Mr Espresso Group Pty Ltd v Chief Commissioner of State Revenue
[2009] NSWADT 291
•25 November 2009
CITATION: Mr Espresso Group Pty Ltd v Chief Commissioner of State Revenue [2009] NSWADT 291 DIVISION: Revenue Division PARTIES: APPLICANT
RESPONDENT
Mr Espresso Group Pty Ltd
Chief Commissioner of State RevenueFILE NUMBER: 096054 HEARING DATES: 7 October 2009 SUBMISSIONS CLOSED: 7 October 2009
DATE OF DECISION:
25 November 2009BEFORE: Verick A - Judicial Member CATCHWORDS: Dutiable Property LEGISLATION CITED: Duties Act 1997
Taxation Administration Act 1996
Administrative Decisions Tribunal Act 1997
Stamp Act 1921 (WA)CASES CITED: McDonald’s Australia Ltd v Chief Commissioner of State Revenue [2005] NSWSC 6
Elwes v Brigg Gas Company (1886) 33 Ch D 562
Commissioner of State Revenue v TEC Desert Pty Ltd [2009] WASCA 128
Vopak Terminals Australia Pty Ltd v Chief Commissioner of State Revenue [2004] VSCA 10
DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431
Hallen v Runder (1834) 1 CM & R 266 (149 ER 1080)
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27
Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150
Sanwa Australia Leasing Ltd v National Westminster Finance Australia (1988) 4 BPR 9514REPRESENTATION: APPLICANT
RESPONDENT
V Chorafitis, agent
MLR Robertson, counselORDERS: The objection decision is set aside and the matter is remitted to the Chief Commissioner to make a determination accordingly to law by disregarding fixtures that were included in the assessment.
REASONS FOR DECISION
1 This is an application pursuant to s 96 of the Taxation Administration Act 1996 (“the TA Act”) for the review of the Chief Commissioner’s decision to disallow the applicant’s objection to an assessment made under s 11(1)(j) of the Duties Act 1997 (“the Duties Act”). The issue in dispute is whether fixtures included in a sale of a business are “goods” dutiable under the Act.
The facts
2 The applicant entered into an Asset Sale Agreement (“the Agreement”) dated 18 December 2007 with Mr Espresso Coffee Pty Ltd (“the Vendor”) to purchase the business previously carried on by the Vendor. The Vendor had, for a number of years, carried on “the business of the sale of coffee and coffee related supplies” both wholesale and retail through its own outlets. It encountered serious financial problems leading to a restructure of the business with the sale of the business “as a going concern”.
3 The applicant and the Vendor are related companies but in the restructure, fresh finance was injected by a new investor through the purchase of shareholdings in the applicant.
4 The following were the key provisions of the Agreement -
“ BACKGROUND
A The Vendor carries on from the Premises (as hereinafter defined) the business of the sale of coffee and coffee related supplies.
B The Vendor is desirous of selling and the Purchaser is desirous of purchasing the Assets relating to the Business (both as hereinafter defined) as a going concern on the terms and subject to the conditions hereinafter set forth.
OPERATIVE PROVISIONS
1 Interpretation
1.1 In this Agreement and the Schedules hereto unless the context otherwise required the following expressions have the following meanings:-
“ Assets ” means the:
(a) Goodwill in respect of the business.
(b) Records,
(c) Intellectual Property,
(d) Book Debts,
(e) benefit (subject to the burden) of the Current Contracts and the Leasing Agreements, and
(f) other assets referred to in Clause 3 hereof to be sold, transferred or assigned by the Vendor to the Purchaser under this Agreement which are required to operate the Business as a growing concern;
“ Assumed Liabilities ” means the obligations and liabilities of the Vendor in respect of:
(a) superannuation guarantee, GST and PAYG deduction;
(b) amounts due under the Leasing Agreements, or bank loans including any overdraft facilities;
(c) amounts payable under the Lease;
(d) employee salaries, wages and other entitlements (including annual leave and long service leave); and
(e) purchases of goods and services,
in every case incurred in the proper and ordinary course of the Business and accrued and unpaid prior to Completion including any inter-company accounts between the Vendor, any of its affiliated companies, and directors and including those obligations and liabilities shown in Schedule 5.
…
“ Business ” means the business carried on by the Vendor in the State as described in Recital A. hereof;
…
“ Lease ” means the leases of the Premises entered into by the Vendor as lessee, …
“ Leasing Agreements ” means the leasing and hire-purchase agreements relating to the Business at Completion …
“ Premises ” means the properties referred to in Annexure A on which the Vendor conducts the Business.
