Palace Hotel (Hawthorn) Pty Ltd v Commissioner of State Revenue
[2004] VSC 137
•23 April 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
VICTORIAN TAXATION APPEALS LIST
No. 7806 of 2002
| THE PALACE HOTEL (HAWTHORN) PTY LTD (ACN 066 880 617) | Appellant |
| v | |
| COMMISSIONER OF STATE REVENUE (in his capacity as Comptroller of Stamps) | Respondent |
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JUDGE: | HARPER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 17 & 18 JUNE 2003 | |
DATE OF JUDGMENT: | 23 APRIL 2004 | |
CASE MAY BE CITED AS: | THE PALACE HOTEL (HAWTHORN) PTY LTD v COMMISSIONER OF STATE REVENUE | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 137 | |
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STAMP DUTY – Transfer to lessee of freehold interest in licensed premises – Consideration for transfer less than the market value - Whether duty is to be assessed on value of freehold or on combined value freehold and business – Goodwill – Stamps Act 1958, s.63(3)(b)(i)(B)
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APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr A.J. Myers QC with Mr P. Zappia | Norton Gledhill |
| For the Respondent | Mr R. Boaden | Solicitor to the Commissioner for State Revenue |
HIS HONOUR:
The Palace Hotel is situated at 893 Burke Road, Camberwell. The business conducted at those premises is one to which goodwill attaches. For a period before 1995, the owner of the business (and therefore the beneficiary of the goodwill) was ALH Group Ltd. In that year, it sold out to the appellant, The Palace Hotel (Hawthorn) Pty Ltd. The purchase price was $220,000. Pursuant to the arrangements thus entered into, ALH Group Ltd on 13 November 1995 assigned its lease over the property to the appellant. The business has been operated by the appellant since then.
The term of the relevant lease was of five years commencing on 24 October 1994. The term therefore expired on 24 October 1999. In the period immediately thereafter, the appellant became a tenant from month to month at a monthly rental equal to the rental payable during the last month of the term for which the appellant held the premises. By cl.13 of the lease, the lessor was entitled in these circumstances to determine the tenancy at any time by giving the appellant one month's notice in writing.
On 20 April 2001, a deed of compromise was entered into between the parties to litigation in this Court. The plaintiffs were Mr Bruce Mathieson and companies, including the present appellant, associated with him. The defendants were Mr John Booth and companies, including one called Mymack Pty Ltd, with which he, in turn, was associated. One of the terms of the deed of compromise was that the fee simple in the property would be transferred by that company to the appellant. A clause in the deed – cl.3.7(b) – removed any right the landlord of the property might otherwise have had to give the month's notice for which the lease provided. In other words, the monthly tenancy which had come into existence on the expiration on 24 October 1999 of the until then extant lease, at that time came to an end. The clause relevantly provided that the parties:
"acknowledge and undertake that from and including 1 March 2001 … Palace Hotels has been and will continue to occupy the Palace [Hotel] … under the terms of the Palace lease until:
(i)Mymack transfers the Palace property to Mathieson or his nominees …;
(ii)Palace Hotels terminates its occupancy of the Palace property, which it may do at any time upon one month's written notice to Mymack given at any time on or after 1 May 2001."
Two instruments of transfer of land were, on 4 June 2001, executed in accordance with the deed of compromise. Between them, the transfers effected the transfer of the whole of the property to the appellant. The consideration stated in the first instrument was $1,146,000 "and the release by the transferee and related entities of their rights in equity to have transferred to them eight tenths of the issued capital of Mymack Pty Ltd and eight tenths of the units in the Mymack Unit Trust, and their rights to damages and legal costs from Mymack and related entities." The consideration for the second transfer was $54,000 "and the release by the transferee and related entities of their rights in equity to have transferred to them eight tenths of the issued capital of Mymack Pty Ltd and eight tenths of the units in the Mymack Unit Trust, and their rights to damages and legal costs from Mymack and related entities."
It follows that, as at 4 June 2001, the appellant was in possession of the property as lessee and was the owner of the business conducted on the property. The transfers conveyed no more (and no less) than the new interest of the transferee in the land; that is, an interest as owner in fee simple.
