Moloney and Commissioner of Taxation (Taxation)
[2024] AATA 1483
•7 June 2024
Moloney and Commissioner of Taxation (Taxation) [2024] AATA 1483 (7 June 2024)
Division:TAXATION AND COMMERCIAL DIVISION
File Numbers:2021/9509
2021/9511
2021/9513
2021/9514Re:Raymond Moloney
APPLICANT
Re:Jacqueline Moloney
APPLICANT
Re:Anthony Moloney
APPLICANT
Re:Kathryn Moloney
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President I R Molloy
Date:7 June 2024
Place:Melbourne
The objection decisions in respect of the Applicants’ amended income tax assessments for the year ending 30 June 2015 are set aside and the Applicants’ objections allowed.
...............................[SGD]...............................
Deputy President I R Molloy
Catchwords
TAXATION – INCOME TAX – objections to amended income tax assessments – capital gains tax – whether small business concessions apply – whether the market value substitution rule applies – parties dealing at arm’s length – whether maximum net asset value test satisfied – decisions under review set aside – decision allowing objections substituted
Legislation
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)Cases
AXA Asia Pacific Holdings Ltd v Federal Commissioner of Taxation [2009] FCA 1427
Copperart Pty Ltd v Commissioner of Taxation [1993] FCA 650
Copperart Pty Ltd v Commissioner of Taxation [1993] 30 ALD 377
Federal Commissioner of Taxationv AXA Asia Pacific Holdings Ltd [2010] FCAFC 134
Re Barnsdall v Commissioner of Taxation [1988] FCA 193
Spencer v Commonwealth (1907) 5 CLR 418
Trustee for the Estate of AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 21 ATR 1123REASONS FOR DECISION
Deputy President I R Molloy
7 June 2024
INTRODUCTION
1. These are applications to review decisions of the Respondent (the Commissioner) disallowing the Applicants’ objections to amended income tax assessments for the year ending 30 June 2015.
2. The parties are in general agreement as to the facts and issues.[1] Orders were made that the evidence in one application is evidence in all applications.
[1] Applicants’ Statement of Facts Issues and Contentions dated 1 June 2022 (Applicants’ SFIC); Respondent’s Statement of Issues, Facts and Contentions dated 8 September 2022 (Respondent’s SIFC); Applicants’ Supplementary Statement of Facts, Issues and Contentions dated 24 March 2023 (Applicants’ Supplementary SFIC).
FACTS
3. Between 1996 and 2015, the JG Moloney Family Trust (Moloney Trust) trading as Mt Noorat Freighters, carried on a bulk haulage freight business predominately in western Victoria specialising in stock feed, grain and other agricultural products (the Mt Noorat Freighters or MNF business).
4. The trustee of the Moloney Trust was JG Moloney & Co (Noorat) Pty Ltd (ACN: 007 127 353) (JGM). The directors of JGM were the Applicants, Raymond Moloney (appointed 4 March 1990) and his brother, Anthony Moloney (appointed 17 May 2006).
5. The Moloney Trust is a discretionary family trust. The beneficiaries include Raymond Moloney, his wife Kathryn Moloney, Anthony Moloney, and his wife Jacqueline Moloney (the Applicants).
6. Commencing in 2014, on the advice of Crowe Horwath, accountants, steps were taken to restructure the business holding.
7. On 12 June 2014, Mt Noorat Freighters Pty Ltd was registered (ACN: 600 068 406) with Anthony Moloney and Raymond Moloney as directors.
8. On 12 March 2015, Anthony Moloney and Raymond Moloney commenced to hold their shares in JGM as beneficial owners.
9. On 20 March 2015, Mt Noorat Freighters Pty Ltd changed its name to Mt Noorat Freighters Holdings Pty Ltd.
10. On 25 March 2015, JGM, in its capacity as trustee of the Moloney Trust, entered into a contract for sale of business pursuant to which the Mt Noorat Freighters Business was sold to JGM in its own right for $3,500,000.
11. A special condition of the contract provided that the price of the business shall be $3,500,000 (exclusive of GST) plus the assumption of liabilities referred to in special condition 3 – being liabilities for all debts of the business, including but not limited to all creditors, all staff entitlements, all hire purchases and leasing liabilities, and all bank debt.
12. On 25 March 2015, JGM, in its capacity as trustee of the Moloney Trust, entered into an agreement for sale of its shares to Mt Noorat Freighters Holdings Pty Ltd for $3,500,000 (the CGT event).
13. On 31 March 2015, JGM entered into a deed of appointment pursuant to which JGM was replaced as trustee of the Moloney Trust by Raymond Moloney and Anthony Moloney.
14. On 19 June 2015, the trustees of the Moloney Trust passed a resolution apportioning the income of the trust for the 2015 income year between beneficiaries with each of Raymond Moloney, Kathryn Moloney, Anthony Moloney and Jacqueline Moloney, entitled to 25% of the trust income.
15. Following the application of the CGT discount and small business concessions, the trustees (Raymond Moloney and Anthony Moloney) resolved to distribute the capital gain between the Applicants as beneficiaries as to 25% each.
16. The determination of the net income of the Moloney Trust for distribution to the beneficiaries took into account the 50% CGT discount and the CGT small business concessions, in reliance on a valuation of November 2014, which valued the Mt Noorat Freighters Business as being $3,500,000 as at 30 June 2014.
17. For the income year ended 30 June 2015, the Moloney Trust lodged an income tax return which relevantly provided as follows:
18. Net income from business:
19. Interest
20. $1,284,745
$3,210
21. NET INCOME
22. $1,287,955
23. Capital Gain from CGT event (sale of shares in JGM to Mt Noorat Freighters Pty Ltd)
24. $3,500,000
25. Less:
- 50% discount on capital gain – Division 115
- 50% active asset discount on capital gain – Division 152-C
- 2 Year deferral on balance of capital gain – Division 152-E
26.
27. $1,750,000
28. $875,000
$875,000
29. CAPITAL GAIN
30. NIL
18. Based on the above, each of the Applicants included $321,989 in their individual tax returns for the 2015 income year as their share of the distribution from the Moloney Trust i.e., 25% of $1,287,955.
19. On 29 April 2021, the Respondent issued an audit conclusion letter notifying the Applicants that their assessments were to be amended.
20. The Respondent concluded that the Moloney Trust was not entitled to the CGT small business concessions and deemed the shares sold by JGM to Mt Noorat Freighters Pty Ltd to have been disposed of for a market value of $10,640,000.
21. The market value of $10,640,000 was based on the midpoint of a range of valuations of the Mt Noorat Freighters Business (excluding debt) just before 25 March 2015, which was determined by KordaMentha in an updated valuation report dated 28 April 2021, after consideration of material provided by the Applicants.
22. KordaMentha’s valuation referred to the business and not the shares, which were the subject of the sale to Mt Noorat Freighters Pty Ltd. Other valuations variously refer to the value of the shares or the business. This is not an issue, as the parties acknowledged, provided the debts and other liabilities are factored in, because the underlying value of the shares was the business.