“ Purchase Consideration ” means the amount of $660,703.00 to be satisfied as set out in this Agreement.
…
“ Trust ” means the Mr Espresso Group Unit Trust constituted by deed dated on or about the date of this Agreement.
…
4 Purchase Price
4.1 The Purchase Consideration for the Assets is agreed to be allocated as follows:
(a) the goodwill $ nil
(b) the Records and other
Intellectual Property Rights $ 1.00
(c) the Book Debts $ 44,742.00
(d) the Current Contracts $ 1.00
(e) the Leasing Agreements and
Lease (including the value of
Cash rental bonds) $ 33,500.00
(f) stock in trade $ 85,000.00
(g) goods $ 22,000.00
(h) the fixtures $475,459.00
…
5 Condition of Completion - Leases
5.1 On or prior to Completion the Vendor must unless the Purchaser agrees otherwise either:
(a) assign to the Purchaser the leases; or
(b) cause the lessor under each Lease to enter into a fresh lease in favour of the Purchaser on the same terms as the relevant Lease.
…
6 Conduct of the Business pending Completion
The Vendor shall until Completion carry on the Business in the same manner as heretofore so as to maintain the same as a going concern and shall not without the consent of the Purchaser enter into any contract or commitment of an unusual nature or other than in the ordinary course of business.
7 Completion
7.1 Completion shall take place on the date of this Agreement at the office of Bartier Perry at Level 18, 133 Castlereagh Street Sydney when all (but not part only unless the parties so agree) of the following shall be transacted:
(a) the Vendor shall:-
(i) give possession to the Purchaser of the assets the property in which is transferable by delivery;
(ii) deliver to the Purchaser duly completed and executed forms necessary to effect transfer to the Purchaser of the Business Names; and
(iii) transfer all other Assets to the Purchaser.
(b) The Purchaser shall cause to be issued to the Vendor 634,990 ordinary $1.00 units in the Trust.
(c) The Purchaser shall cause to be repaid the loan to Veni Chorafitis (director of the Vendor) in the amount of $ 100,703 as referred to in the Schedule 5.
…”
5 The Chief Commissioner assessed as dutiable property “furniture and fittings” having a value of $611,953.40.
Relevant Legislative Provisions
6 Section 8 of the Duties Act imposes duty on certain transactions concerning dutiable property and materially for present purposes duty is payable on the transfer of dutiable property and on an agreement for sale or transfer of dutiable property. Section 11 defines “dutiable property” to include goods in New South Wales that includes a dutiable transaction over any dutiable property with certain exceptions. Relevant for purposes of this application “goods that are stock-in-trade” and “materials held for use in manufacture” are excluded.
7 Section 26 enables the Chief Commissioner to disregard the value of goods if it would be just and reasonable in the circumstances to do so. The provisions are as follows:
“(1) The Chief Commissioner, if satisfied that it would not be just and reasonable in the circumstances to charge duty on the dutiable value of all the dutiable property in a dutiable transaction involving goods and other property, may disregard the value of goods, or any of them, in determining the dutiable value of the property involved.
(2) This section does not enable the Chief Commissioner to disregard the value of goods used in connection with a business in respect of which the goodwill of the business is, or is part of, the dutiable property.
(3) This section applies only to dutiable transactions that occur before 1 July 2012.”
8 A note to section 26 confirms that duty on the transfer of business assets in New South Wales will be abolished on 1 July 2012.
Submissions
9 The applicant’s principal submission was that fixtures are not dutiable property under the Act. Attention was drawn to the Chief Commissioner’s Ruling DUT 004, in particular, to the following statement:
“The term “goods”, while not defined in Chapter 2, is often defined to include all chattels personal other than things in action and money. In some contexts, “good” is defined by statute to include fixtures severable from the realty (see, for example, section 182 in Chapter 6 Hire of goods). However, in the present context, goods clearly does not include fixtures”
10 Reliance was also placed on the decision of his Honour Gzell J in McDonald’s Australia Ltd v Chief Commissioner of State Revenue [2005] NSWSC 6 which it was submitted highlights the “distinction between fixtures (which are not goods) and goods”.
11 It was further submitted that “if the fixtures could be ‘goods’”, the Chief Commissioner should exercise his discretion under s 26 “to disregard the value of the goods”.