On 4 June 2001, Mymack Pty Ltd (by Mr Booth, its authorised officer) prepared a statutory declaration. In that document, Mymack truthfully asserted (among other things) that the consideration for the property and the chattels the subject of the sale was not considered by the transferor to be the market value of the property.
It is accepted by both sides to the current dispute that the statutory declaration accurately stated not only the opinion of the transferor, but also the fact that that opinion was soundly based. Indeed, so much was conceded by the solicitors for the appellant when, on 27 August 2001, they lodged the transfers for stamping. In a covering letter, the solicitors referred to the fact that the real estate had been valued, as at 11 April 2000, at $4,400,000 exclusive of GST. That figure was derived from a capitalisation of the rent at the rate of 10 percent. When it was added to “the value of the business operating on the freehold” then, as the covering letter asserted, the combined value of the property and the hotel business was $6,000,000.
The instruments of transfer are properly subject to duty assessed under the Stamps Act 1958. Pursuant to s.17(1) of that Act, duty is charged upon the instruments specified in the Third Schedule. Heading IV of that schedule includes conveyances of real property and land transfers. The term "real property" is defined in s.63(1) of the Act to include any estate or interest in such property. The term "conveyance" is defined to include land transfers. In the case of such transfers under the Transfer of Land Act 1958, ad valorem duty is payable upon the value of the property transferred. The Stamps Act relevantly provides, by s.63(3)(b)(i)(B) that:
"(3) Except as otherwise provided in this Act –
…
(b)a reference in this subdivision or in the provisions of the Third Schedule under Heading VI to the value of real property or property is a reference –
(i)in relation to a conveyance on sale of the real property or property –
…
(B)to the sum of the amount for which the real property or property and the amount for which such chattels might reasonably have been sold if they had been sold, free from encumbrances, in the open market on the date of sale."
The appellant contends that the proper application of this provision in this case leads to the conclusion that the sum of $4,400,000 is the amount upon which stamp duty should be calculated. If so, the duty payable is $262,949. A cheque for that amount was enclosed with the covering letter of 27 August 2001.
The respondent does not accept that $4,400,000 represents the sum on which stamp duty should be assessed. It initially contended that that sum was $6,200,000. It reached that figure by adding to the valuer's assessment of the value of the real property ($4,400,000) the assessed value of the business, including goodwill. The latter amount, so the respondent contended, was $1.8 million. As a result, the transfers were stamped with duty of $375,100. That sum was subsequently reduced to $363,000 when the respondent accepted the Valuer General's opinion that the value of the property as an owner-operated hotel was $6,000,000.
The appellant objected to the respondent's assessment. By letter dated 9 August 2002, it requested the respondent to treat the objection as an appeal and cause it to be set down for hearing in this Court. The respondent complied. This proceeding is the result.
The appellant submits that the respondent was wrong in including in its assessment the value of property which was not transferred by the dutiable instruments – “namely, the goodwill of the business conducted upon the land”.[1] The Act imposes a duty on instruments, not the underlying transactions to which they give effect. That duty is imposed and assessed by reference to the value of the property which is transferred by the dutiable instrument; and the property, in turn, is to be identified by its description in that document. In this case, the property transferred was the real estate the address of which is 893 Burke Road, Camberwell. It was properly valued at $4,400,000, this sum reflecting the fact that the business of an hotelier was being conducted on the land. The business carried on at that address was not transferred. The goodwill of that business was, it necessarily follows, not the subject of the transaction; and that ineluctable fact necessarily also follows from the circumstance that the transferee of the real estate had been the owner of the business for almost six years before the land itself was included among its assets. One cannot add to a dutiable instrument an amount of duty assessed on the value of property (that is, in this case, the business conducted on the land) to which the instrument does not refer. One could also observe, if it were relevant, that just as the instruments of transfer were in no way concerned with the transfer of the business, neither was the underlying transaction.