23. The Respondent relied on the market value substitution rule, in s 116-30 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), to substitute the KordaMentha value in place of the sale price of the shares in the contract with Mt Noorat Freighters Holdings Pty Ltd, including on the basis that the parties to that contract did not deal with each other at arm’s length.
24. The Respondent calculated the net capital gain to the Moloney Trust as follows:
Midpoint Enterprise
Plus cash at bank
Less debt
$10,640,000
$167,481
($3,830,000)
Total capital proceed
$6,977,491
Less 50% discount
$3,488,740.50
NET CAPITAL GAIN
$3,488,740.50
25. Based on the above, the Respondent amended the assessments of the Applicants to include an additional $872,185 in each of the Applicant’s assessable income as their share of the trust distribution from the Moloney Trust i.e., 25% of $3,488,740.50.
26. Thus, each Applicant’s share of the trust distribution was increased from $321,989 to $1,194,174.
27. On 29 April 2021, notices of amended assessment for the 2015 income year were issued to Anthony Moloney, Jacqueline Moloney and Raymond Moloney. On 4 May 2021, a notice of amended assessment was issued to Kathryn Moloney.
28. The Respondent determined that the safe harbour rule in s 284-75(6) of the Taxation Administration Act 1953 (Cth) applied, and hence no shortfall penalty was payable.
29. In reaching that determination, the Respondent accepted that all required information was provided to the tax agent. However, the tax agent made an error in obtaining a valuation as at 30 June 2014, rather than just before the CGT event of 25 March 2015.
30. On 27 June 2021, the Applicants lodged notices of objection to the amended assessments issued for the 2015 income year.
31. On 27 October 2021, the Respondent wholly disallowed the objections (objection decisions).
32. On 8 December 2021, the Applicants lodged these applications for review of the objection decisions.
ISSUES
33. There are two main issues between the parties:
(a)whether the market value substitution rule in s 116-30 of the ITAA 1997 applies to permit the Respondent to substitute the KordaMentha value of the shares (or any other value) in place of the actual capital proceeds as agreed/specified in the share sale agreement. The Applicants contend, firstly, that the rule does not apply because of the absence of a prerequisite, namely, the requirement that the parties to the share sale agreement did not deal with each other at arm’s length; and
(b)whether the small business concessions apply, and in particular, whether the maximum net asset value (MNAV) test in Division 152 of the ITAA 1997 was satisfied just before the relevant CGT event, being the execution of the share sale agreement on 25 March 2015. The MNAV test requires that the net value of the CGT assets of the Moloney Trust and connected entities did not exceed $6 million.
Dealing at arm’s length
34. Section 116-30(2) of the ITAA 1997 provides, relevantly, that the capital proceeds from the CGT event are replaced with the market value of the CGT asset that is the subject of the event if:
(a)…
(b)those capital proceeds are more or less than the market value of the asset and:
(i)you and the entity that acquired the asset from you did not deal with each other at arm’s length in connection with the event; …
(ii)…
35. The Applicants contend that the Moloney Trust and Mt Noorat Freighters Holdings Pty Ltd dealt with each other at arm’s length in connection with the CGT event. Therefore, by virtue of s 116-30(2)(b)(i), the market value substitution rule does not apply so as to permit the substitution of any other value in place of the actual capital proceeds as agreed/specified in the share sale agreement.
36. The expression “arm’s length” is defined in s 995-1(1) of ITAA 1997 as follows:
“arm’s length” in determining whether the parties deal at arm’s length, consider any connection between them and any other relevant circumstance.
37. The Applicants submit that the fact there is a connection between parties to a transaction, in this case, between JGM in its capacity as trustee of the Moloney Trust and Mt Noorat Freighters Holdings Pty Ltd, in respect of the share sale agreement, is not determinative that the transaction between them was not at arm’s length.
38. The Applicants submit the fact that parties are themselves not at arm’s length, does not mean that they may not, in respect of a particular transaction, deal with each other at arm’s length provided that the outcome of their dealing is a matter of real bargaining. Reliance was placed on the decisions in Trustee for the Estate of AW Furse No 5 Will Trust v Federal Commissioner of Taxation[2]; AXA Asia Pacific Holdings Ltd v Federal Commissioner of Taxation[3]; and Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd[4].
[2] (1991) 21 ATR 1123.
[3] [2009] FCA 1427.
[4] [2010] FCAFC 134.
39. The Applicants relied on the evidence of Anthony Moloney, his brother, Raymond Moloney, and an accountant from Crowe Horwath, Mr Camillo DeLorenzo, all of whom provided witness statements and gave oral evidence.
40. Anthony Moloney described the steps taken to restructure the MNF business and said that the accountant obtained a valuation. The valuation confirmed he said that no CGT would be payable as a result of the restructure and that the value of the shares was $3.5 million. Raymond Moloney adopted what was said by Anthony Moloney.
41. Mr DeLorenzo gave evidence that:
(a)He sought advice from the tax advisory team within Crowe Horwath concerning the consequences of the restructure of the business. The restructure was as suggested by the tax advisory team.
(b)Crowe Horwath and the tax advisory team provided advice to the Applicants in relation to the restructure and the need to obtain an independent valuation of the shares to determine whether the trust would be entitled to the small business concessions.
(c)The tax advisory department referred the restructuring matter to a valuation specialist, Mr Lachie McColl, within Crowe Horwath, to provide an indicative market valuation to assess the market value consideration for the sale of shares.
(d)Other than providing financial statements and answering a few questions, Mr DeLorenzo did not have any dealings with the valuer.
(e)Mr McColl worked within the corporate advisory team which was a separate department from Mr DeLorenzo’s and the tax advisory team.
(f)The corporate advisory team liaised directly with the Applicants for the purposes of the valuation. Neither Mr DeLorenzo nor anyone in his team was involved in the preparation of the market valuation – other than providing financials.
(g)Mr DeLorenzo provided the financials for 2011-2014 to the valuer. He did not provide the financials for earlier years. He provided the information that the valuer asked for. He did not know whether the tax advisory team provided the information for the earlier years.
(h)Mr McColl provided what was described as an independent market valuation report in November 2014 – which valuation was in accordance with APES 225.
(i)Mr DeLorenzo was satisfied that the valuation undertaken by Mr McColl and the corporate advisory division would be independent for taxation purposes.
(j)After receipt of the valuation, the tax advisory division advised the Applicants that the sale of shares could proceed without incurring CGT liability.
(k)Whilst there was some delay in the implementation of the structure, based on his knowledge of the business, Mr DeLorenzo thought the delay was of little consequence. Nothing significant occurred to the business to alter substantially the position provided in the valuation.
(l)Mr DeLorenzo was satisfied the transaction could proceed on the basis of the market valuation report – in circumstances where Mr DeLorenzo understood that it remained an accurate reflection of the true market value of the business.
(m)The restructure proceeded on the basis of the market valuation report and the Applicants were advised that the figure of $3.5 million would be used to undertake the end of 2015 tax reconciliation.
(n)In their capacity as directors of the vendor trustee and purchaser of the shares, Anthony Moloney and Raymond Moloney accepted the advice that the market value of the shares was $3.5 million and decided to proceed.
(o)Following the commencement of the audit, Mr DeLorenzo obtained further valuation reports from other sources in 2019. The reports provided a fair market valuation that was lower than that of Mr McColl.
