regard, I do not accept that the requirements for a transfer (in the sense explained in Coles Myer) are here satisfied. I am persuaded by the submissions for Favotto that, here, there is the creation of new contractual rights (in the sense discussed in Sun World International and in AFA). That is to say, the transactions the subject of this proceeding, properly understood, generated new contractual rights in the forms of limited licences in the sense which I have just described. The transactions do not (whether in terms or in their effect), convey any pre-existing proprietary rights.

165. How McDonald’s Australia treats the transaction in its books (here, as a matter of fact, the recording of a decrease in goodwill on its general ledger after the sale) is not an admission against Favotto; nor do I think that there is any significance to be attributed to the accounting treatment of the payments in question. Similarly, the label given by the parties to the respective agreements (in particular to the first being a “Sale of Business Agreement” and the second a “Sale of Assets Agreement”) is not determinative. The parties cannot, by adoption of a particular label, re-characterise the transaction in question. The “sale” of business is somewhat of a misnomer in my opinion, in the sense that the purchaser does not acquire some kind of indefeasible title to, or ownership of, the said business – rather, it is merely given the right to conduct the business under the terms of each of the licence agreements at the premises the subject of each of the respective leases.

166. That said, the fact that the parties (at least by the time of the Lakemba Agreement) had clearly turned their minds to the issue of goodwill and made clear their intentions in this regard is not irrelevant (and reinforces the conclusion that I have otherwise reached).

167. Certainly, those licences would carry with each the enjoyment of whatever goodwill has been engendered in relation to the relevant business up to the time of the licence (and, obviously enough, the licence holder will enjoy the benefit of whatever goodwill is generated thereafter by use of the McDonald’s System during the term of the licence arrangements). However, I am not persuaded that Favotto has in any sense become, through any transfer, the “owner” of that goodwill.

168. I accept that it is not clear on the face of the documents what is comprised by the term “Franchise rights intangible”. However, I am not persuaded that, simply because there is a separate payment by way of licence fees and the like under each of the licence agreements, it should be inferred that the purchase price payable under each of the “sale” agreements is a payment for goodwill.

169. There is to my mind an incongruity between the payment under the sale agreements of a very large sum of money to acquire a business and/or business assets and the purchaser only being able to use those assets and enjoy the benefits of the business during the term of the licence (and lease); since thereafter the terms of the assignment or sale agreements do not entitle the purchaser to any rights in relation to the business or the goodwill of the business of which it has had the benefit during the term of the licence (and any additional goodwill which it may have built up during the term of the licence). However, I accept that this does not necessarily assist in determining what was “transferred”, if anything, under the sale agreements. Similarly, any such perceived incongruity is explicable to the anticipated profits to be derived from the use of the McDonald’s System, and the running of the businesses, over the relevant period. It is also important, on this particular point, to have in mind that the relevant transaction documents are to be construed as part of a single transaction in the case of each of the two restaurants. As I have already adverted to, this approach was common ground between the parties.

170. Ultimately, the high point for the Chief Commissioner, it seems to me, is the fact that the “sale” agreements are drafted (see cl 3.1) as agreements for the sale of a business (in the case of Menai) or business assets (in the case of Lakemba) with which business any goodwill attached thereto would be inseverable; and that the agreements themselves refer to the item “Franchise rights intangible”. However, at least in the Lakemba Agreement, it is clear that the parties did not understand or intend the agreement to be transferring “goodwill” since they included a statement “[f]or the avoidance of doubt” in the definition of “Business” to make clear that any goodwill referable to the restaurant is not being sold. Therefore, and while again accepting that the labels used by the parties are not ipso facto determinative, I consider that the reference to “Franchise rights intangible” in the Lakemba Agreement at least must have been understood by the parties to be something other than the goodwill.

171. I note the Chief Commissioner’s argument that, by transferring the business, this carried with it necessarily the goodwill of that business and therefore it is not to the point that the agreement contains a statement to the effect that goodwill is not being sold (since it is inseverable from the business). However, as I see it, nothing has been “transferred” in the relevant sense; rather, what has been done is the creation of a contractual right or conferring of authority to operate the business and use of the McDonald’s System (with the benefit of the goodwill attached thereto). That this is the case makes sense when one considers, as I have already pointed out, that there is no obligation, on cessation or termination of the licence arrangements, for there to be any re-transfer to McDonald’s Australia of the “business” nor of any goodwill attached to the business at that time.

172. Contrary to the Chief Commissioner’s submission that, in the absence of any adequate explanation as to that to which the so-called “Franchise Rights Intangible” relates, this term should be treated as a surrogate for the goodwill of the business, I have concluded that Favotto has adequately explained, having regard to all of the above, what has in substance occurred through the transactions.

173. Similarly, while I accept that, even if it is said that no consideration was paid for the transfer of goodwill, if there was in fact a transfer of goodwill there would still be a dutiable transaction comprising the transfer of goodwill and goods (duty in that event being payable on the dutiable value of those items of dutiable property), I have concluded here that no goodwill has been “transferred” in the sense explained above.

174. I have thus concluded that there has been no “transfer” of goodwill such as to give rise to an obligation on the part of Favotto to pay duty.

Orders

182. For the above reasons, the plaintiff’s claims should be allowed. I see no reason not to make the ordinary order as to costs. I therefore order as follows:

1. Set aside the decisions dated 11 August 2015 and 2 December 2016 of the defendant in relation to the Sale of Assets Agreement dated 29 March 2015 (the Lakemba Agreement).

2. Set aside the decision dated 16 December 2016 of the defendant in relation to the Sale of Business Agreement dated 6 November 2012 (the Menai Agreement).

3. Revoke in full each of the Duties Assessments issued by the defendant and dated 10 December 2015.

4. Order the defendant to pay the plaintiff’s costs of the proceedings.

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Decision last updated: 26 February 2020