Oranville Pty Ltd v Commissioner of State Revenue
[2012] QCAT 643
•17 December 2012
| CITATION: | Oranville Pty Ltd v Commissioner of State Revenue [2012] QCAT 643 |
| PARTIES: | Oranville Pty Ltd t/a L J Hooker Toowong (Applicant) |
| v | |
| Commissioner of State Revenue (Respondent) |
| APPLICATION NUMBER: | GAR208-11 |
| MATTER TYPE: | General administrative review matters |
| HEARING DATE: | On the papers |
| HEARD AT: | Brisbane |
| DECISION OF: | David Paratz, Member |
| DELIVERED ON: | 17 December 2012 |
| DELIVERED AT: | Brisbane |
| ORDERS MADE: | The decision of the Commissioner of State Revenue made on 1 June 2011 disallowing the objection is confirmed. |
| CATCHWORDS: | REVIEW OF DECISION OF THE COMMISSIONER OF STATE REVENUE – Sale of rent roll – dutiable transaction – supply right – discussion of goodwill – discussion of personal property – decision confirmed Duties Act 2001, s 37 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 |
APPEARANCES and REPRESENTATION (if any):
This matter was heard and determined on the papers pursuant to s 32 of the Queensland Civil and Administrative Tribunal Act 2009 (QCAT Act).
REASONS FOR DECISION
This is an application by Oranville Pty Ltd (Oranville) to review a decision of the Commissioner of State Revenue (the Commissioner).
The matter concerns the sale of part of a rent roll to Oranville by another entity.
An agreement in writing was entered into between Oranville and Reach Corporation Pty Ltd as Trustee for the Reach Unit Trust on 29 July 2010 in relation to the sale.
The consideration for the sale was $1,818,521.20. The interest acquired was approximately 21% of the rent roll. A “rent roll” is the name for the property management contracts whereby a real estate agent is appointed to manage properties by the property owners.
The Commissioner of State Revenue (the Commissioner) issued an Assessment Notice on 16 November 2010 assessing the transaction as liable to transfer duty of $81,151.50.
The ground for liability stated by the Commissioner was that it constituted a dutiable transaction, being a transfer of dutiable property, as provided for by section 9(1)(a) of the Duties Act 2001 (“the Act”), in the form of a Queensland business asset (s 10(1)(d)).
Oranville objected to the assessment by a letter from its solicitors, McInnes Wilson, on 24 January 2011.
The ground of objection was that section 37(2) of the Act applied to deem the transaction to not be a “dutiable transaction”. That section provides as follows:
37. When transaction for particular Queensland business assets not dutiable transaction
(2) If a supply right of a business is the subject of a transaction, the transaction is not a dutiable transaction unless:-
(a) another type of dutiable property is the subject of the same transaction or, under section 30, it is aggregated with a dutiable transaction, or
(b) under the transaction, the supply right is or is to be transferred with all, or substantially all, of the supply rights of the business.
The argument of Oranville put forward by its solicitors was that:
“The agreement entered into between the parties relates solely to the transfer of a portion of a rent roll (being the uncompleted property management contracts of the seller in respect of the properties as defined in clause 1.22 of the agreement) and there is no other dutiable property being transferred and all supply rights/interests in the vendor’s business are not being transferred.
Therefore, the acquisition of part of a rent roll is not a dutiable transaction by virtue of section 37(2) of the Duties Act and we ask that the duty on the transaction be reassessed as ‘nil duty payable’”.
The Commissioner then referred the matter to the Administrative Policy Branch for an independent review on 11 February 2011.
An Acting Senior Tax Advisor for the Commissioner then issued a Notice of Decision and Statement of Reasons dated 1 June 2011.
That decision was that the objection was disallowed, and was made on the basis that goodwill, which was a business asset, and personal property, were also included in the transaction. This was expressed at p.4 that:
“While the consideration is expressed as a market price for the value of the supply rights through the calculations expressed in the Agreement, the Commissioner is of the view that the consideration is an amount that intrinsically combines the value of business assets that are both goodwill and supply rights. Consequently, s.37(2)(a) of the Duties Act has application and the two types of dutiable property that are a Queensland business asset, are the subject of the same transaction.