42. The Applicants also relied on the following evidence of Anthony Moloney:
(a)All big decisions were made jointly with his brother, Raymond Moloney. The restructure was carried out on the advice of the accountant for future succession planning purposes.
(b)The accountant indicated that a valuation was needed. Crowe Howarth recommended a valuer that it has used previously for other work. The Moloneys did not know the valuer.
(c)Crowe Horwath were doing everything and part of that was organising the valuation. Mr Moloney had discussions with Mr McColl, the valuer, but Mr DeLorenzo supplied the information.
(d)Mr Moloney did not know why the valuer was provided with the financials for the years 2011-2014 only and not earlier years. He did not discuss any of the tax issues with the valuer.
43. The Applicants submit that in respect of the share sale agreement, the parties acted in their respective self-interest, there was no collusion, and the sale price of $3.5 million was the product of real independent bargaining based on an independent valuation.
44. It follows, the Applicants submit, that the price of $3.5 million was the product of an arm’s length dealing, so that this precondition to the application of the market substitution rule - that the parties did not deal with each other at arm’s length in connection with the CGT event - is not satisfied.
45. In Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd[5] , Edmonds and Gordon JJ observed[6]:
Any assessment of whether parties were dealing at arm’s length involves “an assessment [of] whether in respect of that dealing they dealt with each other as arm’s length parties would normally do, so that the outcome of their dealing is a matter of real bargaining”: Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 21 ATR 1123 at 1132 per Hill J. The reference in Furse 21 ATR 1123 to “real bargaining” is significant. It focuses on actual dealing between the parties: see also Re Hains (deceased); Barnsdall v Federal Commissioner of Taxation (1988) 81 ALR 173. That is not surprising. It is the same mental process as that described by Griffith CJ in Spencer v The Commonwealth (1907) 5 CLR 418 at 432.
The question of whether parties dealt with each other at arm’s length in respect of a particular dealing is one of fact in each case: Granby v Federal Commissioner of Taxation [1995] FCA 1217; (1995) 129 ALR 503 at 507. What is required is that “parties to a transaction have acted severally and independently in forming their bargain”: Granby [1995] FCA 1217; 129 ALR 503 at 507. Put another way, it requires consideration of how “unrelated parties, each acting in his or her own best interest, would carry out a particular transaction”: Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 at 291.
[5] [2010] FCAFC 134.
[6] At [105]-[106].
46. I accept that related parties, that is parties who are themselves not at arm’s length, may deal with each other at arm’s length in relation to a particular transaction[7]. I do not accept that this was such a dealing. What was produced and relied on was an Indicative Valuation, albeit as at 30 June 2014, prepared by Mr McColl. It was stressed that Mr McColl dealt directly with the Applicants for the purpose of the valuation, and neither Mr DeLorenzo, nor any member of the tax advisory team within Crowe Horwath, was involved in the valuation process.
[7] See also Copperart Pty Ltd v Commissioner of Taxation [1993] FCA 650; 30 ALD 377, [109] (Hill J); and Re Barnsdall v Commissioner of Taxation [1988] FCA 193, [17] (Davies J).
47. Even accepting, in these circumstances, that Mr McColl’s valuation could be regarded as independent, there was still no real bargaining between the parties to the share sale agreement. They just left it to the accountants. On receipt of Mr McColl’s valuation, as the Applicants submit, “the tax advisory team then advised that the sale of shares could proceed.”
48. There was none of the normal indicia of bargaining which might be expected of parties dealing with each other at arm’s length. The valuation was not challenged or queried on behalf of either the seller or the purchaser. That is unsurprising because each party to the agreement was substantially controlled and directed by the same persons. As the Respondent submits, there was simply no bargaining.
49. In all the circumstances, I am satisfied that the parties to the share sale agreement did not deal with each other at arm’s length in respect of the transaction.
Maximum Net Asset Value
50. Section 152-1 of ITAA 1997 states that, ‘to help small business, if the basic conditions for relief are satisfied, capital gains can be reduced by various concessions…’
51. To qualify for the CGT small business concessions, the following basic conditions must be satisfied by an entity (in this case, the trust estate):
(a)a CGT event happens in relation to a CGT asset of the entity in an income year;
(b)the event would (apart from Division 152) have resulted in a gain;
(c)the entity satisfies the maximum net asset value test; and
(d)the CGT asset satisfies the active asset test.
52. With the exception of the maximum net asset value (MNAV) test, there is no dispute between the parties that the basic conditions were satisfied. The MNAV test is contained in s 152-15 of the ITAA 1997 and provides as follows:
You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000:
(a)the *net value of the CGT assets of yours;
(b)the net value of the CGT assets of any entities *connected with you;
(c)the net value of the CGT assets of any *affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).
53. The issue is whether the net value of the CGT assets of the Moloney Trust together with the net CGT assets of any entities connected with the Moloney Trust exceed $6,000,000. It is common ground that two of the Applicants, Kathryn Moloney and Jacqueline Moloney, were entities (and the only entities) connected with the Moloney Trust just before 25 March 2015. It is also agreed that the combined net value of their CGT assets was $803,901.
Overview
54. A number of expert valuations were exchanged between the parties prior to the objection decisions. Since the commencement of these proceedings, additional expert reports have been served and lodged. The Respondent relied on the KordaMentha (KM) valuations as updated or amended. Mr Andrew Ross from KordaMentha gave oral evidence. The Applicants relied on several valuations but principally upon those prepared by PKF Corporate Advisory (PKF). In that respect, Mr Paul Lom gave oral evidence.
55. I have considered the other valuations provided by the Applicants to the Respondent including in the course of the audit. The persons who prepared those valuations were not called as expert witnesses. That, in a sense, is the choice of the Respondent. Nonetheless, I have not derived any real assistance from these other valuations. As the Respondent points out, they were not prepared in accordance with the Expert Code of Conduct, and their content includes argument and conjecture rendering them of little probative value. Moreover, the issues have been developed and refined through the KM and PKF valuations, and I have had the benefit of seeing and hearing the authors of those valuations give evidence including under cross-examination. I agree with the Respondent’s submission, however, that the report of Crowe Horwath prepared in or about November 2014, prior to the dispute, does contain useful information and incites.
56. Both the experts, Mr Ross and Mr Lom, used the capitalisation of maintainable earnings methodology. This involves determining the arm’s length level of future maintainable earnings (maintainable EBITDA) and then applying a capitalisation multiple to the maintainable EBITDA. The experts applied their experience in valuing the Mt Noorat Freighters business (and the shares). They were not purely formula-driven based on financial statements and available market data.
57. I was impressed by each of the experts who gave evidence. They were well-qualified and had extensive relevant experience. They gave logical and rational reasons in support of the views they expressed. They placed differing emphasis on certain matters, and drew different conclusions, which is only to be expected. I think they did their best in cross-examination to answer the questions they were asked. Challenges were made, in particular, to Mr Ross’s credibility and impartiality. I have considered these matters. I am of the view, however, that each of the expert witnesses gave honest and objective evidence. I am satisfied that they expressed opinions that they genuinely held. I am satisfied they were equally honest and competent.
