SUPER CHEAP AUTO PTY LTD and COMMISSIONER OF STATE REVENUE [2006] WASAT 326

Jurisdiction:	STATE ADMINISTRATIVE TRIBUNAL	Citation No:	[2006] WASAT 326
Act:	TAXATION ADMINISTRATION ACT 2003 (WA)
Case No:	CC:2255/2005	Heard:	10, 11 AND 18 OCTOBER 2006
Coram:	JUDGE J CHANEY (DEPUTY PRESIDENT)	Delivered:	10/11/06
No of pages:	36	Judgment Part:	1 of 1
Result:	Commissioner directed to reassess duty
Category:	B
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Parties:	SUPER CHEAP AUTO PTY LTD COMMISSIONER OF STATE REVENUE
Catchwords:	Stamp duty Sale of business operating in three States Consideration allocated between States Allocation of consideration for intangible assets Whether brands have a separate value Whether brands are separate source of goodwill or form part of goodwill "Relief from royalty" method of valuation Assessment of weighted average costs of capital Choice of beta factor and size premium Whether trademarks exempt from duty Whether trademarks locally situate outside Western Australia Whether consideration expressed in agreements as being for intangible assets in Victoria was really consideration for goodwill in Western Australia Arms length transaction
Legislation:	Finance Act 1934 (UK), s 21 Stamp Act 1894 (Qld), s 54, s 54(2) Stamp Act 1921 (WA), s 74(1), s 74(c), s 75, s 75A, Sch 2, Sch 3, Sch 4 Stamp Duties Act 1920 (NSW), s 66, s 90
Case References:	Carnation Australia Pty Ltd v Commissioner of Stamp Duties (Qld) (1994) 2 Qd R 366 Ciba-Geigg Corp v Commissioner 85 TC 172 Commissioner of Stamp Duties (NSW) v H Small and Company Pty Ltd (1950) 80 CLR 177 DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 Earl Fitzwilliam's Collieries Co v Phillips (Inspector of Taxes) [1943] AC 570 English Scottish & Australia Bank Limited v Commissioners of Inland Revenue [1932] AC 238 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 Haque v Haque (No 2) (1965) 114 CLR 98 Inland Revenue Commissioners v Muller & Co's Margarine Ltd (1901) AC 217 McCaughey v Commissioner of Stamp Duties (1945) 46 SR (NSW) 192 Re Usines de Melle & Firmin Boinot's Patent (1954) 91 CLR 42 2 DayFM Australia Pty Ltd v Commissioner of Stamp Duties (NSW) (1989) 20 ATR 1131 Ah One v Doon (1949) 66 WN (NSW) 151 Alcock v Robb (1976) 2 BPR [9625] Banks v Transport Regulation Board (Vic) (1968) 119 CLR 222 Benjamin Brooke & Co Ltd v Commissioner of Inland Revenue [1896] 2 QB 356 BM Auto Sales Pty Ltd v Budget Rent A Car System Pty Ltd (1976) 12 ALR 363 Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Ltd (1986) 16 ATR 372 Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Ltd (1986) 7 NSWLR 529 Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 21 ATR 1557 Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489 Commonwealth of Australia v Western Mining Corporation Resources Ltd (1998) 194 CLR 1 Conagra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302 Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 Federal Commissioner of Taxation v Just Jeans Pty Ltd (1987) 72 ALR 213 Franconi Holdings Pty Ltd v Gunning (1982) 1 SR (WA) 341 Hepples v Federal Commissioner of Taxation (No 2) (1992) 173 CLR 492 Kelly v Kitty O'Sheas Pty Ltd (1995) 32 IPR 507 Lyndsay Edmonds & Associates Pty Ltd v Quest Sales Pty Ltd (1979) 60 FLR 349 Milirrpum & Ors v Nabalco Pty Ltd & Anor (1971) 17 FLR 141 National Provincial Bank Ltd v Ainsworth [1965] AC 1175 Pinesales Pty Ltd and Commissioner of State Revenue [2006] WASAT 202 Potter v Commissioners of Inland Revenue (1854) 10 Exch 147 R v Toohey & Anor; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 Smelting Company of Australia Ltd v Commissioner of Inland Revenue [1896] 2 QB 179

JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL STREAM : COMMERCIAL & CIVIL ACT : TAXATION ADMINISTRATION ACT 2003 (WA) CITATION : SUPER CHEAP AUTO PTY LTD and COMMISSIONER OF STATE REVENUE [2006] WASAT 326 MEMBER : JUDGE J CHANEY (DEPUTY PRESIDENT) HEARD : 10, 11 AND 18 OCTOBER 2006 DELIVERED : 10 NOVEMBER 2006 FILE NO/S : CC 2255 of 2005 BETWEEN : SUPER CHEAP AUTO PTY LTD

Applicant

AND

COMMISSIONER OF STATE REVENUE

Respondent

Catchwords:

Stamp duty Sale of business operating in three States Consideration allocated between States Allocation of consideration for intangible assets Whether brands have a separate value Whether brands are separate source of goodwill or form part of goodwill "Relief from royalty" method of valuation Assessment of weighted average costs of capital Choice of beta factor and size premium Whether trademarks exempt from duty Whether trademarks locally situate outside Western Australia Whether consideration expressed in agreements as being for intangible assets in Victoria was really consideration for goodwill in Western Australia Arms length transaction

(Page 2)

Legislation:

Finance Act 1934 (UK), s 21

Stamp Act 1894 (Qld), s 54, s 54(2)
Stamp Act 1921 (WA), s 74(1), s 74(c), s 75, s 75A, Sch 2, Sch 3, Sch 4
Stamp Duties Act 1920 (NSW), s 66, s 90

Result:

Commissioner directed to reassess duty

Category: B

Representation:

Counsel:

Applicant : Ms CA Searle

Respondent : Mr AJ Sefton and Ms I Briggs

Solicitors:

Applicant : N/A

Respondent : State Solicitor's Office

Case(s) referred to in decision(s):

Carnation Australia Pty Ltd v Commissioner of Stamp Duties (Qld) (1994) 2 Qd R 366
Ciba-Geigg Corp v Commissioner 85 TC 172
Commissioner of Stamp Duties (NSW) v H Small and Company Pty Ltd (1950) 80 CLR 177
DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431
Earl Fitzwilliam's Collieries Co v Phillips (Inspector of Taxes) [1943] AC 570
English Scottish & Australia Bank Limited v Commissioners of Inland Revenue [1932] AC 238
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605
Haque v Haque (No 2) (1965) 114 CLR 98
Inland Revenue Commissioners v Muller & Co's Margarine Ltd (1901) AC 217

(Page 3)

McCaughey v Commissioner of Stamp Duties (1945) 46 SR (NSW) 192
Re Usines de Melle & Firmin Boinot's Patent (1954) 91 CLR 42

Case(s) also cited:

2 DayFM Australia Pty Ltd v Commissioner of Stamp Duties (NSW) (1989) 20 ATR 1131
Ah One v Doon (1949) 66 WN (NSW) 151
Alcock v Robb (1976) 2 BPR [9625]
Banks v Transport Regulation Board (Vic) (1968) 119 CLR 222
Benjamin Brooke & Co Ltd v Commissioner of Inland Revenue [1896] 2 QB 356
BM Auto Sales Pty Ltd v Budget Rent A Car System Pty Ltd (1976) 12 ALR 363
Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45
Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Ltd (1986) 16 ATR 372
Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Ltd (1986) 7 NSWLR 529
Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 21 ATR 1557
Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489
Commonwealth of Australia v Western Mining Corporation Resources Ltd (1998) 194 CLR 1
Conagra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302
Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392
Federal Commissioner of Taxation v Just Jeans Pty Ltd (1987) 72 ALR 213
Franconi Holdings Pty Ltd v Gunning (1982) 1 SR (WA) 341
Hepples v Federal Commissioner of Taxation (No 2) (1992) 173 CLR 492
Kelly v Kitty O'Sheas Pty Ltd (1995) 32 IPR 507
Lyndsay Edmonds & Associates Pty Ltd v Quest Sales Pty Ltd (1979) 60 FLR 349
Milirrpum & Ors v Nabalco Pty Ltd & Anor (1971) 17 FLR 141
National Provincial Bank Ltd v Ainsworth [1965] AC 1175
Pinesales Pty Ltd and Commissioner of State Revenue [2006] WASAT 202
Potter v Commissioners of Inland Revenue (1854) 10 Exch 147
R v Toohey & Anor; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327
Smelting Company of Australia Ltd v Commissioner of Inland Revenue [1896] 2 QB 179

