HSH Hotels (Australia) Ltd v Commissioner of State Taxation
[2005] SASC 39
•11 February 2005
SUPREME COURT OF SOUTH AUSTRALIA
(Miscellaneous Appeal: Civil)
HSH HOTELS (AUSTRALIA) LTD v COMMISSIONER OF STATE TAXATION
Judgment of The Honourable Justice Anderson
11 February 2005
TAXES AND DUTIES - STAMP DUTIES - WHAT TRANSACTIONS OR INSTRUMENTS ARE LIABLE - CONVEYANCE OR TRANSFER OF SALE
TAXES AND DUTIES - STAMP DUTIES - WHAT TRANSACTIONS OR INSTRUMENTS ARE LIABLE - MORTGAGE
TAXES AND DUTIES - STAMP DUTIES - ASSESSMENT AND AMOUNT PAYABLE INCLUDING FINES - SALES OF MIXED REALTY AND PERSONALTY
Appeal from assessment of stamp duty by Commissioner of Stamps - increase of assessment by Treasurer - whether permissible - meaning of 'modify' in s24 of Stamp Duties Act 1923 (SA) - nature of appeal - whether by way of rehearing or case stated - location of hotel the subject of the sale of paramount importance - whether any goodwill was transferred at time of sale - Commissioner did not include any goodwill in his assessment - consideration of goodwill as discussed in Murry's case - nature of hotel business - particular emphasis on bar and meal trade compared with other four or five star hotels - valuations prepared by experts - expert evidence as to value of real estate component in total consideration - preference for one method of valuation after considering valuation methodologies - capitalisation of rental and capitalisation rate - query if sufficient profit remaining for operator - discussion of s94 - avoidance of duty - Land Rich provisions - use of unit trust with substantial liabilities - management agreement with vendor not continued with purchaser - amount of goodwill small in any event - held: amount of goodwill not sufficient to cause variation in eighty percent threshold requirement pursuant to s94(1)(b) - Commissioner's assessment as varied by Treasurer not shown to be wrong - appeal dismissed.
Stamp Duties Act 1923 ss24, 94(1)(b), 100(2), referred to.
Commissioner of Stamps (SA) v Telegraph Investment Company Pty Ltd (1995) 184 CLR 453; Stevens v General Stream Navigation Company Ltd [1903] 1KB 890; Waitemata County v Local Government Commission [1964] NZLR 689; Souter v Souter [1921] 40 NZLR 716; Wellington District Law Society v Cummins [1998] 3 NZLR 363; Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; Cresswell Nominees Pty Ltd v Commissioner of State Revenue (unreported, VCAT, 7 November 2001); Commissioner of State Revenue v Uniqema Pty Ltd [2004] VSCA 82; Primelife (Glendale Hostel) Pty Ltd v Commissioner of State Revenue [2004] VSC 214, applied.
Kizleap Pty Ltd v Chief Commissioner of Stamp Duties (2001) 46 ATR 323; Telegraph Investment Co Pty Ltd v Commissioner of Stamps (1994) 62 SASR 259, discussed.
Builders Licencing Board v Sperway Constructions (Syd) Pty Ltd (1976) 135 CLR 616, considered.
HSH HOTELS (AUSTRALIA) LTD v COMMISSIONER OF STATE TAXATION
[2005] SASC 39Miscellaneous Appeal
ANDERSON J
Introduction
This matter comes before the court as an appeal from an assessment of stamp duty made initially by the Commissioner of Stamps (“the Commissioner”) on 8 May 1996. The assessment was increased by the Treasurer purportedly pursuant to s24(2) of the Stamp Duties Act 1923 (SA) (“the Act”). The Commissioner had proceeded to assess stamp duty in respect of the acquisition by the appellant (“HSH”) of the freehold and business of what was then known as the Ramada Grand Hotel at Glenelg (“Ramada”). The date of acquisition was 20 December 2004. Settlement took place on 31 January 1995.
The method of acquisition by HSH was to acquire all units in the Ramada Grand Unit Trust together with all shares in Grand Hotel (SA) Pty Ltd which acted as the corporate trustee of the trust.
A consideration of $44,615,100 was agreed between HSH and the vendor and this amount was finalised at $45,783,306 because as part of the agreement HSH undertook various liabilities of the vendor.
A structure was devised for the sale, namely, the transfer of the units in the unit trust for a nominal value of $1 with an assignment of the mortgages in the sum of $44,615,100.
The full details of the way in which the transaction proceeded are set out in paragraphs 59-64 later in these reasons.
The Commissioner had required a statement pursuant to s94(1)(b) of the Act but when HSH failed to provide such a statement the Commissioner assessed the duty pursuant to s100(2) of the Act. Section 94 states, inter alia:
“94 (1) If –
(a) a person –
(i) acquires a majority interest in a private company or scheme; or
(ii) acquires an interest which, together with any other interest acquired during the preceding period of two years, results in the person having a majority interest in a private company or scheme; or
(iii) acquires an interest which, together with any other interest acquired during the preceding period of two years, and the interest of a related person acquired during the preceding period of two years, is a majority interest in a private company or scheme; or
(iv) having a majority interest (including an interest which, together with the interest of a related person, is a majority interest) acquires a further interest in a private company or scheme; and
(b) the private company or scheme is, at the time of the acquisition, entitled to real property –
(i) the unencumbered value of which comprises not less than 80 per cent of the unencumbered value of all property to which it is entitled, whether in South Australia or elsewhere (other than property referred to in subsection (5)); and
(ii) the unencumbered value of which, insofar as the real property is situated in South Australia, is not less than $1,000,000,
the person must lodge with the Commissioner a statement in respect of the acquisition.”
The relevant part of s100 at the time of the transaction stated:
“100 (1) A statement required to be lodged under section 94 or 96 will, for the purposes of this Act, be taken to be an instrument executed by the person required to lodge the statement on –
(a) in the case of a statement under section 94 – the date of the relevant acquisition;
(b) in the case of a statement under section 96 – the date of the acquisition of the land use entitlement.
(2) If a person who is required to lodge a statement under section 94 or 96 fails or refuses to lodge the statement within the time allowed by this Part ––
(a) the Commissioner may make an assessment, on the basis of such information as is available to the Commissioner and such estimates as the Commissioner considers reasonable, of the duty that would have been chargeable if the statement had been lodged (and the duty will be recoverable from the person who is required to lodge the statement)…”
These sections were enacted to prevent duty being avoided where a purchaser acquired real estate through the vehicle of a company or unit trust which had substantial liabilities. Section 94 was enacted in 1990 and was referred to during argument as the “Land Rich” provisions. The heading of Part 4 of the Act, as it currently stands, is “Land Rich Entities”, and a “Land Rich Entity” is defined in the present section 94.
Appeal Procedure
Some time was occupied in an argument as to how in fact the matter should be dealt with in this court. The Act was amended with the repeal of s24 in 1996 and the inclusion of transitional provisions. In addition, a new Act, the Taxation Administration Act 1996 (SA), was enacted to deal with matters involved generally in the administration and running of appeals including notices of objection. It is common ground that the repealed s24 is the relevant section in this matter.
Although it is agreed by the parties that the repealed s24 is the relevant section, an argument was put that the contrast between s24 and the new section in the Taxation Administration Act is indicative of the fact that s24 did not include the power to increase an assessment. Under the new legislation, s88 allows the Minister to confirm or revoke the assessment or make an assessment in place of the assessment to which objection has been taken. Section 92 provides a right of appeal to the Supreme Court against the Minister’s determination, and in turn s98 confers upon the court on the appeal the like powers of confirmation and revocation or substitution of an assessment, as are conferred upon the Minister.
Therefore, it is argued that unlike the present legislation, the repealed s24 did not confer a power on the Supreme Court on an appeal to increase an assessment. I deal with this later.
As indicated, HSH was required to lodge a statement pursuant to s94 of the Act. When it failed to do so, the Commissioner assessed the duty under s100(2). This assessment was conveyed by way of letter dated 8 May 1996. HSH paid the duty on 17 May 1996. The amount paid was $1,783,357.50.
HSH then utilised its right of objection to the Treasurer regarding the Commissioner’s assessment under s24(1). This section provided that HSH had a right to appeal to the Treasurer within fourteen days of the Commissioner’s assessment.
The Treasurer ultimately increased the assessment to an amount of $1,814,080.00. HSH then appealed to the Supreme Court pursuant to s24(3).
It is accepted by the parties that this appeal is governed by s24(3) of the Act. There is a dispute as to the application of s24(4) of the Act. This subsection requires some comment. Section 24(4) provides that:
“For the purpose of any appeal to the Supreme Court under this section, the appellant may require the Commissioner to state and sign a case setting forth the question upon which his opinion was required and the assessment made by him.”
The section does not require HSH to follow the procedure outlined, and in this case HSH chose not to avail itself of that procedure. Instead it filed a notice of appeal with this court and then lodged a Statement of Agreed Facts pursuant to an order made by Perry J on 19 December 2003.
The question raised by HSH is whether HSH’s decision not to use s24(4) to bring the matter before this court as a case stated means that the matter proceeds as an appeal in the normal way.
I was referred to the case of Commissioner of Stamps (SA) v Telegraph Investment Company Pty Ltd (1995) 184 CLR 453. In that case the Commissioner had expressed an opinion without being requested under s23(1). Brennan CJ, Dawson and Toohey JJ discussed the operation of s24(4) and held that it must be read in light of s23(1).
That case concerned the assessment of stamp duty on a deed evidencing the transfer of shares in a company which was incorporated and maintained its share register in South Australia. The purchaser in that case lodged an objection to the assessment with the Treasurer on the grounds that first, the deed was executed in New South Wales, and secondly that both parties were incorporated in States outside South Australia. The Treasurer confirmed the assessment and an appeal was brought in the Supreme Court. The purchaser requested the Commissioner to state and sign a case pursuant to s24(4). The Commissioner agreed to consider submissions on the contents of the case stated but finally refused to include certain factual matters in the case stated which the purchaser sought to include. The purchaser then endeavoured to adduce affidavit evidence of those matters.
The High Court affirmed the decision of the Full Court comprising King CJ, Prior and Perry JJ, in its decision reported in (1994) 62 SASR 259. The Full Court held that s24 did not preclude the reception of evidence on a case stated. The court held that it was important that any discrepancies in the accuracy or adequacy of facts stated be resolved. The result otherwise would be that the court would be unable to review the Commissioner’s process or to remit the case for reconsideration.
The Full Court held that s24(4) and the case stated procedure should still apply whether or not the appeal relates to an assessment following a request made to the Commissioner for an opinion. Note the reasons of Perry J at 263.