Notwithstanding this conclusion, it is noted that clause 7 of the Agreement provides for the transfer of records, documents and items in relation to each transferred property, or supply right. The transfer of such material would be classed as personal property in Queensland of a business in accordance with s.35(i) of the Duties Act.”
Oranville applied on 21 July 2011 to this Tribunal for a review of that decision.
A compulsory conference was held on the 30 November 2011. The parties agreed on issues for determination of the matter, as follows:
1. Statement of Agreed Facts
(a) Oranville Pty Ltd entered an agreement with Reach Corporation Pty Ltd as trustee for the Reach Unit Trust on 29 July 2010 (the Agreement) for the purchase of a portion of a rent roll business.
(b) The transfer under the Agreement of the rent roll business is the transfer of a supply right.
2.Facts in Dispute
(a) Whether or not goodwill or personal property was also the subject of the agreement.
3.Question for Tribunal
(a) Whether or not the Agreement constitutes a dutiable transaction subject to section 37 of the Duties Act 2001.
Certain amendments to the application were also agreed, and were made by the filing by Oranville of an amended application on 28 November 2011.
Both parties have made written submissions.
Goodwill
Oranville says in Annexure “B” of its amended application that:
“We say that only a supply right has been purchased in this case. There is no actual “goodwill” purchased as we never assumed control of the selling entity and that the words “goodwill factor” are a term used by real estate brokers to facilitate the sale of such rent rolls. We as a purchasing agent have to establish our own credibility with our owners or suffer the consequences of the loss of business. There is no loyalty received from the landlord of a property via so called “goodwill” and they are within their rights to terminate their agreement at any point and stop using us or are under no obligation to sign up with us in the first place.”
In its submissions at (j), Oranville argues that the contract was drafted from a precedent designed to facilitate the sale of a business including the transfer of business name, plant and equipment, employees and business premises; that none of those aspects apply to the contract; and that the use of the word “goodwill” was a convenient choice of expression and it does not reflect reality.
There is specific reference to the expression “goodwill” in the agreement.
Clause 1.1.20 says that:
“Purchase Price” means the amount calculated by multiplying the total income of the rent roll by the “goodwill factor”.
Clause 1.1.12 says that:
“Goodwill Factor” means the amount set out in Item 6 being the factor by which the income of the rent Roll is to be multiplied to ascertain the purchase price.”
Item 6 provides a scale of rates per dollar of income to apply to each of four categories of property. These range from $2.00 to $3.35 per dollar of income. This “multiplier” can be seen as analogous to the formulas used in valuing businesses by applying a multiplier to the annual net profit of the business.
In this sense, the argument of Oranville that the term “Goodwill Factor” is a marketing or calculation term only, and does not actually refer to the goodwill of the business itself, but rather is just a name for a multiplier, might be understood. However, what justifies the multiplier? Is it just a genuine pre-estimate of the value of the expected income left in the current management contracts, or does it represent something additional as well?
The duration of each of the current management contracts is not disclosed, so it is not possible to determine the total expected income until the expiry of each current contract.
There is obviously something of great value in the agreement that Oranville was prepared to pay over $1.8 million for.
The concept of ‘goodwill’ was considered in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605. The court said at 615 that:
“From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes “the attractive force which brings in custom”. Goodwill is correctly defined as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.”
The Commissioner, in his submission, has referred to two Queensland cases which have considered or referred to whether goodwill can exist specifically in a rent roll.
In Silkzoom Pty Ltd v Property Shop Port Douglas Pty Ltd [2010] QSC 343, Jones J at [1] referred to the subject matter of the purchase as:
“…effectively [the seller’s] goodwill in a rent roll management of certain tenanted properties on behalf of the respective owners.”
At [68] he notes:
“The goodwill attached to the rent roll business which was transferred to the plaintiff had not, by that date, achieved the expected return of landlord authorities.”