12 The Chief Commissioner’s case, as set out in Counsel’s written submissions, was as follows:
“5. The furniture and fittings were the subject of an arrangement that included a dutiable transaction over other dutiable property (other than intellectual property) elsewhere referred to in s 11 of the Duties Act 1997.
6. No discretion to disregard the value of those goods existed under s 26(1) of the Duties Act 1997, because the goods were used in connection with a business in respect of which the goodwill of the business was, or was part of, the dutiable property.
7. The applicant contends, though, that the furniture and fittings were not “goods” but were fixtures, and so not within s 11(1)(j) of the Duties Act.
8. The applicant bears the onus of proving that the furniture were goods – s 100(3) of the TAA. On the evidence put before the Tribunal, that onus is not discharged.
9. But this issue is illusory, for even if the applicant does discharge its onus on that point, it has still not discharged its onus of showing that the assessment is excessive. If, ex hypothesi , the furniture and fittings are fixtures, then they comprise an interest in land – quicquid plantatur solo, sol cedit . ( Elwes v Brigg Gas Company (1886) 33 Ch D 562, CSR v TEC Desert Pty Ltd [2009] WASCA 128; McDonald’s Australia Ltd v CCSR [2005] NSWSC 6, Vopak Terminals Australia Pty Ltd v CSR [2004] VSCA 10.)
10. Accordingly, they are dutiable property under s 11(1)(a) of the Duties Act, being “land” in NSW. “Land” is defined to include “any estate or interest in land”.
11. In summary, the furniture and fittings are either dutiable property under s 11(1)(a) (Land) or under s 11(1)(j) (goods) of the duties Act.”
Discussion and Reasons for Decision
13 The question in this application is whether “fixtures” are “goods” or “an interest in land” for purposes of s 11(1)(j) and s 11(1)(a), respectively, for purposes of the Duties Act.
14 This question was considered by his Honour Justice Gzell in McDonald’s Australia Ltd v Chief Commissioner of State Revenue [2005] NSWSC 6. McDonald’s Australia Ltd which operates many franchised fast food restaurants under licence and lease agreements, terminated some of their agreements by deed under which McDonald’s Australia Ltd agreed to pay the franchisees concerned an amount for the transfer to it of the relevant plant and equipment in each case. The Chief Commissioner treated the plant and equipment as fixtures and stamped the deeds on the basis that the sale of the fixtures constituted the sale of an interest in land. His Honour Justice Gzell held that the proper characterisation of the transaction “is that contained in Hallen” (1834)(1 CM & R 266 (149 ER 1080).
15 It is useful and helpful to reproduce in full his Honour’s analysis to understand the legal and equitable rights that a tenant or lessee has in relation to “fixtures” under a tenancy agreement or lease -
“62 Since the plant and equipment was that of tenants of McDonald’s and, if affixed, affixed for the purpose of the tenant’s trade, it was submitted that they were trade fixtures which the tenant had the right to sever on the expiration of the term.
63 It was submitted that the sale of unsevered tenant’s fixtures by a tenant to his landlord, as would be the case here if any items of the plant and equipment were held to be fixtures, is to be regarded as a surrender or abandonment of the right to sever and not sale of goods or an interest in land.
64 In Benjamin’s Sale of Goods, 6th ed, Sweet & Maxwell, London, 2002 at [1-095] the authors say:
“A sale of unsevered tenant’s fixtures by a tenant to the landlord or an incoming tenant or purchaser was regarded at common law as merely a surrender or abandonment of the right to sever them, and was not a sale of goods.”
65 To the like effect is Palmer and McKendrick, Interests in Goods , 2nd ed, LLP, London, 1998 at 292:
“The position is different again where a tenant disposes of unsevered tenant’s fixtures. The true nature of such a sale by a tenant to his landlord was described by Parke B in Hallen v Runder as a contract “that the [tenant] should waive his right of removal, and thereby give up to the [Landlord] all his interest in and right to enjoy these effects as chattels.” Such a contractual abandonment of the right of severance is viewed as neither a contract for the sale of goods nor a disposition of any interest in land.”
66 In Hallen v Runder (1834) 1 CM & R 266 (149 ER 1080) the tenant had purchased fixtures which he had a right to remove during his tenancy. He agreed with the landlord to refrain from removing the fixtures, the landlord agreeing to take them at a valuation to be made by two brokers. The tenant was held entitled to his action for the price. It was held that the action was not one for goods sold and delivered and no note or memorandum in writing was required. It was also held that it was not a sale of any interest in land and writing was not required under the Statute of Frauds . Having observed that the chattels, once affixed, became part of the freehold, Parke B said at 276 (ER 1084):
“The plaintiff, therefore, cannot recover the price fixed for these effects as for goods sold and delivered; but the question is, whether he cannot as for fixtures bargained and sold, or sold and delivered. The real nature of the contract between the plaintiff and the defendant was, that the plaintiff should waive his right of removal, and thereby give up to the defendant all his interest in and right to enjoy these effects as chattels.”