58. For convenience, I will refer to the competing final positions of the experts as the KM (or KordaMentha) valuation and the PKF valuation.
59. The Respondent set out, in final written submissions, what were perceived to be the final positions of the experts as to the market value of Mt Noorat Freighters (and the JGM shares) as follows:
| KM | PKF | |
| Maintainable EBITDA | $1.85 million | $1.6 million to $1.7 million |
| Capitalisation multiple | 5.5 to 6.0 | 3.75 to 4.25 |
| Valuation of business | $10.175 million to $11.1 million | $6 million to $7.225 million |
| Less: Long term/ Financial liabilities | ($3,660,000) | ($3,660,000) |
| Valuation range | $6,515,000 to $7,440,000 | $2,300,000 to $3,600,000 |
| Midpoint (say) | $7,000,000 | $3,000,000 |
60. The Applicants did not entirely accept this summary. They contended, referring to Mr Lom’s evidence, that the capitalisation multiple should be 3.3 to 3.6. But whilst Mr Lom said that there was justification for further reducing the multiple by a business specific risk factor, which would have supported the Applicants’ contention, he expressly said he had not done that, given what he described as the “judgmental nature” of doing so.[8] I conclude that the above table does represent the two experts’ positions.
[8] Tribunal Book, page 1388, PKF Report, 3 June 2022, [8.17].
61. The adjustment for long term/financial liabilities was agreed. The connected entities’ CGT assets, $803,901, must also be taken into account. It is apparent, however, that if either the Applicants’ or the Respondent’s position is entirely accepted, then that figure of $803,901 does not affect the result for the purpose of determining whether the MNAV test was satisfied.
62. As the Respondent submitted, a significant factor in KM’s determination of an appropriate capitalisation rate (and to a lesser extent maintainable EBITDA) was their perception of the industry and environment within which the Mt Noorat Freighters business operated.
63. In identifying such factors, KM primarily relied on information contained in Crowe Horwath’s report, in or about November 2014, which provided the valuation as at 30 June 2014. It identified as a source of its information “discussions and correspondence” with the management (namely Anthony and Raymond Moloney).
64. The information in the Crowe Horwath report referred to the following matters pertaining to the business:
(a)the business originally had one customer that represented 100% of its revenue but it subsequently diversified its customer base, so that that one customer, Ridley Corporation Limited (Ridley), accounted for approximately 50% of total revenue in FY2014;
(b)the loyalty of Ridley was underpinned by a strong relationship with management and it was highly unlikely Ridley would change suppliers in the near future – the management also had strong relationships with other customers in the western Victoria region where the business operated;
(c)Ridley had previously transported its own products but had no intention of returning to that model;
(d)Ridley’s strategy included consolidating its Noorat/Teranga location and expanding its dairy offering in the location which was a positive signal for the business;
(e)the business had an experienced workforce and provided internal training to promote driver safety and ensure an understanding of the appropriate regulations;
(f)it had a fleet of modern trucks that included GPS tracking and a diary that monitors the schedule of drivers – the trucks were maintained to a high standard;
(g)management maintained excess capacity as opportunities tended to arise at short notice, which it could capitalise on, rather than referring to other freight operators;
(h)there was limited competition capable of providing freight services at a similar scale in the western Victoria region;
(i)the current management had overseen significant growth since inception (in 1996).
65. In addition, KM took into account that the reported profits of the business were significantly higher than the average margins in the wider industry (five to six times higher than the industry average) and the profits had been increasing during the period from 2012 to 2015.
66. In a report dated 28 April 2021, KM reduced its valuation of the business after taking into account additional information which had been provided at KM’s request. Half of the reduction in the valuation was:
(a)due to KM becoming aware that revenue assumed to have been from haulage operations was actually revenue from asset sales (being irregular sales of depreciated assets); and
(b)the other half was attributable to the Ridley contract not being transferable to any new owner and other additional clauses in the Ridley contract that Mr Ross agreed he had not fully considered in his earlier report.
67. In cross-examination, Mr Ross was challenged as to whether he should have given more or significant weight to other matters or information, some of which was contained in a report or reports obtained during the audit period. Those matters and his responses, as set out by the Respondent, were as follows:
(a)management would not stay in the business – it would be unreasonable for a vendor of a business to take deliberate steps to deflate the value of a business. In most small businesses there is a transition period;
(b)staff would not stay in the business – there was no reason for staff to leave where they have security and tenure and live in an area where there is limited opportunities of employment – further there was no significant alternative competitor operating in the same industry where the staff could find alternative employment;
(c)the Ridley contract had still not been executed 5 years after the valuation date – this was with the benefit of hindsight and accordingly not relevant – but the relationship with Ridley had existed since the commencement of the initial term in 2010 and there was no suggestion that the business relationship was about to end;
(d)under the Ridley agreement, Ridley had to be notified if Mt Noorat Freighters proposed to sell a vehicle and have first right of refusal – Ridley had previously abandoned undertaking a trucking business and had no intention of returning to that model;
(e)90% of the work was related to the dairy industry which is highly volatile – the business had been able to manage this volatility as demonstrated by a record of increasing profits in the years prior to the valuation date and its long operating history in this industry;
(f)the wider industry had been diversifying to better drought-proof their business – the business had been operating since 1996 and the ability of the management to navigate risks of this kind had been factored into the historical results of the business.
68. The Applicants pointed out that, in his evidence in chief, Anthony Moloney said:
(a)The MNF business has been subject to the vagaries of the agricultural markets which tend to be cyclical in nature, which has always been a factor having an impact on the stability of the business’s revenue stream from one year to the next.
(b)Because approximately 90% of the cartage work related to dairy, fluctuations in the dairy industry affected the amount of cartage work available in the market. Other factors that bear on the business include competition, change in customer requirements, and changes in cartage rates and costs of fuel and maintenance.
(c)By early 2015, the make-up of the customer base was (i) Ridley 55%, (ii) Southern Stockfeed 20%, (iii) Caprice 10%, and (iv) other small customers.
(d)As at March 2015, he did not turn his mind specifically to whether the business was going to grow further. He does recall observing that the revenue was up and the hours the drivers were working had increased. He did not understand that 2015 was a good year until the end of the year when he spoke to the accountant.
(e)Once he was informed of this, he did not think that this revenue growth would continue because he knew that the sector was highly unpredictable and that all things had to align before there is a good year. There were good and bad years as reflected in the trading summary.
(f)As at 25 March 2015, the Ridley contract was extant and was due to expire on 9 August 2015. It commenced in 2010 with an initial term of 3 years and was extended by two further years.
(g)Whilst a new contract was being circulated, it was never signed – although the services arrangement continued. That contract was signed on 7 December 2020. The terms of the Ridley contract included:
· Mt Noorat Freighters was engaged as an independent contractor/carrier on a non-exclusive basis to provide road haulage to Ridley: Clause 1.1
· The carrier is free on its own account to undertake any work in any capacity and to enter into similar arrangements with other parties: Clause 1.3
· Ridley will undertake a formal review of the services provided by the carrier on a 6 monthly basis: Clause 1.5
· The carrier acknowledges that Ridley does not warrant any minimum number of assignments that it will provide to the carrier, nor does it warrant that any assignment will be of any minimum volume of product: Clause 3.4
· The carrier’s fee will be reviewed in accordance with an industry-based cost index on an annual basis. If agreement cannot be achieved, then either party may terminate or seek mediation: Clause 8.2
· The carrier acknowledges that the rights and duties created by the agreement are personal to the carrier: Clause 12.2.