Their Honours held that the court was not confined to a case stated procedure, and that it can and should allow any appropriate procedure that suits the circumstances of the case.
As to the procedural process, it was held by the Full Court at 270 that an appeal of the kind now in question is an appeal by way of rehearing de novo to be heard by a single Judge. Rule 97.04(1) of the Supreme Court Rules 1987 (“the Rules”) was referred to as was the case of Builders Licensing Board v Sperway Constructions (Syd) Pty Ltd (1976) 135 CLR 616.
It was held that the Commissioner had acted under s100(2) without the purchaser requiring or requesting that the Commissioner express an opinion on a statement under Part 4. The High Court upheld the Full Court’s reasoning that an appeal in such a case is by way of rehearing de novo by a single Judge pursuant to the Rules.
The High Court also held that the right to appeal under s24(3) is independent of the procedure outlined in s24(4), and agreed with the Full Court’s sentiment that the Court has the inherent power to govern its own proceedings.
McHugh and Gummow JJ, in concurring with the majority judgment, highlighted the words in s24(4), namely, that the appellant ‘may require’. This suggests that the power is exercisable at the appellant’s discretion. It does not mean that an appeal can then proceed by way of a case stated. Section 24(4) does not exhaust the procedural content of the right of appeal to the Supreme Court given by s24(3). The appeal avenue is still available to a taxpayer who does not make a s23(1) request. See pages 479-80 of the reasons.
In this matter, HSH argued that the Commissioner was bound by the agreed facts and could not resile from them.
In response, the Commissioner submitted that the Commissioner’s approach, as stated in the Agreed Statement of Facts, merely explained how the assessment was arrived at. It is not an approach that binds the Commissioner, nor is it a statement of how the Commissioner proposed to conduct its case. A letter dated 31 December 2003 on behalf of the Commissioner to HSH states:
“In response to Mr Griffin’s query, the Commissioner’s and the Treasurer’s assessments are important because they are the decisions against which an appeal is being brought. A statement of what they did is necessary to inform the Court of the decisions appealed against. The statement is not included as a statement of our case.”
In my opinion, HSH had the option of using s24(4) to bring the matter to this court as a case stated but did not exercise that option. Instead, it followed the procedure to bring the appeal by way of a hearing de novo. Whilst the Commissioner can not resile from what it has agreed occurred as part of the assessment, it is nevertheless at liberty to adduce new evidence, and it is not required to conduct its case in the same manner as the Commissioner proceeded on the assessment.
Treasurer’s Increase of Assessment – Meaning of ‘Modify’
It was argued that the repealed s24 did not confer any powers on the Supreme Court to increase the assessment. The Treasurer, in his review of the Commissioner’s assessment, decided to increase the duty and HSH argues that neither the Treasurer nor this court on appeal has the power to do that.
The Commissioner argues that, pursuant to s24(2), the Treasurer has power to modify, which suggests in turn that the Commissioner is not limited to reducing the amount of an assessment.
Section 24(2) reads:
“The Treasurer may, on receipt of a statement of grounds of objection, confirm or modify the Commissioner’s assessment and, if the assessment is reduced, any excess duty paid by the objector will be refunded together with interest on the excess, from the date of payment of the duty, at the rate fixed under subsection (10).”
The important wording is, “…and if the assessment is reduced”, which gives rise to a construction argument.
The issue can be resolved through ordinary principles of statutory interpretation. An examination of the wording of s24(2), particularly the second sentence which states, “…and, if the assessment is reduced…”, suggests that by the inclusion of the word ‘if’, there is an ability for the assessment to be increased. If the section contemplated only a reduction then the word ‘if’ was not required, and a more appropriate word would have been ‘when’. Section 24(2), in my opinion, does provide the Treasurer with the power to increase an assessment of the Commissioner.
The wording of the other sub-sections is also helpful in resolving the question.
Subsection 6 states:
“Upon the hearing of such case (at least seven days’ notice of which shall be given to the Commissioner) the Court shall determine the question submitted, and assess the duty, if any, chargeable under this Act.”
Subsection 10(a) states:
“Where duty is assessed under this Act according to the market value of property, an objection or appeal under this section may be made (wholly or in part) on the ground that there has been an incorrect determination of market value.”
Subsection 10(c) states:
“If the Treasurer or the Court (as the case may be) finds that there has been an incorrect determination of the market value of property, the Treasurer or the Court may alter the assessment of duty.”
Subsection 11 states:
“In this section-
“assessment” includes-
(a) a reassessment;
or
(b) the imposition of additional or further duty under this Act.”
These subsections read together make it clear that the court does have the power to increase the amount of the duty. The word ‘assessment’ is defined to include the imposition of additional duty. It follows that the Treasurer and the court have the power to increase the assessment of stamp duty.
The legal interpretation of the word ‘modify’ in s24(2) was also argued. It was put in argument by HSH that the meaning of the word ‘modify’ means only to reduce and not to increase. It seems that some dictionary definitions support this proposition of limiting or reducing.
In the Macquarie Dictionary (2002 rev 3rd ed) ‘modify’ is defined as “to change somewhat the form or qualities of; alter somewhat…to reduce in degree...”. In the Australian Concise Oxford Dictionary (1997 3rd ed) ‘modify’ is defined as “make less severe or extreme; tone down...”.
There is also authority supporting the notion of expansion in connection with the word ‘modify’.
In Stevens v General Steam Navigation Company Ltd [1903] 1 KB 890 the Court of Appeal dealt with the meaning of modification and the Interpretation Act 1889. Collins MR said at 893:
“Modification implies an alteration, and it seems to me to be as much a modification of that which previously existed that the word harbour should be added as if a limitation had been imposed by the removal of a word from the definition. The ship in this case was unloading in a river and not in a dock, and on the legislation as it existed before the Workmen’s Compensation Act it would not have fallen within the scope of that Act … in my opinion there is no reason to limit the word “modification”, which is equally applicable whether the effect of the alteration is to narrow or to enlarge the provisions of the former Act.”
Stirling LJ, in the same case, said at 894:
“The sole question is whether when the modification takes the form of extending and not narrowing the former provisions it amounts to a modification within the meaning of the Interpretation Act. I can see no reason for holding that an alteration such as that with which we are dealing in the present case is not such a modification as was contemplated.”
This decision was referred to and followed in Souter v Souter [1921] 40 NZLR 716, which concerned a codicil to a will, it was said (at 725 per Cooper J):
“One of the primary meanings of the word “modify” is, no doubt, “to limit” or “restrict”, but it also means “to vary”, and there is authority that it may even mean “to extend” or “enlarge””.
In Waitemata County v Local Government Commission [1964] NZLR 689 per Richmond J (at 696) it was held that:
“Prima facie therefore “modify” is used in a sense applicable to both classes of objection – in other words as having the meaning “to make partial changes in” (whether restrictive or extensive).”
In the case of Wellington District Law Society v Cummins [1998] 3 NZLR 363 (at 366-367) it was said:
“Notwithstanding that the general tenor of dictionary definitions favours as a primary meaning of “modify” to assuage or reduce in severity, there are two matters arising from the context of the Act which persuade us that the word “modify” in s118(3) allows the Court to impose on appeal a more severe penalty than has been imposed by the tribunal:
(1) It is illogical to suggest that the Court on appeal can only reduce the severity of an order of the tribunal as to penalty when a right to appeal is given to the complainant as well as to the practitioner”.
The dicta from these various cases indicate that whilst a strict dictionary definition may favour the notion of reduction in the word ‘modify’, the legal meaning of the word embraces the concept of expansion, or in this case, an increase. In my view, therefore, the power of the Treasurer to modify the Commissioner’s assessment pursuant to s24(2) includes the ability to increase the assessment.
Background – Relevant Extracts from Statement of Agreed Facts
Ramada Grand Hotel Unit Trust
1. At the time of the transactions which are the subject of these proceedings, the Trustee of the Ramada Grand Hotel Unit Trust owned a hotel (comprising accommodation, public rooms, restaurants, bars, car park and the like) at 2 Jetty Road Glenelg and operated a hotel business from there under the name “Ramada Grand Hotel”. The Trustee held a General Facility Licence pursuant to s44 of the Liquor Licensing Act 1985 (SA) in connection with its business.
2. The Trustee at the time of the transactions was a company called Grand Hotel (SA) Pty Ltd. The issued capital of the Trustee was at all relevant times two one-dollar shares. A company called Grand Hotel Pty Ltd was the original trustee of the Unit Trust but was replaced prior to the transactions which are the subject of these proceedings by Grand Hotel (SA) Pty Ltd.
3. The Trustee held all its property on trust under the terms of the Unit Trust. The Deed establishing the Unit Trust appears as Document 1 in the Agreed Book of Documents filed in these proceedings. At the time of the transactions which are the subject of these proceedings, 6.5 million units had been issued in the Unit Trust. All units were owned by a sole unitholder, a company called Roxburgh Investments Pty Ltd, which was therefore the sole beneficiary of the Unit Trust.
Unit Trust Property: property held at the time of the transactions
4. The Trustee held in the Unit Trust certain real property, amongst other property. This real property comprised the hotel premises and car park located at Jetty Road aforesaid. There were also a number of apartments owned and held by the Trustee in the Unit Trust, but these were no longer part of the Trust’s assets on 31 January 1995 when the transactions which are the subject of these proceedings took place.
5. These apartments were conveyed separately by a contract between a company called Southstate Corporations Holdings Limited (referred to below at paragraph 8) as mortgagee in possession and HSH as transferee for a sum of $2.69 million as contemplated by the sale and purchase agreement referred to in paragraphs 11 and 12 (below). The liability to duty of the conveyance of the apartments is not the subject of these proceedings.
6. A balance sheet was prepared at the time of the transactions in January 1995 and provided to the State Taxation Office by HSH’s then solicitors in connection with the Commissioner’s assessment.
7. HSH was required to, and did obtain, the approval of the Licensing Authority for its directors and shareholders to hold positions within the licensee company to enable it to trade pursuant to the General Facility Licence.
Ownership of shares in Trustee
8. The Trustee had a sole shareholder at the time of the transactions, which was a company called Southstate Corporate Holdings Pty Ltd.
Management of Hotel
9. The Trustee had entered into a hotel management agreement with a company associated with a Mr Biagio (also known as William) Sparr, called Hotel Management Consultants Pty Ltd, under which Mr Sparr through the company would manage and run the hotel’s business for a fee. The agreement had been in force for a number of years. Mr Sparr, through his company, operated the hotel on behalf of the Trustee and was responsible for all day-to-day operational and management decisions in relation to the conduct of the hotel. Mr Sparr is a well-known Adelaide businessman with significant experience in the hotelier industry and the running of hotels and licensed premises in general.