Also at [71] he notes:
“Additionally, the way in which the transfer of the goodwill attached to the rent roll was managed by the contracting parties clearly upset a number of the clients.”
In Ferrari Investment (Townsville) Pty Ltd (in liq.) v Ferrari [2000] 2 Qd R 359 the company directors of one company transferred its property letting business for no consideration to another company controlled by them. Pincus JA noted at 362 that:
“[6] The case is about the value attainable on a sale of goodwill.”
Shepherdson J, at 374, identified the rent roll as a source of goodwill of the original company, and said:
“[3]. The rent roll represented goodwill of Investment. That it constituted such goodwill in the circumstances of this case is well illustrated by the words which I have emphasised in the following extract from the speech of Lord Herschell in Trego v Hunt (1896) AC 7 at pp 17 and 18:
‘the goodwill… is the connection thus formed, together with the circumstances of habit or otherwise, which tend to make it permanent, that constitutes the goodwill of a business. It is this which constitutes the difference between a business just started, which has no goodwill attached to it, and one which has acquired a goodwill. The former trader has to seek out his customers from among the community as best he can. The latter has a custom ready made…’”
The Commissioner referred in the Notice of Decision to the comments of Young CJ in Southern Cross Financial Group (Newcastle) Pty Ltd v Rodrigues (2005) NSWSC 621 at 38 where his Honour stated in relation to the transfer of “client lists” of the financial services business in that case that “juristically, what (the parties) were really selling was goodwill”, and said at p 40:
“A client list is something that courts come across in all sorts of businesses, most commonly real estate agents’ rent rolls. However, what they really represent as saleable property is the likelihood that an income stream will be produced if the purchaser has access to that list. It must always be remembered that all aspects of goodwill have a nebulous quality about them.”
Those comments of Young CJ are directly relevant in this matter.
Whilst it may be accepted that there is no obligation on property owners to continue to deal with the new owner, beyond any contractual time periods they each have, there is an obvious anticipation that there is a likely possibility that they will do so.
What the purchaser of the rent roll is buying, in addition to the current management contracts, is a list of current customers who have already been qualified, scrutinised and validated.
It is immaterial that only about 21% of the total rent roll is being purchased, in terms of it having value beyond the current management contracts. The 21% of the rent roll that is being purchased is an entity in itself. The entire rent roll does not have a public product name. A proportion of the rent roll is just as valuable, proportionally, as the entire rent roll. The rent roll itself is an intangible asset, and any part of it can deliver income and benefit to whoever controls it.
The likelihood of future business, by renewal of the existing management contracts, and perhaps new business from the existing landlords, is of value, and constitutes goodwill.
The Commissioner also refers to the restraint of trade provisions of the agreement in clause 11 as evidencing goodwill. Clause 11.2 provides that:
“11.2 The Seller acknowledges that the Buyer has purchased the Goodwill of the Rent Roll and the Seller warrants that the Seller will at all times act in such a manner so as not to derogate from the Goodwill between the Buyer and the Property Owner’s of the Properties”.
That clause is a direct reference to the presence, and actuality, of goodwill in the rent roll that is being sold.
Both the nature of the transaction, and the words of the agreement, support the conclusion that this sale carries within it a valuable component of goodwill.
I therefore find that goodwill was a subject of the agreement.
Personal property
“Personal property” is defined in Schedule 6 of the Act as “a personal chattel”. Examples are given in the notes to the Act as an aircraft, boat or motor vehicle, livestock, material held for use in manufactured or partially manufactured goods, plant or equipment, and trading stock.
Oranville says in Annexure “B” of its application that:
“The only items received at settlement were a set of keys for access to the property and enough information to enter data into our property management platform so we could start managing the properties. No property owned by the seller was ever purchased, eg. Computers, furniture, office fitout etc. The keys are owned by the landlord not by the seller. We therefore believe that “personal property” cannot be aggregated as a “dutiable property” for the purposes of duty assessment”.
Similarly, in its submissions at (i)(ix) Oranville says that the contract did not include personal property in Queensland of the business and says:
“Oranville already holds such personal property as required to carry on the business of a rent roll management or a general real estate agency.”