69. In his evidence in chief, Raymond Moloney essentially adopted what was said by Anthony Moloney.
70. The Applicants submitted that Anthony Moloney’s evidence in cross-examination was consistent with his statements, credible, and ought to be believed. In particular, he said:
(a)Ridley was not MNF’s sole customer since before 2006.
(b)Ridley’s business comprised two parts – 70% of the business involved the sale of stockfeed and its cartage to farmers. The other 30% involved buying raw materials from farmers which needed to be picked up from the famers and delivered to Ridley’s processing plant.
(c)The use of specialised equipment was only relevant to the delivery of finished product from the stockfeed mill because the farmers did not have unloading equipment. Normal everyday trucks were sufficient to collect the raw materials from farmers because the farmers have the necessary equipment to load the trucks.
(d)That is, if MNF was collecting grain from a farmer for processing into feed, it could use a normal bulk haulage type vehicle. If they were collecting feedstock that had been processed, then MNF used specialised equipment to deliver to the farmers.
(e)The specialised equipment is not required all the time. People can do without MNF’s specialised equipment but for MNF, “we made sure we had very good specialised equipment”.
(f)MNF did not need the specialised equipment to do a lot of the work, but it chose to have the specialised equipment because, “that is what we do and we consider ourselves professionals in the industry.” There are still people doing the work without the specialised equipment.
(g)The stockfeed suppliers like Ridley do not require the carrier to have specialised or a particular type of equipment. They require the carrier to be able to deliver their feed in a safe and timely manner.
(h)MNF also provided haulage work for Southern Stockfeed and Caprice, which was similar and involved buying raw materials from farmers, processing it and delivering the finished product to other farmers.
(i)There are many businesses in the stockfeed business that are fighting for the same market as it is highly competitive. Companies in the stockfeed business let transport companies know that they were looking at growing their market. When Ridley indicated a strategy to expand, “that would be pretty general corporate speak, I would imagine, that I’ve heard them say many times over the years”. That was not viewed as a positive signal for MNF going ahead. All the companies that MNF worked for say the same thing from time to time.
(j)MNF did not expect increased work from the expanding market as “it was about staying relevant in the market and making sure that you didn’t go backwards, because we deal in a very volatile market that has real ups and downs and you’ve always got to be looking at what you call drought proofing, which means that when there are bad seasons and things are tough, you are able to diversify.”
(k)The contract with Ridley was not an exclusive contract. The 2015 contract was not signed until 2020 but the services continued even though there was no contract in place.
(l)As the MNF business grew, the amount of Ridley’s work reduced and was replaced by other companies or other work. The work for Ridley was not an upward trend and varied, but there was a certain amount of work for Ridley that had a certain amount of consistency.
(m)There was other work, mainly the carting type of work, that was not specialised and MNF was getting less and less of that because Ridley was going to the open market and a lot of that work was being done by others – that was why the percentage of Ridley work reduced because they got others to do that work.
71. In cross-examination, Raymond Moloney’s evidence was consistent with that of Anthony Moloney.
72. The Applicants make the point that much of what Anthony Moloney and Raymond Moloney had to say was not directly challenged in cross-examination. Of course, much of what Anthony Moloney had to say (and through him, Raymond Moloney), was a combination of fact and opinion (including predictions). I did not understand there to be any significant dispute in respect of most matters of fact, for example, that specialised equipment was not always required.
73. The Respondent contended there are inconsistencies between assertions made by management contained in the Crowe Horwath report, and Anthony and Raymond Moloney’s evidence before the Tribunal. It was submitted that their evidence reflected a more unfavourable view of the business. However, I found them credible. Much of what they said was opinion or conjecture. And of course, they come to the matter from their own perspective. Understandably, they emphasised matters they saw as important to their case. I have considered their evidence in this light, and in conjunction with the other evidence which bears upon the valuation, including the contents of the Crowe Horwath report.
Maintainable EBITDA
74. Mr Ross and Mr Lom agreed on the normalised EBITDA for FY2011 to FY2014, but not in respect of FY2015. For FY2015, KM adopted a normalised EBITDA of $2,008,421 and PKF adopted a normalised EBITDA of $1,920,561. The Respondent summarised the position as set out below:
| Financial Year | 2011 | 2012 | 2013 | 2014 | 2015 |
| PKF | 1,970,376 | 1,397,639 | 1,469,590 | 1,663,695 | 1,920,561 |
| KM | 1,970,376 | 1,397,639 | 1,469,590 | 1,663,695 | 2,008,421 |
| Difference | 0 | 0 | 0 | 0 | 87,860 |
75. In broad terms, as submitted by the Respondent, the higher maintainable EBITDA determined by KM is a result of KM placing greater weight on the revenue of the business in the more recent period before 25 March 2015, and reflects a continuation of a trend of increasing revenue. PKF takes the view that a prudent purchaser would not assume such a trend would necessarily continue given the nature of the business. The Respondent contends that the KM opinion is to be preferred as it is consistent with the financial data recording the increasing revenue generated by the business over a number of income years (from 1 July 2010 onwards).
76. In assessing the normalised FY2015 EBITDA, KM initially adopted the annualised EBITDA based on the financial statements of the Moloney Trust for FY2015 and the financial statements of Mt Noorat Freighters Pty Ltd for FY2015. This approach was rightly criticised because the FY2015 financial statements included a time, and could only have been prepared, after the valuation date. KM then revised its approach to take into account only the financial statements of the Moloney Trust for FY2015 which recorded the results of the business until 31 March 2015.
77. I accept that this was an appropriate approach. Despite Anthony Moloney’s evidence that he was unaware of the profitability of the business at the time, I accept the Respondent’s contention that that information would have been available as at the valuation date, although not in the form that KM relied upon in its report i.e. the FY2015 financial statements for the Moloney Trust. Mr Lom conceded in cross-examination some financial information at least up until 28 February 2014, would have been available to a prospective purchaser.
78. I accept the Respondent’s contention on this point. That is, that a potential purchaser, could have accessed the financial information to the valuation date. This also happens to conform with the principle that a hypothetical potential purchaser is taken to be conversant with the subject of the sale at the relevant time, and cognizant of all the circumstances which might affect its value[9].
[9] Spencer v Commonwealth (1907) 5 CLR 418, per Griffiths CJ, page 432, and Isaacs J, page 441.