Background to Sale
10. Roxburgh Investments Pty Ltd, the unitholder, was indebted to Southstate Corporate Holdings Pty Ltd in the sum of some $76 million. Southstate Corporate Holdings Pty Ltd was a corporate entity which represented a consortium of financiers that had lent money to the Trustee’s predecessor in title to fund the construction of the hotel. Southstate Corporate Holdings Pty Ltd held a charge over the units in the Unit Trust to secure its lending. The amount owing by Roxburgh Investments Pty Ltd to Southstate Corporate Holdings Pty Ltd far exceeded the net value of the units. Under the instruments creating the charges Southstate Corporate Holdings Pty Ltd had the power to sell Roxburgh Investments Pty Ltd’s units in the case of loan default and Southstate Corporate Holdings Pty Ltd also held a registered mortgage over the legal title to the Trust’s real property.
Transactions
11. The Trustee had defaulted in its repayment obligations to Southstate Corporate Holdings Pty Ltd, hereinafter referred to as “the Vendor”. On 20 December 1994, the Vendor, as owner of the shares in the Trustee, agreed with HSH to sell to HSH its shares in the Trustee. Relying on its security interest over the units, the Vendor also agreed at the same time to sell to HSH Roxburgh Investments Pty Ltd’s units and to assign the mortgage the Vendor held to HSH.
Sale and purchase agreement
12. Settlement was fixed for 31 January 1995.
13. On 31 January, 1995, in pursuance of the sale and purchase agreement, the following property was conveyed by the Vendor to HSH:-
(a) all the shares in the Trustee for a nominal consideration of $1.00 (see clause 3 of the agreement); and
(b) all the issued units in the Trust for a nominal consideration of $1.00 (see clause 4 of the agreement).14. The shares and units were sold free of any charge of any type: see clause 2 of the agreement. It is agreed that the commercial effect of these transactions was to bring all the property of the Unit Trust within the beneficial ownership of HSH and to bring the Trustee under HSH’s control.
15. The Vendor also simultaneously assigned its mortgage to HSH for a consideration of $44,615,100.00 adjusted down from $47,300,000.00 to reflect the sale of the apartments.
Summary of Effect of Transactions
16. In sum, by virtue of these transactions, there was effected by the Vendor to HSH the sale of the beneficial ownership of the trust assets, free of any debt to the Vendor, for a total consideration of $44,615,101.00. HSH also gained control of the Trustee.
Termination of Management Agreement
17. Pursuant to clause 28 of the sale and purchase agreement, HSH required the Vendor to terminate the Hotel Management Agreement between the Vendor and Hotel Management Consultants Pty Ltd (HMC). The HMC contract was accordingly terminated by the Vendor. Appellant’s request for Commissioner’s Assessment
18. HSH through its then solicitors, Fisher Jeffries, requested the Commissioner’s opinion on the transfer of the units in the unit trust for the nominal consideration of $1.00. The Commissioner proceeded to investigate the possible application of Part 4 of the Stamp Duties Act.
Part 4 of Stamp Duties Act, 1923
19. Part 4 of the Act contains the provisions which are relevant to the assessment in this case. The effect of Part 4 at the time of the transactions was, relevantly, to require a person to prepare and lodge with the Commissioner a statement when certain threshold conditions were satisfied.
Threshold Conditions in Part 4
20. Relevantly, the threshold conditions in Part 4 in relation to the transactions were as follows:-
(a) a person must acquire a majority interest, as defined, in a unit trust scheme: s94(1)(a)(i).
(b) the scheme, at the time of the acquisition, must be entitled to real property located in SA the unencumbered value of which equals or exceeds $1,000,000.00: s94(1)(b)(ii).
(c) the scheme is at the time of acquisition entitled to real property the unencumbered value of which comprises not less than 80% of the unencumbered value of all property to which it is entitled (other than property excluded by section 94(5)).If these conditions were satisfied, an acquirer was required to lodge a statement in accordance with s94(7) and the statement was subjected to ad valorem duty in relation to the real property contained in the statement as a voluntary disposition inter vivos in accordance with s95. The acquirer was required to pay the duty in accordance with s100(1).
Parties Dispute as to Applicability of Part 4
21. HSH maintained through its solicitors at the time of the Commissioner’s investigation, and maintains now, that it was not obliged by virtue of any of the transactions to comply with section 94(1) of Part 4 of the Stamp Duties Act 1923.
22. The Commissioner maintained then, and maintains now, that s94(1) applied to the conveyance of the units in the unit trust and in default of a statement from HSH, the Commissioner was entitled under s100(2) to proceed to assess the conveyance to duty as he maintained was required by s95.
Dispute on the Facts
23. HSH and the Commissioner agree that threshold conditions (a) and (b) referred to in paragraph 20 above are satisfied in this case and that their dispute on this appeal relates solely to the question of the satisfaction of condition (c).
24. It is agreed that if the Trustee was entitled to real property the unencumbered value of which equalled 80% or more of all property to which the Trust was entitled (taking account of the exclusions required by s94(5)), HSH was required to lodge and file a statement under section 94(1) by virtue of the aforesaid transactions.
25. In that event, HSH and the Commissioner further agree that the Commissioner was correct in proceeding to assess the conveyance to duty, although HSH in that event disputes the value to be attributed to the real property.
26. Conversely, the Commissioner accepts that if condition (c) is not satisfied (i.e., the Trustee was not entitled to real property the unencumbered value of which equalled 80% or more of all property to which the Trust was entitled (taking into account the exclusions required by Part 4)), HSH was not required to lodge and file a statement under Part 4. The Commissioner further accepts in that event that he was incorrect when he proceeded to assess the transactions to ad valorem duty under section 100(2) in default of a statement lodged by HSH.
Commissioner’s Assessment
27. The Commissioner proceeded to raise an assessment for stamp duty against HSH under s100(2) of the Stamp Duties Act as follows.
Property Held by Trustee
28. He first identified all property held by the Trustee under the Unit Trust that was relevant to the potential application of Part 4. In default of a statement from HSH, he determined under s100(2) that HSH held the following property apart from the hotel and he attributed to them certain values as follows:-
Current non-real assets held by Trustee $1,134,542.00
Furniture, Fittings and Equipment $4,804,313.00
China and Glassware $ 61,164.00
Motor Vehicles $ 91,529.00
$6,091,548.0029. Whilst some of the items marked as “Furniture Fittings and Equipment” are annexed to the freehold and may form part of the real property, they were treated as not forming part of the freehold in the Commissioner’s assessment.
30. The current “non-real assets” referred to above comprised as follows:-
Cash at bank $ 28,405.00
Cash on hand $ 47,280.00
Trade debtors $ 367,296.00
Other debtors $ 41,879.00
Prepayments $ 213,814.00
Inventory $ 435,869.00 $1,134,542.0031. The values referred to in paragraphs 28 and 30 above were taken from the balance sheet referred to in paragraph 6 above. The balance sheet was prepared as at January 1995 for the purposes of the sale by the Vendor and was supplied to the Commissioner by HSH in the course of communications between the Commissioner’s officers and HSH’s then solicitors.
Commissioner’s Calculation
(i) Determination of Value of Real Property
32. The Commissioner, basing himself on the consideration paid for the assignment of the mortgages of $44,615,100.00, extrapolated a value for the Trust’s real property as follows:-
Consideration for assignment of mortgages $44,615,100.00
He then added:
ADD Consideration for unit transfer $ 1.00
ADD liabilities of the Unit Trust to be retained $1,243,890.00He then subtracted:-
LESS Current Assets held by Trustee $1,134,542.00
LESS Hotel Furniture, Fittings and Equipment $4,804,313.00
LESS China and Glassware $ 61,164.00
LESS Motor Vehicles $ 91,529.00
IMPLIED VALUE OF TRUST’S REAL
PROPERTY: $39,767,443.0033. The Commissioner took the value for the non-real assets and the liabilities from the said balance sheet. The Commissioner did not, however, include an item of $93,274.00 appearing in the balance sheet as a “Preopening Expense” as he did not believe this was an asset.
34. The Commissioner found, therefore, that the value of the real property was $39,767,443. HSH agrees with the Commissioner’s arithmetic.
(ii) Determination of Value of all Property Owned by Trust
35. The Commissioner found the value of all property to which the Trustee was relevantly entitled was as follows:-
Real Property $39,767,443.00
ADD Current assets $1,134,542.00
ADD Furniture, Fittings and Equipment $4,804,313.00
ADD China and Glassware $61,164.00.00
ADD Motor Vehicles $91,529.00.00
VALUE of TOTAL ASSETS: $45,858,991.00(iii) Determination of Relevant Percentage
36. The Commissioner deducted from this total, in accordance with s94(5), the cash and money held at the bank which formed part of the current assets. The cash and money amounted to $75,685 according to the said balance sheet. The total assets of the trust for Part 4 purposes were relevantly found to have a value of $45,783,306.00. The Commissioner calculated that $39,767,433.00 is 86.86% of $45,783,306.00. HSH agrees with the Commissioner’s arithmetic, but otherwise takes issue with the assessment.
(iv) Calculation of Duty Payable
37. The Commissioner, having found that the 80% threshold stipulated by Part 4 had been exceeded, applied s100(2) and calculated duty according to the rate for conveyances operating as voluntary dispositions inter vivos applicable as at the date of transfer, which was in the following terms under Schedule 2 as at 31 January 1995:-
“CONVEYANCE operating as a voluntary disposition inter vivos of any property (including a statement under Part IV) –
……
Where the value of the property conveyed
exceeds $1,00,000.00:$38,830.00 plus $4.50 for every $100 or fractional part of $100 of the excess over $1,000,000.00.”
38. Applying this rate, the Commissioner calculated duty of $1,783,367.50 on the implied value of the real property he had arrived at of $39,767,443.00. HSH agrees with the Commissioner’s arithmetic, but disputes the value attributed to the real property.
39. The Commissioner gave credit for the $1.00 in nominal duty already paid by HSH in relation to the transfer of the units in accordance with s95(2)(c) and therefore formally assessed duty in the sum of $1,783,366.50. This amount was paid by HSH.