In its submission at [61] the Commissioner points to material that was to be transferred under the Agreement:
“61. The Agreement provided for the delivery of a number of documents to the taxpayer, for example correspondence files, repair and maintenance details, documents, notices, records, files, bond receipts, tenancy agreements, original condition reports, and bond lodgement forms – see clauses 7.1.2,7.1.3,7.1.4,7.1.5,7.1.6,7.1.11(c) for example.”
The Commissioner argues that the Agreement did provide for the transfer of personal property in the nature of physical records, and that Oranville’s submission that it only received minimal material is irrelevant.
Oranville says that it received at settlement “enough information to enter data into our property management platform so we could start managing the properties”. It is not clear how this information was transferred.
The transfer of information could have been provided in a physical form by the handing over of discs or drives containing computer files, or perhaps paper records; or by the electronic transfer of files (such as spreadsheets).
Property is generally described as either real or personal property. Real property is land, and generally personal property is anything else. I note, for example, that section 10, the dictionary, of the Personal Property Securities Act 2009 (Cth) provides that “personal property” is defined as:
“property (including a licence) other than
(a) land, or
(b) a right, entitlement or authority …”
Personal chattels are generally regarded as anything other than real property and chattels real.
If the information was handed over in a physical form, whether as a computer disc or drive, or in paper form, then this is a chattel which would constitute “personal property” of the business.
It is a more difficult question whether personal property would have passed if the information was transmitted electronically.
In an article by Stephen Gunning, of Mallesons Stephen Jaques, published on 31 May 2007[1], the author notes that:
“In Australia, it is generally accepted that knowledge or confidential information of itself is not property.[2] Rather, confidential information is protected by equity as “an obligation of conscience” arising from the relevant circumstances in which the information was communicated or obtained and not on the basis of rights in property.[3] Accordingly, confidential information “is not property in any normal sense, but equity will restrain its transmission to another if in breach of some confidential relationship”.[4] On this view, confidential information in itself is not property capable of being assigned or the subject of a charge.[5]”
[1] Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414.
[3] Moorgate at 438.
[4]Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721 per Lord Hodson and Lord Guest.
[5]For example, see M Pattison “Using Intellectual Property as Security” (1996) 7 AIPJ 135 at 142 regarding the ability to take a charge-like security over confidential information.
Oranville must have received documentation, information, and statutory authorisations in relation to the management contracts of the properties comprising the rent roll in some form, so that it could enforce them.
It is most likely that some physical material such as paper files and records were handed over at some stage, but this is unclear.
The Commissioner further has submitted that even if Oranville did not receive the physical records, that it had a right to that material under the agreement which it was entitled to enforce. That argument has some strength, unless all the records were electronic, which is then more problematic.
Whilst there is uncertainty on the material before me as to what was handed over on settlement, and what the buyer was entitled to receive, and whether that constituted personal property, there is nevertheless a strong implication that personal property was handed over, and was also the subject of the agreement.
Dutiable transaction
The ultimate question that the Tribunal is being asked to decide is whether or not the agreement constitutes a dutiable transaction subject to section 37(2) of the Duties Act 2001.
If the sale had been for 100% of the rent roll, then there would be no doubt that duty was payable. Questions arise in this matter because only about 21% of the rent roll was sold, raising the question as to whether the proviso in s 37(2) applies to make duty not payable.
It is agreed that the transfer under the agreement of the rent roll business is the transfer of a supply right.
I am satisfied that the sale also included goodwill. This is another type of dutiable property which is the subject of the same transaction.
It is unclear as to whether personal property is also included, but there is a strong implication that it is included. In any event, it is not necessary to determine that aspect finally, once a finding is made as to the inclusion of goodwill.
The effect of the finding that another type of dutiable property is the subject of the transaction, is that the transaction is dutiable under s 37(2) of the Act.
Accordingly, I find that the transaction is dutiable, and I confirm the decision of the Commissioner made on 1 June 2011 disallowing the objection, and order accordingly.
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