79. In determining maintainable EBITDA, KM selected $1.85M and PKF selected a range of $1.6M to $1.7M.
80. The Respondent submits that the maintainable EBITDA determined by KM is to be preferred including for the following reasons:
(a)the normalised EBITDA for FY2012 to FY2015 demonstrates a steady growth – to the extent that FY2011 is an “outlier”, it is actually in favour of the business having higher profitability potential as demonstrated in FY2015;
(b)there is no evidence to demonstrate that the business is cyclical, in the sense “that growth was immediately about to cease occurring” - to the extent that there is an “outlier” in FY2011, this does not assist a lower maintainable EBITDA;
(c)the assertion by PKF that the business is inherently cyclical on the basis that it is involved in the “farming industry” which is cyclical and is subject to the “impact of different weather conditions” is a gross generalisation – it says nothing about the particular farming experiences in western Victoria and its impact on this kind of freight business;
(d)PKF states that “when valuing an established business [not a fast growing or relatively recently established business] that is reporting steady revenues, I would usually look at an average of the past two or three years’ results and I would generally adopt a weighting system with more weight placed on more recent results as these generally are the most relevant” (albeit Mr Lom goes on to state that he would use a longer time span for a cyclical business) – accordingly, if the Mt Noorat Freighters business is not cyclical this would result, based on PKF’s calculations, in a weighting towards the more recent years FY2013, FY2014 and FY2015. and a maintainable EBITDA of $1.8 million;
(e)there is no indication that PKF took into account Ridley’s proposed strategy including consolidating its Noorat/Terang location and expanding its dairy offering in the location, and Mr Lom in cross-examination specifically stated he did not take it into account – this development was described as a “positive” signal for Mt Noorat Freighters by Crowe Horwath in its November 2014 report and taken into account by KM;
(f)PKF disclaims, contrary to the evidence, that there is any prospect of future growth due to the expansion by its customers;
(g)Anthony Moloney states “the business has grown significantly since it was established in 1996 …” – (albeit he does then refer to the cyclical nature of harvest years as being a factor impacting the stability of revenues) – again, this is entirely consistent with a general upward trend for the business;
(h)Anthony Moloney refers to Southern Stockfeeds (20% of make-up of the business) and Caprice (10%) endeavouring to grow their positions in the market that would utilise specialised equipment being acquired by the business;
(i)PKF was not aware of the potential increase in business from Southern Stockfeeds and Caprice - to the extent that there was a proposal for expansion by Ridley, PKF does not refer to it in its reports as having been taken into account as compared to KM.
81. The Respondent submitted that in determining the maintainable EBITDA of $1.85 million, KM has taken a relatively realistic and accurate determination of the economic and commercial circumstances of Mt Noorat Freighters as at the valuation date.
82. The Applicants were critical not only of the KM valuation, but of Mr Ross himself. Their submissions went as far as to accuse him of dishonesty, of concealing the truth, and incompetence. I reject each of these submissions. I repeat what I said earlier. I find both experts who gave evidence to be competent and to have expressed openly and frankly their genuinely held opinions. I therefore put to one side the personal attack on Mr Ross. It has not influenced my assessment of the valuation evidence or my decision in any way.
83. Turning to the criticisms of the actual KM valuation, it was submitted on behalf of the Applicants that Mr Ross did not give weight to the following:
(a)the presence of competition and low barriers to entry;
(b)there was no firm contract in place and the terms of the extant contract with Ridley, could not provide comfort to a prospective purchaser that they will be able to secure or negotiate a new contract that could generate profits in 2015;
(c)the Ridley fees were reviewable in accordance with industry based benchmarks;
(d)the profits of 5-6 times industry average were simply not maintainable and attracted external competition which would necessarily erode such profits;
(e)the business operated in a limited geographical area and hence, the potential for growth was limited;
(f)the revenue for the years prior to 2011 suggested a degree of fluctuation that would raise serious risk that the 2015 profits would not persist, and the business could flatten and possibly drop in profitability;
(g)there was a large number of operators who had already taken business from MNF; and
(h)the IBIS forecast was that the profitability in the sector was expected to decline.
84. The IBISWorld industry report[10] published in February 2015, contains the following statements:
(a)Industry revenue is projected to grow at a compound annual rate of 2.5% over the five years through 2019-20. Despite this strong performance, industry profitability is expected to decline as operators face growing skill shortages and potentially higher access costs to the country’s road networks. High competition will force many smaller operators to absorb these rising costs, sacrificing profit margins in the process. [page 4]
(b)Over the past five years, demand from downstream users of agricultural output has grown faster than the other major markets. Receding drought conditions have underpinned this growth. More favourable weather conditions have increased crop sizes and have driven demand for transport services from downstream users of agricultural inputs . [page 15]
(c)The industry is characterised by high levels of competition from internal and external sources. Rival road freight operators and alternative forms of freight compete fiercely for market share. Competition can vary based on size of operations, with larger firms maintaining significant market power in the industry despite low market share. [page 21]
(d)Due to the large number of owner-operators and fierce competition, the major players essentially set the rate they are willing to pay to subcontractors, forcing these operators to accept low margins or lose work. [page 22]
(e)Barriers to entry in the industry are low, with entry into the general freight market possible for as little as the cost of a second-hand light commercial vehicle. Competition among players after entry provides the largest industry barrier. [page 22]
[10] Exhibit B, IBISWorld Industry Report I4610 – Road Freight Transport in Australia dated February 2015.
85. Mr Lom prepared three reports, a letter reviewing the initial KordaMentha valuation and, as I have said, he gave oral evidence. As previously stated, PKF adopted maintainable earnings in a range of $1.6 to $1.7 million. Mr Lom’s evidence, both written and oral, included the following:
(a)As companies tend to forecast increasing profits, multiples based on forecast results are usually lower than those based on historical results. Only historical results of the company being valued are taken into account, if it is to be valued using a multiple derived from the historical results of comparable companies.
(b)In 2015, the business’s cartage income was high due to an exceptionally good harvest of wheat and barley. A prudent purchaser would have been aware of this and would not have assumed that this was likely to be the new norm.
(c)The MNF business relied on carting cattle feed and serving the local farming community. 90% of the business relied on the dairy industry and the volume of freight available to the business varies from year to year depending on weather conditions.
(d)Looking at the most recent period could show the results as either good or bad, but to get a sense of what is the real picture, it is necessary to look at the good and bad years.
(e)The duration of the cycles depends on what the weather does and that could be either two or ten years. It is impossible to predict.
(f)When considering the business environment in which MNF operated, there was only so much freight available – that is the amount of freight available was limited by the geographic area. A buyer would not accept that the 2015 result was maintainable into the future.
(g)The selection of a level of maintainable earnings requires a degree of commercial judgment and should not be purely formula-driven. When valuing a business that operates in a cyclical industry, he looks at a longer time span to try to capture the average profitability over the business cycle.
(h)Mr Lom said that Mr Ross has made an assumption that the trend he has observed would continue into the future and that a prudent purchaser would accept such an assumption. There is no evidence that Ridley has increased its production capacity and there is no evidence that the volume of business from the local farming community has grown over time.
(i)The MNF business is heavily dependent on seasonal conditions and good harvests are inevitably followed by poor harvests. Mr Lom made a different assumption to that made by Mr Ross – that is, that a prudent purchaser would not assume that the trend observed by Mr Ross is likely to continue. For that reason, Mr Lom selected a level of maintainable EBITDA that more closely reflects the average of past results.