Appellant’s Objection
40. HSH appealed to the Treasurer by a notice of objection dated 21 May 1996.
Treasurer’s Decision
41. The Treasurer on 26 May 2003 purported to reassess the stamp duty and to increase the duty payable. The Treasurer found that the value of the real property to which the Trustee was entitled was $40,450,000.00, basing himself on a valuation obtained from FPD Savills. He found that this amount was approximately 88% of the total consideration paid by HSH for the units in the trust and the assignment of the mortgage. He therefore found that the 80% threshold had been exceeded. He recalculated duty as $1,814,080.00 in accordance with the scale mentioned above at paragraph 37 on a value of $40,450,000.00. HSH agrees that if the Treasurer had jurisdiction in law to increase the duty payable as a result of his consideration of the objection the arithmetic is correct. HSH disputes, however, that the Treasurer so has jurisdiction.
42. The Treasurer, making allowance for duty already paid, required payment of a further $30,713.50 in duty.
43. HSH contends that the true value for the Trust’s property is no greater than $27,600,000.00.
Further Agreed Facts: Legal Provisions
44. HSH and the Commissioner agree with one another and respectfully submit to this Honourable Court that the relevant Part 4 provisions and the relevant head of duty in Schedule 2 are those that applied as at 31 January 1995.
45. HSH and the Commissioner agree with one another and respectfully submit to this Honourable Court that the relevant objection and appeal provisions are those that were in force as at the date of lodgement of the objection on 21 May 1996. As at the date of the lodgement of the objection, the Taxation Administration Act 1996 was not yet in force: it came into force on 1 January 1997. Pursuant to the transitional provisions in Schedule 1 (see clause 9) an objection lodged prior to the commencement of the Act may be dealt with under the provisions of the Stamp Duties Act prior to its amendment by the Taxation Administration Act 1996.
46. The parties note that the appeal provisions in the Stamp Duties Act in s24 prior to the repeal of this section by the Taxation Administration Act 1996 envisage the filing of a case stated by the Commissioner when required by HSH to file one. To the extent, if any, that this Honourable Court’s jurisdiction depends on the filing of such a case, HSH and the Commissioner agree with one another and respectfully submit that this statement of agreed facts should be taken by this Honourable Court to be that case stated.
47. The parties agree the following chronology of critical events:
(i) 31 January 1995: the date of settlement of the transactions which are the subject of these proceedings.
(ii) 17 February 1995: application for assessment of duty lodged by HSH with the Commissioner.
(iii) 8 May 1996: Date of the Commissioner’s assessment;
(iv) 21 May 1996: Notice of Objection served on State Taxation Office under s24 of Stamp Duties Act;
(v) 1 January 1997: commencement of Taxation Administration Act 1996;
(vi) 26 May 2003: Treasurer dismisses objection;
(vii) 11 June 2003: Notice of appeal filed in this Honourable Court.Findings of Fact
Ultimately, the question for the court involves the value of the real estate component passing in the transaction, and as a stepping stone towards that conclusion, did any, and if so how much, goodwill pass in the transaction?
The question of goodwill generally is covered by the High Court in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605, (“Murry’s case”). I deal with the question of goodwill specifically in relation to this transaction later in my reasons. In relation to goodwill and its assessment, I adopt, with respect, the comments of Mr Nettle QC, as he then was, in Cresswell Nominees v Commissioner of State Revenue (unreported, VCAT, 7 November 2001) where he said at [20]:
“The question of how much of any goodwill inheres in land and thus affects the value of the land is a question of fact. The question is to be answered in terms of how much an objective purchaser of the land would be prepared to pay for the opportunity of exploiting the land and, in turn, that means how much of any goodwill attaching to a business would the purchaser regard as attaching to the land rather than to other factors.”
It is then necessary to make findings of fact against which the question of goodwill can be considered.
I now set out my findings, over and above those which emerge from the Statement of Agreed Facts and based on my assessment of the evidence. These findings are relevant to my consideration of goodwill and other matters relevant to determine the real estate value.
The findings I make are as follows:
1The location of this hotel is of paramount importance in assessing the value of the real estate and the value of the business.
2The hotel occupies one of the prime real estate sites in Adelaide regardless of what use was made of the site. In other words, many businesses would be successful on that site simply because of the location.
3The hotel before being acquired by HSH operated as a hybrid. On the one hand it was a luxury hotel attracting tourists and people wishing to attend conventions but by the same token it was a very busy and successful suburban hotel in the operation of its bars and meal facilities.
4The car park has also been a successful and profitable part of the hotel operation in its use by guests and the public alike.
5The precinct in which the hotel is situated contains one of the busiest shopping strips in Adelaide and also one of the busiest entertainment areas.
6Mosley Square where the hotel is located is an important and busy civic and tourist precinct.
7The construction of the hotel commenced in 1988 and was completed in 1989.
8The hotel comprises a 10 story building with approximately half the rooms having views across the sea and half having views back towards the city and the Adelaide hills.
9At the time at which the transaction was finalised, the buildings overall were in good condition and well maintained.
10The occupancy rates in the four years leading up to settlement varied between about 64% and 68%.
11Prior to the acquisition by HSH, the hotel was operated by entities associated with Mr Bill Sparr pursuant to a management agreement. Mr Sparr was an experienced and successful restauranteur and developer. His organisation was not part of the purchaser’s plans and the management agreement was terminated. See paragraph 58 of these reasons.
12The hotel industry generally was coming out of a particularly low phase at the time of purchase, but there were positive signs for improvement and the hotel had already shown improvement in its trading figures in the months leading up to settlement.
Location and Description of Hotel
As can be seen from the above findings, I have found the location generally, and the site of the hotel in particular, to be very important factors in resolving the question of the value of the real estate.
I have taken comments from a valuation report of Mr Dee dated 18th November 1994 (“the KFH report”) as providing useful observations about the importance of the site and other important observations about the way the hotel is physically set-up. Mr Dee was engaged by the Hai Sun Hup Group, and says in his report, (my underlining):
“The Ramada Grand Hotel occupies a prime position in Adelaide’s best known and visited seaside suburb, only 11 kilometres from the Adelaide Central Business District. It has an extensive frontage to the South Esplanade therefore enabling it to capitalise on the beach front location. The Glenelg jetty is accessed via Mosley Square and is an added attraction to the locality. The City to Glenelg tram stops immediately outside the Hotel providing direct access to the Adelaide Central Business District…
…The ground floor of the Hotel can be best described as the entertainment hub of the building. It comprises five restaurants and two bars, each catering for a different style of dining or leisure. Those restaurants and bars fronting the South Esplanade and Jetty Road have large folding windows which can be opened during summer to provide a cosmopolitan atmosphere. The floor coverings are a mixture of polished timber, tile and carpet with lighting via incandescent supplemented by natural illumination.
The first floor of the Hotel has stair or lift access from the ground floor and features a bridge link to the carpark capable of allowing vehicle access for displays. The main feature of the floor is the grand ballroom that overlooks the sea. It can be divided into 5 separate rooms or combinations of each and features a balcony to rooms 2, 3, and 4. Separate conference rooms are located to the northern side of the floor and each features a balcony. Fitout is similar with carpeted floor coverings, incandescent lighting, opulent ceilings and wall coverings. A kitchen is located on this floor with access from the main basement kitchen via either of two service lifts. A bar facility is also located in the main function lobby, with both male and female toilets located centrally…
…The third to twelfth floors of the Hotel features the accommodation. The number of rooms on each floor varies according to the type of accommodation offered with the total number of rooms being 220. Access to each floor is by either of three lifts which exit onto a small lobby with access to the 12th floor by security key only…
…Extraordinary Food and Beverage results have been achieved in the past as a result of management and the site goodwill associated with the complex. The site is considered to be arguably the best tourist and most prominent beachside location in South Australia, being located on the Esplanade at the end of Jetty Road, which is one of the premier strip retail locations in Adelaide.
The beach front location and the general surrounding commercial, retail and residential developments complement the operations of the Ramada Grand Hotel.”
There is further support for the importance of this site from the document offering the property for sale. JLW Transact were appointed as the agents offering the Ramada for sale. Under the heading “Location” in the executive summary, the agents said (again, my underlining):
“Glenelg is Adelaide’s most historic and well known beachside suburb and one of the city’s major leisure, retail and accommodation precincts and principal tourist attractions.
Situated in a prime beachfront position, the Ramada Grand enjoys magnificent beach and ocean views and is located within the commercial and retail centre of Glenelg. The property is very well located only six kilometres from Adelaide International Airport and 11 kilometres from Adelaide Central District (CBD) via Anzac Highway or Adelaide’s only tramline.
The hotel’s magnificent beachfront location makes it particularly well positioned to cater to the leisure and conference markets as well as the Adelaide dining market.”
The document goes on to emphasise Glenelg from the point of view of its history and proximity to the city. In relation to the site description, the document states:
“The hotel provides excellent access to the Glenelg foreshore and to the major retail facilities located along Jetty Road which adjoins Mosley Square. The Post Office and Town Hall are located directly opposite the hotel on Mosley Square as is the termination point for the city to Glenelg tramline.
At a height of approximately 48 metres, and due to the primarily low lying nature of surrounding development, the Ramada Grand enjoys landmark visibility and panoramic views over Glenelg Beach and Jetty and the Southern Ocean to the west, the Adelaide coastline to the north and south and the Adelaide CBD to the north-east.”
These extracts from the KFH report and the JLW sales brochure are included to emphasise the significance of the site, even allowing for some embellishment in the latter.
The Commissioner’s Assessment
The way in which the Commissioner approached his assessment is set out in paragraphs 77-88 hereof in the agreed statement of facts. The Commissioner started with the consideration for the assignment of the mortgages, added the consideration for the unit transfer and the liabilities of the unit trust to be retained, and then subtracted the current assets, the hotel furniture fittings and equipment, china and glassware, and motor vehicles to arrive at a value of the real property of $39,767,443. The figures which he used for the assets other than the real estate and for the liabilities were taken from the balance sheet.
The Commissioner contends that it does not matter by which methodology the Commissioner arrived at his assessment if the correct answer was obtained or more precisely that the assessment can not be shown to be wrong.
The Commissioner did not allow anything for goodwill associated with the business. There was no goodwill in the balance sheet, but of course the relevant accounting standards did not allow for internally generated goodwill to be included in the accounts of a company.
When the objection was lodged with the Treasurer following the Commissioner’s assessment, the Commissioner chose to engage Mr Aschberger, a qualified valuer, to value the land and buildings on which the Ramada was conducted as at 31 January 1995. Again, Mr Aschberger did not include anything in his calculations for goodwill associated with the business.
The Commissioner has submitted there is no reason to be involved with an assessment of goodwill in this case because the business acquired by HSH was not the same business that was conducted previously by the vendors.