[1]Appellant’s outline of contentions dated 26 May 2003, para. 16
In reply, the respondent submits that the appellant misunderstands its position. The essential difference between the parties, according to the respondent, lies not in the question whether the transfer of land included the transfer of the goodwill in the business. It plainly did not. The subject of the transaction was indeed the real estate, and only the real estate. But its value is the amount for which it might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of sale. That value was (in the words of the respondent’s outline of contentions) "enhanced by the goodwill of the licensed hotel business which is conducted on the premises." Indeed, it was not merely enhanced by, but increased to the full extent of, the value of the business, including the goodwill associated with it. The outline continued:
"If the property had been for sale on the open market, a potential purchaser would have been prepared to pay more than the mere value of the land and improvements, because in the circumstances of this case acquisition of the ownership of the land carried with it the right to run the hotel business from the premises.
The transfer of the ownership of the premises did carry with it the opportunity to exploit the goodwill of the business. At the time of the transfers the transferee was in occupation of the premises only as a tenant from month to month. It had no goodwill which it could sell because the goodwill has its source in the premises themselves, and with no lease in place it could not have sold the business to a third person.
By conferring absolute ownership of the premises upon the transferee, in a transaction which did not make any other disposition of the ownership of the business, the effect of the transfers was to give to the transferee ownership of both the land and the business."
There is a fundamental flaw in these propositions. It is that at the time of the transfers the transferee was not "in occupation of the premises only as a tenant from month to month". It was in occupation pursuant to cl.3.7(b) of the deed of compromise. It already had an equitable interest in the freehold of the land. The effect of the transfers was not to give to the transferee ownership of both the land and the business. The latter had been held by it for well over five years.
Accordingly, this was not a case in which, immediately before the transfer, the ownership of the land carried with it the right to run the hotel business from the premises. The appellant had that right before, and quite independently of, the acquisition of its freehold interest in the land itself.
It was said that the right, being supported by no more than a monthly tenancy, was in effect worthless. But from the moment the compromise was agreed, the former landlord lost the ability to evict the appellant; and so, at the time of the transfer, the appellant’s right (in the absence of any breach by it of the terms of the settlement) to continue to conduct the hotel business from the premises was secure. In these circumstances, it is inaccurate to say that the effect of the transfers was to give to the transferee the ownership of both the land and the business.
The respondent itself accepts, in its outline of contentions, that it would be correct to assess the value of the land in accordance with the appellant's argument if "there had been in actual existence a lease pursuant to which the lessee was running the business and thereby exploiting the goodwill which has its source in the premises; and this had not been transferred to the transferee of the land." But here there was a lease pursuant to which the lessee was running the hotel. Neither this lease nor the business was transferred to the transferee of the land; they could not be, because the transferee was already not only the tenant but also, of course, the owner of the business. The High Court has declared that goodwill is property which is inseverable from a business, and is also indivisible.[2] That being so, it seems to me impossible to contend that a transfer of the freehold interest alone should attract duty assessed on any basis other than the value of that freehold interest, taking appropriately into account the effect on that value of the land's ability to attract the rent generated by a business operating on it as a going concern.
[2]Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 620, where Gaudron, McHugh, Gummow and Hayne JJ speak of "the two fundamental premises of the law of goodwill, that is to say, that goodwill has no existence independently of the conduct of a business and that goodwill cannot be severed from the business which created it."
I therefore accept that the value of real estate is increased if its ownership carries a secure income with it. A purchaser will pay more for a fully tenanted office building, with good tenants on long leases, than for an empty shell. Land on which an hotel is erected will attract a higher price if the business is well run, is conducted in a prosperous area, has an established clientele, and generates large profits, than if the opposite were true. The prosperous publican, if a lessee, will in those circumstances be anxious to retain the lease; and that anxiety will be reflected in the amount of rent that the business will generate for the owner of the land.