(j)Mr Lom considered the normalised EBITDA for 2015 and said that the difference between the valuers in the normalised EBITDA for 2015 has no impact on the various average calculations that he has made and the judgments expressed in his reports.
86. I think PKF is correct in that the difference between the two valuers does not lie so much in the adjustments to historical results. It is more a difference in the perception of the economic and commercial circumstances of Mt Noorat Freighters as at the valuation date. I have taken all of the above matters into account. I am much influenced by PKF’s approach. I believe Mr Lom has given more attention and consideration to this particular business and the circumstances and location in which it operates. I believe PKF has taken a more realistic approach to the cyclical nature of the agricultural sector and how that may, and likely will, affect the MNF business. Overall I believe PKF has focussed more closely on this particular business. And I think PKF’s view more closely aligns with the likely thinking of a willing but not anxious purchaser (and seller) as at the valuation date.
87. The Applicants have satisfied me that I should accept the PKF range, that is, maintainable earnings in a range of $1.6 million to $1.7 million.
Capitalisation multiple
88. The maintainable earnings must be capitalised at an appropriate multiple. In arriving at the competing capitalisation multiples, the experts again considered various factors relating to the MNF business, including the environment in which the business operated, and information as to capitalisation multiples of other businesses operating broadly in the same industry.
89. With the application of their judgment and experience, the experts determined what they considered to be an appropriate multiple. KM determined a capitalisation multiple of 5.5 to 6.0. PKF determined a capitalisation multiple of 3.75 to 4.25.
90. The experts referred to publicly available information on capitalisation multiples derived from:
(a)multiples inherent in the share prices of individual listed entities (Trading Multiples);
(b)multiples inherent in the sale prices of controlling interests in individual unlisted entities (Transaction Multiples); and
(c)survey data being summarised transaction multiple data derived from the review of multiple transactions which involved the sale of controlling interests in unlisted entities collated and published by Pepperdine University and Grant Thornton (Survey Data).
91. The primary sources of disagreement between the experts in respect of this information is:
(a)whether the Trading Multiples should be adjusted downwards by a “discount for lack of marketability for controlling interest” (“marketability discount”) in order to reflect the trading multiples applicable to an unlisted entity such as the Mt Noorat Freighter business; and
(b)the relevance and relative weight to be given to the Transaction Multiples and Survey Data.
Trading multiples
92. PKF considered a number of transport companies listed on the ASX as at the valuation date and determined their multiples on a “control basis”. Mr Lom considered it appropriate to adopt a control premium in a range of 21% to 26% to the market capitalisation of the comparable companies (with one exception, as he explained) to determine the multiples on a “control basis”. Mr Lom then took into account that shares in public companies are readily marketable and therefore liquid. He opined that an investment in a listed company is more valuable than an unlisted company, due to lack of marketability. The lack of marketability of a controlling shareholder is due to the absence of a private market and the transaction costs to achieve liquidity through either a sale or a public offering.
93. This was said to support a discount to reduce the listed multiple to an unlisted multiple. PKF adopted a marketability discount of 25% to the Trading Multiples. This discount was to reflect the reduced transferability of unlisted shares but also the fact that investments in listed companies are considered to be less risky due to stronger financial reporting disciplines imposed by public scrutiny.
94. Mr Lom also said that the companies he relied on are much larger by revenue and EBITDA than Mt Noorat Freighters and operate in multiple markets. Shares in larger companies tend to be more valuable which supports a further discount to allow for size and access to capital not enjoyed by smaller private companies. The smaller the size of the business, the less diversity of customers and the lower the income flows and, therefore the greater risk for the equity holders.
95. KM takes the view that no discount is applicable. This is on the basis that when multiples in listed companies are adjusted by a control premium, there is no need for any further adjustment. The value of controlling interests in listed companies reflects the value of controlling interests in unlisted entities. Both involve the existing equity owners having to engage in a similar process of preparing the entity as a whole for sale, the sale process, and completing the sale.
96. To apply a marketability discount to multiples of listed companies is appropriate only if the multiple is to be used to determine the value of a minority (non-controlling) interest in an unlisted company i.e., to reflect the lack of marketability of a minority (non-controlling) interest in an unlisted company. In this case, the multiples of controlling interests in listed companies are being used to determine the value of a controlling interest in an unlisted company (the Mt Noorat Freighters business) so that “like is being compared to like”.
97. That submission on behalf of the Respondent is true to a point. But there are what I accept as significant differences, identified by Mr Lom, which overall justifiy the marketability discount he has applied. In addition to the matters referred to above, Mr Lom also refers to three matters specific to the Mt Noorat Freighters business, namely, (a) customer concentration – 65% of the business with Ridley; (b) the contractual arrangement with Ridley did not guarantee any amount of work; and (c) the profitability of the MNF business, although relatively high, carried the risk that it could not be sustained.
98. Mr Lom said he believed these items justify reducing the multiple by a business specific risk factor. He decided not to reduce the multiple further for this factor, given “the judgmental nature” of doing so, but alluded to inclusion of a further 15% business specific risk. As I have said earlier, when stating the valuers’ positions, Mr Lom did not apply this further discount, but only in circumstances in which he had already factored in the marketability discount. Overall, I think his approach is conservative and realistic. In terms of exercising his judgment, I am persuaded that Mr Lom’s approach, and the capitalisation multiple range upon which he has settled, are correct.
99. The Respondent submitted that PKF’s position on a discount for lack of marketability suffers from a credibility issue because no mention was made of such a discount in the first PKF report dated 14 December 2020, in which PKF was instructed to critique KM’s first report. I do not give any weight to that submission, however, because of the nature of PKF’s so-called first report, and recognising the reports on both sides have evolved over time.
100. The Respondent also submitted that the Applicants did not challenge Mr Ross in cross-examination suggesting that a discount was necessary, as compared to Mr Lom who was challenged on the issue by the Respondent. But this is a case in which the experts have expressed their views in reports exchanged over time, and their opposing views are well-known. I have taken the Respondent’s submission into account, but I am not much influenced by it.
101. I firmly believe that Mr Lom’s approach is to be preferred.
Transaction multiples
102. Three transactions were initially identified in the Crowe Horwath report involving the sale of Scott Corporation Ltd, Giacci Holdings Pty Ltd and Mitchell Corp. Pty Ltd. KM identified the businesses as having changed hands at multiples of between 4.2 and 6.9. However, as the transactions took place between March 2011 and November 2013, up to 4 years prior to the valuation date, KM placed more weight on the Trading Multiples. KM also rejects PKF using the Scheme Booklet data for Mitchell Corp. Pty Ltd on the basis that it does not explain the source of its multiples.
103. PKF seeks to support its multiple by reference to five additional businesses referred to in Lloyd’s Business Brokers. KM takes the view that it is not appropriate to place weight on the data from Lloyd’s Business Brokers for the following reasons:
(a)the dates of the transactions are not identified and transaction multiples can and do change over time;
(b)there is no information on the identity of the business or the parties transacting – so it is not possible to determine if they are accurate and reflect market forces e.g., the transactions may be between related parties or forced disposals;
(c)the description of the businesses (“Refrigerated Road Transport”, “Mobile Concrete Pumping”, “Transport Logistics Air Express Freight” and “International Freight Forwarding”) does not allow any assessment of whether the businesses are comparable in a meaningful sense to Mt Noorat Freighters.