This argument relied on the termination of the management agreement entered into with the management company run by Mr Sparr. It was also argued that any goodwill of the business prior to the sale was shared between the entities, that is the trustee as owner and investor, and the operator, Mr Sparr’s company, and that therefore it was not possible to transfer any goodwill in which Mr Sparr’s company and the trust were jointly interested because Mr Sparr’s company was not part of the transaction involving HSH. Therefore it is said that HSH paid only for the physical assets of the trust and paid what it believed was the value to it of the earning power of those assets.
The agreed fact was that Mr Sparr, through his company, had operated the hotel and was responsible for all day to day operational and management decisions in relation to the conduct of the hotel. This had been so for a number of years.
It is therefore argued by the Commissioner that the method by which the Commissioner proceeded is reasonable because there was in fact no goodwill involved.
Goodwill – Murry’s Case
As I have said, neither the Commissioner nor Mr Aschberger considered the question of goodwill in their assessment and valuation respectively. HSH says simply that there must be some goodwill and therefore there is an error. I believe, however, that the overall result of both the assessment and Mr Aschberger’s valuation is consistent with the reasoning of the High Court in Murry’s case, and in particular at [51] where Gaudron, McHugh, Gummow and Hayne JJ say:
“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 of the business 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. Nevertheless, the earning power of the trade mark is unlikely to equal the earning power of the business.”
Mr Whitington QC and the Solicitor General agreed that this statement by the court should be read in conjunction with paragraph 24 of the reasons. Mr Whitington also sought to distinguish the case of a trade mark, where a value for the trademark was included in the balance sheet of the company, with the facts of this particular case. But as their Honours said in paragraph 24:
“However, goodwill is a quality or attribute that derives inter alia from using or applying other assets of the business. Much goodwill, for example, derives from the use of trade marks or a particular site or from selling at competitive prices. But it makes no sense to describe goodwill in such cases as composed of trade marks, land or price, as the case may be.” (My underlining).
In my view, the site here can be compared with the trademark example, and both when valued may represent close to the whole value of a business. I refer also to the comments of their Honours in paragraph 33 as follows:
“However, as discussed later in these reasons for judgment, the potential use of an asset which is transferred out of the business may give it a value which approximates to the value of the goodwill which the business derived from the use of the asset. Nevertheless, potential use is merely an attribute of an asset, while goodwill is property which is inseverable from a business. They are not to be equated for legal purposes, notwithstanding that in some cases the value of the goodwill of a business may be reliable evidence as to the value of the asset or its potential use.”
It is my understanding, with respect, that their Honours are again simply relating these comments to the later statement in paragraph 51 of the reasons. In this case, of course, there was no goodwill shown in the books of account. However, from my reading of Murry’s case, there should be no distinction when considering either goodwill which derives from a trademark or goodwill which derives from a particular site.
HSH relies very much on the proposition that a substantial amount of goodwill must of necessity have been included within the total consideration in the transaction. Mr Smith, an accountant retained by HSH, calculated a figure of about $6 million as representing the goodwill. See paragraph 190 of these reasons.
Goodwill is a separate item of property and does not form part of the real property but is associated with the business. See Murry’s case at [23].
The Commissioner says here that the goodwill is almost exclusively tied up with the real estate asset. It argues that a purchaser will not pay again for a separate item of goodwill when it is the earning power of the real estate which, in this case, determines the earning power of the business.
Here the site is, as I have said, prime beachside property with a high real estate value, and it is argued by the Commissioner that it would therefore be inappropriate to have a separate item of any significant amount in addition for goodwill. HSH in fact decided to terminate the management agreement when it took possession after settlement and the Commissioner suggests that this is a strong indication of the attitude of the purchaser, namely, that it did not regard as important, the fact that the whole management of the hotel had been handled for some years by Mr Sparr’s management company. – See Agreed Fact in paragraph 58 of these reasons.
The over simplified argument is that in this case any goodwill is almost entirely related to the site and it is therefore already taken into account in the amount paid for the real estate. The Solicitor General says that on the basis of that reasoning the whole question of goodwill in this matter becomes of minor significance. HSH places the whole aspect of goodwill at the forefront of its argument to attempt to find a figure which will then by arithmetical calculation reduce the value of the real property below the threshold of eighty percent.
The fact that a large business was up and running and included considerable infrastructure, that there were probably advance bookings and that the hotel business was, in general terms, successful, would tend to indicate on the face of it that there was some goodwill involved.
The fact that the management company arrangement involving Mr Sparr was discontinued, is an important factor in assessing the importance of goodwill overall, but in my view, it would be impossible to say, that even with an entirely new management company, there was no aspect of the business which was conducted in substantially the same manner as it was beforehand. There is no evidence at all as to the manner in which the business was carried out after the transfer. In my view, however, it is likely that some goodwill attached to the conduct of the business and in the efficient use of the assets of the business, and was therefore transferred with the business in addition to the real property, and I find accordingly.
Having accepted that some goodwill was associated with the business, but because of my finding regarding the site, it follows that I consider that most of the goodwill associated with the business derives from the site.
In Murry’s case at [23] Gaudron, McHugh, Gummow and Hayne JJ say that goodwill is:
“the right or privilege to make use of all that constitutes “the attractive force which brings in custom”. Goodwill is correctly identified as property, therefore, 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.” (footnote omitted)
Furthermore, their Honours say at [24]:
“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.”
At [45] in the same judgment, their Honours go on to say:
“Once goodwill as property is recognised as the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business, it follows that a person acquires goodwill when he or she acquires that right or privilege.”
In the same judgment their Honours distinguish, in referring to goodwill, between goodwill as having sources rather than being composed of elements. See [34]. Their Honours go on to say at [25] and [26]:
“Many of the sources of goodwill are not themselves property. Nor are they assets for accounting purposes. Thus, manufacturing and distribution techniques, the efficient use of the assets of a business, superior management practices and good industrial relations with employees, may be sources of the goodwill of a business because they motivate service or provide competitive prices that attract customers. Yet they are neither property, not assets for accounting purposes.
In some businesses, price and service may have little effect in attracting custom. The goodwill of such businesses may derive almost wholly from their location. This will often be the case where there is no nearby competitor and custom is drawn from nearby residents or those who must pass by the site of the business.” (My underlining).
In my view, for the reasons already stated, this case is one where the goodwill of the business derives almost wholly from the location. It is not a case where the other factors mentioned by their Honours in the passage above have any significant influence. No evidence was led in relation to those other factors.
This is a case where although the business, namely, the running of a four or five star hotel, is taken over by the purchaser, there is no evidence to suggest that the means of operating the business, attracting custom, maintaining the same staff, and running the bars and restaurants continued to operate in the same way. I will assume, however, in the absence of any such evidence, that it is unlikely that any radical changes would have been made to the operation of the hotel in the short term. Because of the cessation of the management agreement I believe, as I have indicated, that the goodwill here derives almost wholly from the location. The site is the source of the majority of the goodwill.
By contrast, I refer to the decision of Kizleap Pty Ltd v Chief Commissioner of Stamp Duties (2001) 46 ATR 323. This case involved similar considerations relating to the eighty percent threshold under the New South Wales legislation. The sale in that case involved a caravan and camping park in the holiday area south of Sydney and known as the ‘Lake Illawarra Village Caravan and Tourist Park’. Adams J in that case dealt with a submission similar to the one made in this case, namely, that the purchase of the park did not involve any goodwill of any significance because of the value of the land. The business included land owned by the vendor, Zonula, and additional land over which the vendor had a permissive occupancy.
In that case there was evidence which showed that apart from the attraction of the land and its position near the sea, there was a substantial part of the business related to personal aspects of those who patronised the caravan park. There were relationships which had developed over a long period of time, and expert evidence was led in relation to the management of caravan parks to demonstrate the substantial degree of management and personal skills required to operate such a business.
In Kizleap, there were approximately 286 out of a possible 321 sites which were occupied. Of those, about 220 were occupied permanently by permanent residents, the balance used as holiday accommodation by persons who left their vans permanently on the site.
The background was that the park had been progressively developed and utilised by members of the Saint George Leagues’ Club who had earlier acquired the park so that it could be used by the members of the club. The company which sold the business, Zonula, was also connected with the Leagues’ Club, and it so happened that those who had for many years used the facilities for holidays ended up living there in retirement. These facts illustrate how different the case is from the present one, and how it was that Adams J was able to say [at 10]:
“Although there can be no doubt that the site itself is of considerable attraction to those who live there permanently and holiday makers by virtue of its physical attributes and position, a substantial part of its attraction is purely personal in the sense that relationships have developed over time between occupiers of the site, whether permanent or temporary and between them and management and staff.”
In other words, a substantial source of goodwill derived from factors other than the location.
Adams J dealt with Murry’s case in connection with one significant issue in the case, namely, the value of the land because of its waterfront position. His Honour cited a passage regarding trademarks following that to which I have already referred in paragraph 115 of these reasons. His Honour then said at [22]:
“Although it is convenient to talk of “personal” goodwill, I do not understand that this can refer only to the unique attributes of a particular individual. The matter must be looked at as a practical question of business. I am of the view that where management entails personal relationships with customers of a kind such as Mr Nunn describes, substantial personal goodwill, apart from the attributes of the location, is a significant component of the assets of the business, even where the particular individuals whose skills, attributes and activities have built up the profitability and security of income of the business have moved on and are replaced, since it is only by continuing the same practices with individuals possessing the same talents that profitability can be maintained and, with improvements, perhaps increased. Considered as a matter of commonsense, it is difficult to understand how the value of land can be increased or decreased depending on the quality of management of the business that is undertaking upon it.”
His Honour considered the competing evidence he had from two experts in relation to these issues and accepted the view that aside from the attraction of the land and therefore the value of the land, there were very substantial reasons in that case to show that there was an element of goodwill not directly related to location which was an essential part of the business.
I refer also to two decisions in the Supreme Court of Victoria. The first, Commissioner of State Revenue v Uniqema Pty Ltd [2004] VSCA 82, is a decision of the Court of Appeal dealing with the Victorian Stamps Act and involving the sale of a business including a factory. It was necessary for the court to consider the question of goodwill and whether goodwill was a chattel within the meaning of the Victorian Act.
In Uniqema the court was concerned with a business in Port Melbourne, where both the land and business were sold. In the total consideration an amount was allocated to the site, and a similar amount for goodwill. Plant and equipment made up the balance of the purchase price.