And at 277 (ER 1084):
“We are quite satisfied that this not a sale of any interest in land, for the reasons given in the course of the arguments.”
67 It was argued for the Chief Commissioner that these authorities are no longer good law in light of the decisions in Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 and Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150. Both cases involved a sale and lease back arrangement.
68 In Eastern Nitrogen , the taxpayer sold its industrial plant, but not the land to which it was affixed. At [47] Car J said that since there was an intention of the parties that property in the ammonia plant was to pass to the financiers followed by a lease-back of the plant and valuable consideration had been paid and received, equitable remedies would have been available to the extent necessary to protect the financier’s equitable interest in the ammonia plant.
69 In Metal Manufactures , the taxpayer sold portions of its plant to a bank which leased them back to the taxpayer. At first, Metal Manufactures Ltd v Federal Commissioner of Taxation 99 ATC 5,229 at [196], Emmett J concluded that, notwithstanding that the plant and equipment were fixtures, the purchaser obtained an equitable interest in them. On appeal at [57], it was noted that his Honour’s conclusion that while the bank acquired no legal interest it obtained an equitable one, was not suggested to be erroneous.
70 In my view, Eastern Nitrogen and Metal Manufactures dealt with a different point: a sale by the owner of land of fixtures annexed to it. In the instant circumstances and in Hallen the issue was the proper characterisation of a “sale” by a tenant of tenant’s fixtures to a landlord. I am of the view that the proper characterisation of the transaction is that contained in Hallen .”
16 More recently, this question was considered by the Western Australian Supreme Court of Appeal (Wheeler JA, McLure JA and Newnes JA) in Commissioner of State Revenue v TEC Desert Pty Ltd [2009] WASCA 128. The Court of Appeal reversed the decision of the primary judge and held that the sale by WMC Resources Ltd of two power generation systems to the respondent and others was the sale of an interest in land and subject to duty under the Stamp Act 1921(WA).
17 In TEC Desert Pty Ltd the respondents had argued their case on two grounds – that the owner of land cannot sell fixtures separately from the land and that if that was possible, the sale does not give rise to an interest in land.
18 There was a great deal of discussion but for, present purposes, it is sufficient to say that the Court of Appeal noted that there was authority (DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (New South Wales) (1982) 149 CLR 431) that an owner of land “holds an entire and unqualified legal interest and not two separate interests, one legal and the other equitable” in the land. But held that on the basis of the decisions in Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue (2004) 12 VR 351; Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150 and Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 an owner of fixtures was entitled to sell fixtures. It was also held that “fixtures have no status separate from the land” and a sale of fixtures by a landlord does not purport to pass legal title “but only the creation of a new interest”, described by these cases as an “equitable interest”. It was further held that if “the creation of an interest is not a sale, an agreement that creates an interest will not be dutiable” under the Western Australian Stamp Act. However, both Wheeler JA and McLure JA (Newness JA agreeing) held that “that analysis cannot apply where the Vendor is the holder of a mining tenement under the Mining Act” because as observed by McLure JA -
“It was accepted by the parties that the holder of a mining tenement is in a position analogous to that of a tenant. A holder of a mining tenement has existing statutory and general law rights relating to tenant’s fixtures on the tenements. Section 114 of the Mining Act (set out in the reasons of Wheeler JA) deals with the removal of, inter alia, fixtures from a mining tenement. That section builds on and extends the general law rights relating to tenant’s fixtures to three months after the mining tenement expires or is surrendered or forfeited.”
19 The second issue in this case was whether where a tenant disposes of unsevered tenant’s fixtures to a landlord, there is no sale of an interest in land, but rather a waiver of the right of removal of the fixtures. Several authorities including Hallen v Runder and McDonald’s Australia Ltd v Chief Commissioner of State Revenue were considered. Wheeler JA accepted that “the position is by no means clear” but concluded that Hallen v Runder was “against the weight of the authorities”. McLure JA distinguished the facts from Hallen on the grounds that in TEC Desert Pty Ltd the issue was the nature of “the right of a tenant to tenant’s fixtures during the term and any extension thereof” of the lease and took the view that in those circumstances “a tenant’s right to claim and remove tenant’s fixtures gives rise to an equitable interest in the land to which they are attached”.