104. In its final report, KM refers to all of the nineteen Transaction Multiples referred to by both experts (including the additional transactions in the Scheme Booklet). This results arguably in an average multiple of 3.6. But KM identifies a number of deficiencies in the PKF analysis that undermine the multiple derived, including an absence of information concerning some of these transactions. KM submits that the Transaction Multiples are more supportive of KMs multiple.
105. I have to say that I do not see that much can be made of the Transaction Multiples by either the Applicants or the Respondent. The information concerning each transaction is incomplete and/or the transactions are sufficiently different from the MNF dealing to make comparisons of marginal use.
Survey data
106. PKF adduced the Survey Data derived from a review of multiple transactions which involved the sale of controlling interests in unlisted entities:
(a)the “Private Capital Markets Project” surveys produced by Pepperdine University for 2014 (Pepperdine 2014 Survey) and 2015 (Pepperdine 2015 Survey); and
(b)the Grant Thornton ‘Dealtracker 2016 Australian M&A and IPO market insights’ Report (GT Dealtracker 2016 Survey).
107. PKF considered the Survey Data should only be used for determining size discounts. The Survey Data should not otherwise be used to determine the multiple on the basis that Pepperdine uses only US data and Dealtracker information which is not broken down by industry group.
108. KM state that the Survey Data is confirmatory of its view and that PKF should have taken into account the multiples in the Survey Data (based on the Pepperdine 2015 Survey and the GT Dealtracker 2016 Survey) for valuation purposes as those multiples reflected a similar size and industry sector as the business sought to be valued, rather than using that data to apply size discount.
109. PKF refutes KM’s claim that the Survey Data supports KM’s position. PKF refers to the Pepperdine Surveys being in $USD and that as the EBITDA of Mt Noorat Freighters is less than AUD$2M, it falls within the USD$0M-USD$1M in the first band. PKF asserts that only companies with an EBITDA greater than $2M fall into the second band of $2M-$5M relied upon by KM. Yet in cross-examination Mr Lom (PKF) accepted that he had used the second band in determining size discounts.
110. The 2015 Pepperdine Report is confusing as it is not clear in which band, whether the first or second, the business sits. The equivalent table from the 2016 Pepperdine Report tendered in the Tribunal[11] is clear as to the year, but does not to my mind, clarify the ambiguity in the 2015 Report. In the result, I do not consider either side gains anything in reliance on the Pepperdine Report.
[11] Exhibit C, Pepperdine Private Capital Markets Project – Private Capital Markets Report 2016.
111. This issue (of the appropriate band) does not arise in respect of the GT Dealtracker 2016 Survey (relating to Australia) which refers to a multiple of 5.5 for companies with revenue less than $20M. The Survey Data supports the KM multiple range of 5.5 to 6.0. PKF does not accept this because the Dealtracker information is not broken down by industry group.
112. Having regard to all of the reasons, the Applicants and the Respondent refer to, in criticising the other’s use of the Survey Reports, I do not consider that either side derives any real assistance from them. Their use has not assisted me in determining which capitalisation multiple should be preferred.
113. As I said earlier, KM determined a capitalisation multiple of 5.5 to 6.0. PKF determined a capitalisation multiple of 3.75 to 4.25. I prefer Mr Lom’s (PKF’s) analysis, and accept the appropriate multiple is at the high end of his range, 4.25.
Notional Realisation of Assets
114. Both experts agreed that the capitalisation of future maintainable earnings (CFME) method of valuation was the most appropriate approach. The notional realisation of assets (NRA) approach was not adopted, being more suitable for unprofitable or insolvent companies.
115. The Respondent submits, and I accept, it is common for experts in valuing on-going businesses to use the NRA approach as a “cross check” to identify the level of implied intangible asset value of an on-going business. Crowe Horwath performed such a cross-check in its valuation as at 30 June 2014, and calculated the net business assets of Mt Noorat Freighters as being $6,960,531. KM in its first report dated 27 March 2019, performed a similar cross-check, and calculated the net business assets of Mt Noorat Freighters as being $7.87 million. But this is of limited assistance because, as KM states, “this figure is calculated as total assets less current liabilities using figures from 30 June 2015 balance sheet.”
116. Mr Lom stated that cross-checks were not useful as they were based on “book values” and do not represent the realizable value of the assets. As an example, he stated, the “trucks could well realise something completely different”. The Respondent has countered this by pointing out that, in respect of the Crowe Horwath report, the primary asset of the business, the motor vehicles, recorded at a book value of $3,634,628, was revalued upwards by $3.2 million. The Respondent submits the NRA methodology, as a cross-check, reveals that PKF’s valuation, using the CFME method, effectively attributes only nominal or negative goodwill to the business, yet it had been profitable for many years.
117. The Respondent submits that the above analysis, based on the NRA methodology, is straight-forward and logical, and suggests the PKF valuation is far too low. This submission, however, is much weaker than it initially might seem. The adjustment to market value of the motor vehicles, in the Crowe Horwath report, commenced with the insured values of the vehicles in February 2014. Crowe Howarth say “Management has instructed us to rely on insurance documentation to indicate market values of the motor vehicles for the purposes of this report.”
118. Crowe Horwath say “Given the date of our valuation is 30 June 2014, Management has updated the values based on their best estimates. We have adopted these estimates as a proxy for market value.” Apart from that date being considerably earlier than the transaction date, it is clear that no actual valuation of the motor vehicles, not even an informal appraisal, was carried out by anyone shown to have relevant expertise. Crowe Horwath seem to be at pains to make the point that they were not using actual market values.
119. And as the Applicants submitted, insurance value does not necessarily equate to market value. The insurance may envisage replacement cost, even replacement with something better. The Applicants also referred to the significant cost and delay likely associated with realisation of large trucks of the type owned by the business with specialised equipment. In the end, I am not satisfied that the NRA methodology does establish that the PKF valuation is too low.
CONCLUSION
120. In my view, the Maintainable EBITDA is within PKF’s range of $1.6 to $1.7 million, say $1,650,000. In my view, the appropriate capitalisation multiple is at the high end of PKF’s range of 3.75 to 4.25. This values the business at the valuation date at approximately $7,012,500 ($1,650,000 x 4.25). The agreed long term/financial liabilities are $3,660,000. This leads to a valuation of $3,352,500. Adding the combined CGT assets of the connected entities ($803,901) leads to $4,156,401.
121. The Applicants have established that the net value of the CGT assets of the Moloney Trust (including the net CGT assets of the connected entities) did not exceed $6,000,000 just before 25 March 2015. Consequently, the objection decisions should be set aside and the Applicants’ objections to the amended assessments allowed.
I certify that the preceding 121 (one hundred and twenty-one) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy
................................[SGD]..............................
Associate
Dated: 7 June 2024
Dates of hearing: 7, 8, 9 February 2024, 26 April 2024 Counsel for the Applicants: B Orow Solicitors for the Applicants: Aitken Partners Counsel for the Respondent: T O’Brien Solicitors for the Respondent: ATO Litigation & Legal Services
0
4
0