It seems that the various products produced by the business found their way to all Australian States and also overseas. The regional headquarters of the business were in fact located in Malaysia. The premises in Port Melbourne did not involve any sales to the public. Ormiston JA said in his judgment (with which the other members of the court agreed) at [21]:
“There is no reason to suppose that the land itself was not valued fairly and, now that the value of certain items which had been wrongly (in law) treated as merely part of the plant and equipment has been included in the value of the transferred land, (as to which there has been no appeal from the judge of the Trial Division), there can otherwise be no reason now to doubt that the value fixed for the land comprehends the working factory on its site. What amount should have been added for that purpose must have depended on the additional value a purchaser might have seen in the existing buildings and factory complex. A proper value would reflect the possibility that a prospective purchaser of the site might wish to manufacture the same or similar materials at the factory, but it would also have to take account of the real possibility that the factory would be of no use to some purchasers, at least at some time in the future. Although the origins of the business dated back to 1856, when tallow was first processed on the site, it did not follow that the present factory had an unlimited life, though as it stood the purchaser intended to use it as a means of manufacturing a considerable proportion of the chemical products it sold in its business which seems to have had its head office elsewhere, indeed outside Australia. The “value added” by reason of the factory had nothing to do with goodwill, merely with its usefulness as the means of manufacturing certain chemical products.” (footnotes omitted)
His Honour said at [32] when specifically referring to paragraph [51] of Murry’s case:
“The majority [in Murry’s case] then pointed to the example of a trademark which when fully valued might result in there being very little extra value which can be attributed to goodwill as such, so that the purchaser will not pay twice for the same source of earning power. But in my opinion that is merely another example of a case where a particular asset provides the drawing power and attraction for customers by reason of the fact that the business has become identified with the trademark. If the business be sold without the particular trademark, then the purchaser will of necessity fail to attract the whole custom because it cannot use the trademark to support the business in the future. That is little different from the “pub on the corner” where, if the business is sold without the hotel itself, there is little likelihood that regular local custom of the hotel will move to some different part of town or further afield. Those are particular examples of cases where goodwill is largely attributable to a single asset without which a business cannot survive or can only survive in a very attenuated form. Those examples have little relationship to a wholesale chemical manufacturing business, whose goodwill must (and did) depend on a wide variety of factors.”
The Court held that no part of the goodwill of the manufacturing business had its source in the Port Melbourne premises. Ormiston JA said at [37]:
“In the present case the actual business of selling the vendor’s product was conducted away from the factory, not merely in terms of contact with customers but because no part of the selling of the product either took place on or was organised from the site. It was merely the place at which most of its products were manufactured, excluding products which were bought in from other manufacturers. It was an entirely wholesale business so that it seems that it had neither trademarks or any other get-up which was of significance to purchasers and thus in attracting trade to it. Perhaps that was because it effectively had a monopoly in this specialised field of chemicals but it appears that no attempt was made to use the factory as a basis for advertising its wares for that in effect would have been pointless. There was thus no aspect of the business which was peculiar to the site. The site was merely the place where most of its products were made, and so was no different from that used by a wholesaler, a chain retailer or any other business enterprise which would likewise see little purpose in selecting a specific office or other site in order to attract business.” (footnotes omitted)
Eventually the Court determined that the Commissioner was wrong when he assessed the value of the land for stamp duty purposes to include the value of the goodwill of the chemical manufacturing business. The Commissioner should not have included the goodwill because it did not relate to the location of the premises. In my view, the discussions set out illustrate how different that case is to the present case.
That decision was in turn referred to in some detail by Harper J in Primelife (Glendale Hostel) Pty Ltd v Commissioner of State Revenue [2004] VSC 214. In paragraph [1] of his judgment, his Honour summarises the background as follows:
“On 12 February 1999, IOOF Community Villages Pty Ltd entered into a number of transactions for the sale of aged care facilities in Victoria. The transactions, which were inter-related, involved the disposal not only of the real estate on which the facilities were constructed, but also the businesses that operated them and the “approved” or “allocated” places by which, under the Aged Care Act 1997, the Commonwealth Government allocates subsidies for the provision of accommodation and residential care for the elderly.”
The argument by the Commissioner on the one hand was that the land, the chattels, the businesses and the ‘allocated places’ should all be assessed as part of the real property involved in the transactions. The appellants on the other hand argued that the businesses, including goodwill, and the ‘allocated places’ should not be taxable. It was on the basis that they did not form part of the real property.
In his consideration of the Uniqema judgment, his Honour said at [33]:
“Goodwill which has its source in land is, in a sense, inseparable from the land. It is also, and perhaps in a more relevant sense, inseparable from the business with which it is associated. When a business changes its location, the “local” or “site” goodwill does not remain with the land on which the business was formerly conducted; it disappears. The business continues at its new address with whatever goodwill remains to it – without the “site” goodwill it had before the move, but perhaps with new “site” goodwill, having its source in whatever advantage the new address has in attracting custom.”
Harper J went on to say at [40]:
“[The value of the land] will be affected, and doubtless in most cases be increased, by reason of the fact that a business is being conducted on the land, that the business is profitable, that it generates goodwill, and that the goodwill has its source at least partially in the land. The benefit of any increase in value will accrue to the Commissioner to the extent that the amount payable as duty will be increased by the appropriate proportion. But the ownership of the goodwill is inseparable from the ownership of the business. The one passes with the other, not in “a sense” but in every sense. The goodwill cannot therefore be brought to duty as if it were “inseparable” from the land, in the sense that it forms an element in or is a constituent part of the land. Goodwill cannot be dealt with in this way. Accordingly, its value cannot merely be cumulated with the value of the land.”
After a discussion regarding some of the propositions in Murry’s case, his Honour went on to say at [43]:
“Goodwill is an asset of a business. A business is a species of personal property. So, therefore, is goodwill. Land is a species of real property. It is real property or, rather, instruments of transfer of real property, which are subject to assessment for duty under Heading VI of the Third Schedule of the Stamps Act.”
His Honour said at [51] in referring to Murry’s case and the principles emerging from that case:
“I have referred to them already; but they are sufficiently important to bear repetition. They are that goodwill is property which is not only inseverable from a business, but is also indivisible. It is, consistently with this, legally distinct from the sources – including other assets of the business, such as the land on which the business is conducted – by which goodwill has been created. Accordingly, it seems to me that, with those characteristics, goodwill cannot be included, for the purpose of the assessment of stamp duty, in the value of real property as if it were an element of that real property.” (footnotes omitted)
His Honour concluded at [53]:
“For these reasons, it is in my opinion wrong for the Commissioner to calculate the stamp duty payable in relation to either the Glendale or the Cumberland transactions by including in the value of the real property any element of goodwill. I add, out of what I hope is an excess of caution, that the Commissioner is entitled to take into account the effect on the value of the land of the business that is being conducted on it; or, to be more precise, the income-generating capacity of the land.”
His Honour followed the decision in Uniqema to the effect that, in calculating the duty on real property transactions under the Victorian Stamps Act, it was correct to exclude goodwill where the source of that goodwill was wholly separate from the land, and that it was also correct to exclude from the calculation of stamp duty so much of the goodwill that did not have its source in the real property. His Honour held that neither the goodwill, nor the ‘allocated places’ were ‘tangible or physical things’ in the sense required, and were therefore not assessable as chattels attached to the land under the provisions of the Act.
Whilst these decisions, on the Victorian Stamps Act, are obviously considering quite different legislation, I have referred to these decisions to illustrate how important the factual situations are in governing the way in which goodwill is considered. The Kizleap decision in New South Wales, in my view, very amply illustrates that point. The two decisions in Victoria contrast different types of businesses and whether the goodwill is tied up with the site of the businesses, albeit in the context of the Victorian legislation.
After judgment was reserved, I referred the two Victorian decisions to counsel so that further submissions could be made. As they did in relation to Murry’s case, both counsel gained considerable comfort from various propositions in these cases consistent with the causes of their clients. As can be seen from my analysis of the expert evidence, I believe that the statements of principle are consistent with the way in which Mr Aschberger has valued the land and not valued the business or its goodwill. His approach in relation to the valuation of the land and its income earning capacity seems to me to be consistent with the propositions I have set out from the cases. Mr Aschberger’s approach is that by far the greatest proportion of the value of the business is related to the land. I deal with this aspect later in these reasons.
The Expert Evidence
Both parties in this court called ‘experts’ to assist in determining the question to be decided under s94 of the Act. Unfortunately the two experts were never ad idem as to how to approach the question of valuation. Mr Smith was called by HSH as their expert. He was not a valuer. Therefore his assistance to the court was to bring his expertise as an experienced accountant who was involved in an accountancy business which gave advice regarding the sale and purchase of many four or five star hotels. He did not profess to have any expertise in the valuation of the underlying real estate, his experience more related to the accounting aspects of such businesses. He had also acquired knowledge of large hotels in the four of five star category by acting as a Receiver and Manager of several of them.
The Commissioner called Mr Aschberger who was an experienced valuer but who had no specific experience in the valuation of four or five star hotels and their businesses. The court is placed in the position of having to decide the important question in this matter, namely, the value of the real estate by analysing the evidence of the competing experts, and insofar as it can be of assistance, deciding whether, on the whole of the evidence, HSH has discharged its onus and shown that the assessment by the Commissioner is wrong.
Mr Aschberger was cross-examined to the effect that he had been ‘on probation’ for some months prior to being retained by the Treasurer, during which time various correspondence passed between him and the Treasurer. It was suggested that the weight of his evidence should be reduced accordingly because of the fact that he was effectively experimenting with methods which would reach the result desired by the Treasurer. A bundle of correspondence was tendered. I reject that suggestion. Whilst clearly he was being directed in relation to certain matters, in my view there nothing untoward in this correspondence which passed between Mr Aschberger and the Treasurer, and indeed it was what one would expect for the specific brief upon which he was retained.
The respective “valuations” of the experts were subject to very precise scrutiny in detailed cross-examination by both sides. Valuation is not a science, but both cross-examinations went into considerable detail in analysing the accounts of the Ramada leading up to the time of sale, and the way the accounts had been used by the experts.
Both experts, although using different methodologies in attempting to fix a value for the real estate, were attempting to ascertain a figure at which the hotel could be rented out to an operator. This rental had to allow a reasonable profit for the operator. The rental so determined was then capitalised to reach a value for the business.
No evidence before me shows that there is any specialised field for the valuation of four or five star hotels. Mr Aschberger had valuation experience in the industry generally and was a qualified valuer. Mr Smith had no valuation qualifications. Valuation principles, I should have thought, remain constant but are adjusted for different situations. HSH made a decision to present its case without the assistance of an expert professional valuer and opted for an accountant with experience in the sale and management of four or five star hotels.