20 In TEC Desert Pty Ltd, the court did not consider nor express any views where the sale of fixtures is by a tenant to a purchaser other than the landlord. However, Wheeler JA expressed his views as to the difficulty in determining this issue as follows at [116]:
“I doubt that it is possible, relying on either authority, or logic alone, to determine whether the sale of a fixture is the sale of an interest in land, where the sale is made during the course of a lease by a tenant to another person, who is not the landowner. I would adopt the observations of Powell J, in a related context, that “… it seems to me that I would do the law no great service – indeed, I would, in all probability only further obfuscate the already obscure – if I were to embark upon a lengthy and detailed examination of the authorities, or seek to expound, at any length, my personal views upon the law of ‘fixtures’” ( Sanwa Australia Leasing Ltd v National Westminster Finance Australia (1988) 4 BPR 9514 at 9515)”.
21 The task would certainly be fairly complex if a court or tribunal now seeks to determine de novo the common law characterisation of the sale of fixtures by a tenant to another person, who is not the landowner. I do not think for the purposes of this application that is necessary. The decision of his Honour Gzell J in McDonald’s Australia Ltd, which is binding on this Tribunal, is a strong authority for the view that the sale by a tenant of fixtures “was a surrender or abandonment of the right to sever them, and was not a sale of goods” and was also not “a sale of any interest in land”. This Tribunal is bound by his Honour’s “view that the proper characterisation of the transaction is that contained in Hallen”.
22 In the judgment, his Honour made a fairly important observation in relation to the Full Federal Court decisions in Eastern Nitrogen and Metal Manufactures. His Honour made the important distinction that in each case there was “a sale by the owner of land of fixtures annexed to it”. In those cases, a sale of fixtures creates an equitable interest in the land although the transaction is not characterised as a transfer of any interest in land. Further, his Honour cited with approval statements made by authors in Benjamin’s Sale of Goods and Palmer and McKendrick’s Interests in Goods. Both, consistent with views expressed in Hallen, recognise that in common law a sale of a tenant’s fixtures to the landlord or to an incoming tenant or purchaser is regarded as merely a surrender or abandonment of the right to sever them and is neither a sale of goods nor a disposition of any interest in land.
23 The outcome in TEC Desert Pty Ltd was largely due to the interaction of common law with the relevant statutory mining law that applied to the leases in question and thus the decision turned on its own facts and provides little general guidance as to the characterisation of transactions dealing with fixtures.
24 In McDonald’s Australia Ltd, the facts were to some extent, similar to those in this matter, but also importantly different from those in this matter in one aspect. There the owner was dealing with its franchisees/lessees. In this matter, the tenant transferred the fixtures to a legal entity that had no connections with the legal owner of the leased properties. I think that difference would clearly place the characterisation of the fixtures in that factual scenario in quite a different category. As the tenant was not the legal owner of the land, the sale of unsevered tenant’s fixtures would merely be a contract between the tenant and the purchaser under which the tenant waived its rights of removal and gave the purchaser the right to use the fixtures. I also do not consider that this matter is different from McDonald’s Australia Ltd because the tenant sold fixtures as part of the sale of an ongoing business. The cases, including McDonald’s Australia Ltd, do not suggest that the outcome would be any different if the sale was not at the cessation of a business carried on by the tenant.
25 In the absence of any sale of goods or transfer of any interest in land, the transaction relating to the fixtures was not a dutiable transaction under the Duties Act. I think McDonald’s Australia Ltd provides sufficient authority for that view. The Chief Commissioner should accordingly have disregarded the value of the fixtures in making any assessment against the applicant.
26 In the light of this finding, it is not necessary for me to consider whether the Chief Commissioner should exercise his discretion to disregard the value of any goods under s 26(1) of the Act.
27 The Tribunal has power under s 101(1)(b) of the TA Act in dealing with an application for review to make an assessment in place of the assessment to which the application relates. But in this matter there is insufficient material before the Tribunal and the proper course is for the matter to be remitted under s 65 of the Administrative Decisions Tribunal Act 1997 to the Chief Commissioner to make a proper determination by disregarding the value of the fixtures that were included in the assessment.
Order
The objection decision is set aside and the matter is remitted to the Chief Commissioner to make a determination according to law by disregarding fixtures that were included in the assessment.
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