On the other hand, it is not in my opinion strictly accurate to say (as the respondent does in its outline of contentions) that the value of the real property which was in this case transferred by the instruments of transfer was "enhanced by the goodwill of the licensed hotel business which is conducted on the premises". It is true that the value of the reversion was enhanced by the fact that the business of an hotelier, one of the assets of which was its goodwill, was being conducted on the land and therefore generated rent for the owner of the reversion. But the goodwill, an asset of the business, has a number of sources: the personality of the licensee and the quality of the management, to mention just two of them.[3] Another source is the land on which the business is conducted. When the appellant was a mere lessee, this particular source was the leasehold (but not the freehold) interest in the land. That interest carried with it the right to possession of the land, together with all the advantages (including the property’s location and the quality of the improvements on it) which possession encompassed. The holder of the reversion had no interest - certainly none of a proprietorial nature – in the goodwill.
[3]The notion that, as a matter of law, all or substantially all of the goodwill that attaches to a public house is to be deemed to be site goodwill, is no longer, if it ever was, a proposition which can stand in the way of the truth that the principles relating to the goodwill of an hotel should not differ from those which relate to any other business: see Krakos Investments Pty Ltd v Commissioner of Taxation (1995) 61 FCR 489.
It is therefore perhaps confusing to speak of goodwill that has its source, or part of its source, in the land, as enhancing the value of the land. That enhancement, if any, arises from the capacity of the land to produce income. It is no more (and no less) true to say that the value of 893 Burke Road, Camberwell was enhanced by the goodwill of the business than it is to say that the worth of the land on which stands a large mid-city commercial building is enhanced by the collective value of the goodwill of the many separate businesses carried on within it. The land is valuable (or not) because it is (or is not) attractive to prospective and actual tenants, and therefore likely (or unlikely) to generate correspondingly attractive (or less than attractive) rental income.
The respondent relied on the decision of Mr Geoffrey Nettle QC (as he then was) in Cresswell Nominees Pty Ltd v Commissioner of State Revenue[4]. In that case, Mr Nettle referred to the propositions, re-affirmed by the High Court in Federal Commissioner of Taxation v Murry,[5] that goodwill is in itself indivisible and is property which is inseverable from a business. Mr Nettle continued:
"17.For present purposes, however, the important point is not that goodwill is not divisible or that it has no existence independently of the business, but rather that, although it is indivisible and without existence independently of a business, some aspects of the goodwill will nevertheless affect the value of the land on which the business is conducted and others will not.
18.In some of the cases which precede Murry there is a tendency to treat goodwill as if it were divisible and thus to pose the question of how much if any of the goodwill passes with land. Murry makes plain that a purchase of land is not a purchase of goodwill and, as a matter of law, that the money which is paid for land is not money paid for goodwill. Nevertheless, to the extent that goodwill may be said to be annexed to land it will inform the amount which a potential purchaser is prepared to pay for the land and hence, in the valuation of the land, the value of so much of the goodwill as derives from the land may be considered in point of fact, though not in point of law, to be decisive of the valuation."
[4]Victoria Civil and Administrative Tribunal, Unreported, 7 November 2001
[5](1998) 193 CLR 605
It seems to me, with respect, that it is unhelpful to speak of goodwill, which of its nature is (a) indivisible and (b) inseverable from a business, as being "annexed" to land where the owner of the business may have no greater interest in the land than that of a tenant. It is also true that, as a matter of valuation practice, the value of land may be assessed (as it was in this case) by capitalising the hypothetical rental "to arrive at a figure for the value of the real estate net of the operating business." It follows, as I understand it, that the valuer in arriving at its value of $4,400,000 took into account the ability of the business to generate rental income for the owner of the reversion. On the other hand, I would be surprised were the valuer to assess the value of so much of the goodwill as derived from the land, and then consider that value as decisive of the valuation.
Given that the valuer proceeded to capitalise the hypothetical rental, it is in my opinion on the resultant value (that is, $4,400,000) that, in this case, duty should be assessed. The applicable principle is that duty is payable on the sum of the amount for which the real estate situated at 893 Burke Road, Camberwell might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of sale. That amount is to include a component which accurately reflects the value to the owner of the freehold of the fact that the hotel business was conducted on the land. It does not include any amount for the business itself. That being so, it necessarily excludes any sum representing the goodwill associated with the business.
The appeal must, for these reasons, be allowed.
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