HSH argues that no account at all should be taken of the Aschberger valuation. It argues this on two bases, first, that Mr Aschberger’s evidence should not be admitted, and then in the alternative that his methodology is flawed to such an extent that no weight can be placed on his ultimate conclusion.
In relation to Mr Aschberger’s qualifications to give valuation evidence, I am satisfied that although he had no direct experience in the valuation of luxury hotels, it does not affect the admission of his evidence. As the Commissioner points out, he is the only expert qualified to give evidence of the value of the underlying real estate, which after all, is what s94 requires, and which is the central point of the case.
In one area in particular his expertise was challenged. That related to his opinion as to an appropriate percentage to be applied to the revenue from the accommodation section of the hotel business in his calculation as to an appropriate rental which I deal with later.
Mr Aschberger gave evidence as to the reasons why he chose twenty-five percent for the accommodation department of the hotel in his methodology of using the rental streams for his valuation. He supported his opinion of twenty-five percent for the accommodation department on the basis that he had considerable experience in valuing hotels and motels, and that he thought that was the appropriate figure having regard to that experience. He also indicated that he had had a discussion with a Mr Ken Smith, a valuer who was independent of this matter, and that his figure had been confirmed by Mr Smith.
HSH says that therefore Mr Aschberger’s evidence is inadmissible because it is based upon hearsay. The fact is, however, it was Mr Aschberger’s own opinion of which he sought confirmation. Cross on Evidence (2004 7th ed) at [29150] states:
“[A] witness is entitled to draw upon the corpus of knowledge available in the field, even if this material is not published, and even if it is obtained, for example, by a valuer in conversations with other valuers, some of it in relation to specific transactions, not so as to prove the details of those transactions, but so as to form part of the general experience, knowledge and expertise of the valuer.”
Experts generally are entitled to and often do consult with other experts to confirm their opinion. Given that their role is to assist the court it is not surprising that they should seek confirmation of their own views before giving their opinion to the court.”
Mr Aschberger, using his own knowledge as an expert valuer, has used information from the hotels and motels with which he is familiar. He has given evidence that he does not believe there is any reason why the same approach, and therefore the same percentages, albeit with adjustments, should not apply in this case.
HSH did not seek to call any evidence from any other expert to challenge the percentages fixed by Mr Aschberger for the various rental streams. Mr Smith was not in a position to do this because of his lack of experience with that methodology. The Commissioner has been critical of HSH in not calling evidence to rebut the income stream analysis of Mr Aschberger when it was in a position to do so. It is said that clearly HSH had access to such information and therefore the inference should be drawn that Mr Aschberger was correct.
Both experts made mistakes in their respective calculations, but if the methodology chosen is appropriate, and after adjustments are made to correct the acknowledged mistakes, the result reached is reasonable, then the actual mistakes made in the calculation may not matter. It is necessary however to look at those errors.
Valuation Methodologies
It was at the stage of determining the appropriate rental that the respective methodologies differed. Mr Aschberger calculated a high rent because of his insistence on the importance of the location of the hotel whereas Mr Smith came up with a low rent because he played down the significance of the location.
As I have indicated, valuation is not a science. It was suggested by Mr Aschberger that it could not be precise within a range of ten percent either way. This appears to me to be a reasonable margin for error in such an inexact art.
By way of example, Mr Smith initially calculated a value for the business by use of his methodology of $36.9 million. As will be seen, he calculated about $11 million of that figure as assets which he said were unrelated to the hotel’s real estate value, namely, what he called business value (including goodwill) of nearly $6 million, and plant and equipment of about $5.3 million.
An independent report, the KFH report, reached a value of $45 million as at 18 November 1994. It was a valuation which calculated the current market value of the property, as a “Going Concern” including plant, furnishings, fittings, equipment, liquor licence and motor vehicles.
In the KFH report Mr Dee compared the standard for food and beverage revenue related to accommodation revenue. The Ramada had almost four times the average food and beverage operations of other hotels. The excess over the average was capitalised (at 17.5 percent) and this value was then added to a valuation for a hotel with standard food and beverage operations. As distinct from Mr Smith’s report, the KFH report included plant and equipment.
Mr W Rae, another licensed valuer, following an inspection of the property in June 1994, valued the Hotel and the apartments separately but his final figure in total was approximately $37.5 million as at 30 June 1994. Mr Rea based his valuation on the methodology of discounting 10 year cash flows and applying an internal rate of return of fourteen percent.
I am not suggesting by any means that these other valuations are any more than an exercise which serves as a cross-check on the reasonableness or otherwise of the valuation in question. Provided that it is accepted that there is a range of ten percent variation upwards or downwards, as suggested by Mr Aschberger, the valuations, with such adjustments, tend to fall within a ‘ballpark’. Mr Aschberger’s suggestion of this percentage tolerance was not challenged by any other evidence.
I accept on the whole of the evidence that there must be such an allowance of the order of ten percent in such an imprecise area.
Mr Aschberger reached his valuation of $40,450,000 for the real estate by calculating a notional market rental for the property and then capitalising that. Mr Aschberger was able to use the actual trading figures to 31 January 1995 and project figures for the full year ending 30 June 1995. He was also able to use the actual income divided into the various departments of the hotel from the actual figures to the end of January 1995. He then applied industry percentages to those income figures for the various departments to arrive at a net annual rental which would have been appropriate to anyone renting any particular section of the business. This gave him a total figure of $4.25 million. He then capitalised that figure at the rate of 10.5 percent to reach a valuation of $40,450,000 for the real estate.
The percentages, applied to the income streams of the various departments of the hotel, is suggested as an appropriate method in this case because of the unusual proportion of food and beverage income, and, in addition, the substantial income derived from the car park. I believe this approach to be reasonable having regard to the findings I have made regarding the way in which the hotel operated.
Mr Smith reached his initial valuation of $36.9 million by capitalising the operating profit before interest, depreciation and tax of $4.06 million at his suggested capitalisation rate of 11%. He had taken the figure contained in the KFH report of $4.06 million for the operating profit subject to one qualification relating to a provision for future refurbishment requirements.
Mr Smith then proceeded to calculate what he regarded as the appropriate market rental by considering the level of rent appropriate for a long-term lease. In doing this, he had regard to two leases with which he had experience, namely, the leases for the Le Meridien Hotel in Melbourne and the Hilton Hotel in Sydney.
It therefore comes back to analysing the experts’ methodology to determine if the actual approach to the calculation of rental was reasonable. In simple terms, Mr Smith used total income and applied a percentage to that whereas Mr Aschberger divided up the income streams of the hotel and applied industry standards, with some modifications. They were standards with which he was familiar in the hotel industry and although these standards generally related to suburban hotels and motels, there was no evidence to suggest this was inappropriate. Mr Smith simply said he was not familiar with this method.
As previously indicated, Mr Aschberger applied various percentages to the annual income of each department to reach a figure for the annual rental. He used percentages for accommodation of twenty-five percent, an eight percent average for food and beverage, twenty percent for the function room, and other percentages for sundry items of income. One major item was the car park, and based on his experience with city car parks, he chose fifty percent.
Mr Smith, in his first report, distinguished between real estate value and the value of business components in the sale of the property. His experience was that hotel leases were rare, but he sought and found the two he used for comparative purposes to which I referred earlier.
The business value assessed independently of the real estate, on Mr Smith’s evidence, comprised a component for goodwill. It was his evidence that the goodwill for a hotel specialising in accommodation was derived from sources such as hotel guests, conference and meeting room users, banquet users and corporate users, and he distinguished those patrons from public bar patrons who would be more inclined to use the facilities for site related reasons.
From his comparison of the two leases, Mr Smith then obtained a rent figure to which he applied his capitalisation rate of 11 percent. He was thus able to reach a business value of 14.09 million, which sum included goodwill.
Mr Smith then divided the business value according to the various departments in the hotel, and reached figures of $7.61 million and $6.48 million respectively for the accommodation and food and beverage operations.
Finally, Mr Smith was able to conclude that 50 percent of goodwill relating to the rooms was unrelated to any site goodwill. He expressed the view that “…hotel and site related issues are not necessarily of prime importance.” He said in his report:
“[It] is reasonable to conclude that locational considerations generally do not singularly, or even largely account for the source of most accommodation hotels’ source of goodwill.”
He therefore finally came up with a value for goodwill which was unrelated to the site itself in the sum of $5.97 million. His overall calculation was that at 30 June 1994, the hotel had a value of approximately $36.9 million, and that included within that $36.9 million were two assets unrelated to the real estate value of the hotel, namely, a business value (including goodwill) of $5.97 million, and in addition, a value for business plant and equipment of $5.3 million.
In my view, Mr Smith was out of step in his failure to acknowledge the true importance of the site. The opinions of the other experts, Mr Aschberger, Mr Dee and Mr Rae, differ markedly on this aspect. I accept that of these, only Mr Aschberger gave evidence and was cross-examined but I was informed that neither Mr Dee or Mr Rae were available to give evidence. Their reports were before me by consent.
The criticisms made in cross-examination of both of the experts were detailed. I now deal with the major criticisms.
In his first report, Mr Smith used the older trading figures, that is, up to 30 June 1994 for his valuation of $36.9 million, but later when he used the projected annualised figures of Mr Aschberger, up to 30 June 1995, he came up with a value of approximately $55 million which of course was considerably in excess of the purchase price. His calculations showed effectively that he was allowing about $25 million for the value of the hotel’s business, obtained by capitalising a net operating profit of $2.756 million at 11%, and leaving therefore a real estate value of approximately $30 million.
In my opinion, that just does not accord with the common sense of the situation. The Commissioner, through his counsel, asked rhetorically why an investor would pay similar amounts for the business without any assets, and with a limited lease, as he would pay for the real estate content which is an asset he owned for all time. The answer is, in my view, clearly he wouldn’t, and this casts doubts as to that particular methodology.
The criticism made of the Aschberger valuation is that his figures related to an annualised projection to 30 June 1995 which was derived from actual trading figures up to 31 January 1995. The period between 30 June 1994 and 31 January 1995 was a period of considerable increased profitability in the hotel business generally. Therefore, it is said that the projected figures take into account that rising trend, and that whereas HSH paid the purchase price based on certain figures, the valuation by the Commissioner is based on different figures.
The response to this criticism is, first that there is no evidence about what figures the purchasers used. Secondly, it is acknowledged that the value of the hotel can be more accurately ascertained by using the figures to 31 January 1995 because the extra seven months trading up to that point showed a significant improvement in profit. Mr Smith in fact agreed that those later figures should be taken into account for valuation purposes.
Mr Aschberger’s instructions were to value the land and buildings as at 31 January 1995, having regard to the potential use of the land and buildings. He inspected the property for the purpose of the valuation on 10 January 2003. Apart from any other variation which one would expect because of the inexact nature of such a valuation, it is clearly more difficult to form such a retrospective valuation, although valuers are often asked to perform this task.
The accounts available to Mr Aschberger included information up to the end of January 1995. As already indicated, he determined a market rental and then capitalised that to obtain a market value. As against the total value of the assets, therefore, he was giving an opinion as requested on the market value of the land and buildings as at the end of January 1995 but taking into account various changes which had occurred both in the industry and in relation to this particular hotel.
Insofar as the total value of assets is concerned, in my view it is highly unlikely that there would be any significant difference between the value of those assets between 30 June 1994 and 30 June 1995 and therefore any intermediate position including the end of January 1995.
I have already dealt with the criticism of applying percentages to the revenue streams of the business, and as stated, there was no evidence to counter Mr Aschberger’s percentages or methodology.
A further criticism related to a different valuation carried out later by Mr Aschberger to another hotel in the same general location where different percentages to those used in this matter were applied by him to the various departments. It seems obvious that it is impossible to compare different businesses with any precision even though they might be generally located in the same area. In any event, the differences in my view are not all that significant given that there is a range of sensitivities to be applied. I do not regard this as a significant matter.
In his calculations, Mr Aschberger, as I have indicated, made some mistakes. In particular, in relation to the management fees, Mr Aschberger conceded he should not have taken all of those fees out of his calculation but should have adjusted the profit calculations in his report by eighty-five percent of the figure of $750,000 allocated for management fees.
In addition, Mr Aschberger conceded that he had not made an allowance for furniture, fittings and equipment (FF&E) when he was calculating the net operating profit.
The combination of these last two acknowledged errors substantially reduced the residual operating profit from about $2.8 million to about $1 million. Mr Aschberger maintained that the profit remaining, namely, approximately $1 million was still, in his opinion, appropriate. He said that the extra rent which someone would be prepared to pay to operate a business in such a premium location was reflected in this adjustment.
Mr Smith’s approach was likewise attacked by the Commissioner in relation to the methodology he chose. In his first report of 7 November 2003, the methodology used by Mr Smith resulted in a valuation of the hotel as a going concern as $36.9 million. Then in his witness statement, Mr Smith used updated and projected figures so that the valuation reached was approximately $55 million. The Commissioner pointed out that neither of those two figures bore any approximate relationship to the consideration paid for the business, namely, $45,783,306.00
The Commissioner attacked Mr Smith’s methodology because of his reliance on the two examples of what he regarded as comparable hotel leases. The Commissioner argued that the leases were not comparable. It is the case that there are very few leases of luxury hotels, and Mr Aschberger made the point that these two leases in particular did not bear all that much relationship to the business in question.
As already stated, Mr Smith used the total income to calculate the rental stream for the purpose of capitalising and reaching a value. Mr Smith’s rental in fact was derived from the average of the two leases he chose as the comparators, namely, Le Meridien in Melbourne and the Hilton in Sydney.
He was criticised for his choice of both hotels as comparators. Their locations for instance are quite different, Le Meridien being in the central business district of Melbourne at the bottom of Collins Street, and the Hilton centrally located in Sydney. Le Meridien did not operate its bars and restaurants in any way like the Ramada, and did not have the same successful car park operation. It did not have large function rooms with the impressive view which the Ramada offered. At the relevant time, it also required substantial refurbishing.
Mr Smith reasoned that he had not included anything for the obligation to refurbish in the Meridien lease because he assessed that the tenant of the Ramada would have to spend a similar amount. It seemed to me at the time that Mr Smith was somewhat hesitant and defensive in his answers to the cross-examination directed to him on this issue. He had plainly omitted it, in my view, and sought to retreat from that position. His assumptions were not correct as it turned out, and affected the validity of using the Meridien as a comparator.
The Meridien lease was entered into in 1992, and Mr Smith attempted to identify various points of similarity between the Meridien lease and the Ramada. I have already indicated some differences between the two operations, but for reasons which I have already indicated, it is not a valid comparison to say that both properties have a mixture of food and beverage facilities. Likewise, it is not a valid comparison to say that both hotels have positive locational attributes. Whilst there are similarities between the rooms in relation to their size and as to the number of rooms, and even the revenue available per room, I think the actual way in which the two businesses operated makes them unlikely comparators for each other. Put simply, the Ramada has a very large and successful bar and restaurant operation because of its strategic position and in that respect operates more like a suburban hotel. Even in relation to its rooms, they command outstanding views compared with inner-city views, all of which makes them quite different in the way that they operate.
In relation to the Hilton hotel, there was a paucity of information, and moreover, the information which was provided was incomplete. It was information which could tend to mislead and, in my opinion, that hotel, because of those factors, was not a good comparison. The Hilton lease was a forty-year lease entered into in 1975, and the terms of the entire lease were never made available to Mr Smith. In particular, he was unable to identify the obligations in the lease regarding fit-out. This made comparisons quite difficult.
Another significant criticism of Mr Smith’s valuation relates to the fact that on the amended figures, he ultimately was left with a value for the hotel business of about $25 million with the real estate valued at very roughly a similar amount. I have dealt with this in paragraph 193 of these reasons.
Likewise, by using the same capitalisation rate for both the real estate and the business component, another illogicality was demonstrated. In considering the risks, it cannot be said that the risks of running a hotel business should be equated with the risks of the landlord of those premises.
I think that the use of the revenue streams by Mr Aschberger has somewhat more precision, even though there must, of necessity, be a variation in the percentages between different types of hotels operating in different ways. However, as I have indicated, this hotel is what I have called a hybrid, and does not operate like most of the hotels that Mr Smith was familiar with. It has a much higher income from food and beverage than normal hotels of this type because of its local patronage. It also has what was conceded to be a quite significant income from the car park which is a large contributor to the profit.
I believe that Mr Aschberger’s approach to the car park rental, because of his knowledge of how it worked, placed him in a more advantageous position than Mr Smith. In my view, it was not possible to compare the car park operation of the Ramada with Le Meridien.
Mr Aschberger is a qualified and experienced valuer who was able to bring to bear his experience in adjusting figures from other hotels he had valued. It was submitted that Mr Aschberger was, in effect, out of his area of expertise in that he was being asked to value a business, and that therefore he was not bringing to bear his qualifications as a valuer of land. I take this into account in my overall assessment of the use to which the evidence of both of the experts can be put. Mr Aschberger’s knowledge of the local scene, and his understanding of how the hotel operated, and in particular his local knowledge of the importance of the site at Glenelg, gave him a distinct advantage over Mr Smith, aside from his valuation expertise.
That advantage, that is as a qualified valuer, in the valuation of the real estate component of the transaction was an advantage which, in my view, was not countered by HSH in any way other than by attacking his expertise.
I have formed the view, from reading all the criticisms made of each of the experts in final addresses, that Mr Aschberger’s approach is more appropriate for the operation of this hotel, and because he is a valuer with experience in the valuation of the real estate component, and Mr Smith is not.
I believe that it is very difficult, as I have said, to equate the leases of Le Meridien and the Hilton hotels to the Ramada for the many reasons canvassed in argument showing the dissimilarities between them. Mr Aschberger’s approach is more appropriate in relation to the food and beverage operation of this hotel, which places the hotel in a very different position than most of the hotels with which Mr Smith was familiar.
Resolution of Section 94(1)(b)
The errors and deficiencies in their respective reports, as acknowledged by both Mr Smith and Mr Aschberger, make the task of the court somewhat more difficult in finally resolving this matter.
I have Mr Smith’s amended calculations which include a substantial component for goodwill but which results in the somewhat unlikely scenario of a simular value being attributed to the business on the one hand, and the real estate on the other.
As against that, I have Mr Aschberger having to substantially reduce the profit component for an operator because of the need to adjust the rental figure.
Counsel for the Commissioner, after acknowledging the errors in calculation made by Mr Aschberger, produced a document, Exhibit R13, to show how any business value using Mr Aschberger’s approach but correcting the figures, was likely to be quite different than that established by Mr Smith.
Exhibit R13 takes the amended calculation for the profit figure available to the operator and capitalises this at fifteen percent. Depending on whether total management fees include a fee called the ‘Ramada fee’, the business value comes out between $6.49 million and $8.72 million.
When either of those two amounts is added to Mr Aschberger’s real estate value, total figures of $46.94 million and $49.17 million respectively are obtained. It seems that those figures are still within the ten percent tolerance I have found to be acceptable.
A capitalisation rate of fifteen percent was used in R13 because of a concession which Mr Smith made in his cross-examination. He considered that it would be appropriate in some cases and specifically did not say it was inappropriate in this case, even though he was re-examined generally on the topic.
The calculation in R13, provided the capitalisation rate of fifteen percent is used, serves to illustrate that if the Commissioner’s primary submission is rejected, namely, that no goodwill passed in the transaction, then it is possible to establish, by using Mr Aschberger’s adjusted figures, a business value in the order of either $6.49 million or $8.72 million.
This is no more than a useful cross-check to show that even though there were mistakes made in the calculation, the end result can still be said to be within the reasonable ‘ballpark’.
In the Commissioner’s assessment, the value of the real estate was expressed as approximately $39.7 million and the unencumbered value of all other property at approximately $46.8 million. Eighty percent of that total amounts to approximately $36.7 so that the excess above the threshold was then approximately $3 million.
I have formed the view, for the reasons stated, that the goodwill passing in the transaction which is not site-related is, in all the circumstances, relatively small and certainly no more than $3 million. If the Treasurer’s amended assessment is used, the margin is approximately $3.7 million. I mention this because the notice of appeal complains about both assessments.
In both the original assessment by the Commissioner and the adjusted calculation in R13 including a business value, it is likely that the eighty percent threshold is exceeded.
For these reasons I do not consider that HSH could legitimately come below the eighty percent threshold. The important thing is that it has not been demonstrated by HSH on the balance of probabilities that the assessment by the Commissioner, as varied by the Treasurer, is wrong.
The Commissioner’s assessment, in my view, is, as I have said, also reconcilable with the calculations made by other experts as to the likely value of the real estate even though calculated at different times and using different methodologies.
I have formed the view that any goodwill component is likely to be relatively low. Therefore the failure to include any allowance for goodwill in the Commissioner’s assessment does not mean that the assessment should be overturned. I would therefore dismiss the appeal.
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