(Page 4)

REASONS FOR DECISION OF THE TRIBUNAL:

Summary of Tribunal's decision

1 In 2003, Super Cheap Auto Pty Ltd purchased the automotive parts sales business known in Western Australia and Victoria as Marlows, and in South Australia as Rocca Bros. The agreements for sale allocated the purchase price between the assets, including intangible assets, located in each State. When the agreements were lodged for assessment of stamp duty, the Commissioner of State Revenue assessed the consideration allocated to intangible assets in Victoria as being, in a reality, consideration for intangible assets, and in particular goodwill, in Western Australia.

2 He also rejected Super Cheap's contention that the Marlows brand, which formed a component of the intangible assets, had a value, in Western Australia, of around $6 million. Instead he concluded that the whole of the amount allocated to intangible assets in Western Australia was consideration for goodwill. He thus assessed the consideration for goodwill as being $11 217 820 and not, as Super Cheap argued $1 393 358.

3 Super Cheap sought a review of the decision. The Tribunal was called upon to decide the value of the Marlows brands in Western Australia. Having heard extensive evidence from valuers engaged by each side, the Tribunal concluded that the brands had no separate value. As a result the whole of the amount allocated to intangible assets in Western Australia (less the value of certain trademarks) represented consideration for goodwill. That value attracted ad valorem stamp duty.

4 The Tribunal rejected the Commissioner's contention that the amount allocated to intangible assets in Victoria represented consideration for goodwill in Western Australia. The agreement was an arms length commercial transaction. There was no basis for concluding that the consideration for intangible assets in Western Australia represented an under valuation of goodwill in Western Australia. The Commissioner was not entitled to re-allocate the purchase price between States.

Introduction

5 On 21 May 2003, Ernst & Young, acting on behalf of Super Cheap Auto Pty Ltd (Super Cheap) submitted to the respondent two documents for assessment of stamp duty. The first document was a "heads of agreement" dated 21 February 2003 between Marlows Limited, Marlows

(Page 5)

(Wholesale) Ltd, Rocca Bros (SA) Pty Ltd and Theride Ltd as vendors, and Super Cheap as purchaser. The second document was an agreement for sale of business (sale agreement) dated 7 March 2003 between the same parties. The sale agreement comprised a fuller and more detailed document embodying the transaction to which the parties had bound themselves by the heads of agreement. The operative terms of each document are, for present purposes, not materially different. Since the sale agreement comprised the ultimate operative agreement between the parties, it is appropriate to identify its particular terms for the purposes of these reasons.

6 The provisions setting out the subject matter of the sale and the consideration were clauses 2 and 3 of the sale agreement. Those clauses read as follows:

2. Agreement to sell

The Vendor agrees to sell and the Purchaser to purchase the Vendor's Business comprising the following assets ('

the Assets

'):

(a) the goodwill of the Business, trademarks, brand names, copyright, information processes, computer software and licences, websites domain names, copies of business records relating to the assets being acquired, the business names and intellectual property referred to in SCHEDULE 4;

(b) all the chattels, plant, equipment, fixtures and fittings used in relation to the Business, whether listed in the fixed asset register or not;

(d) the unexpired term of the Vendor's lease of those business premises referred to in SCHEDULE 5 ('Leases');

(e) the benefit of each of the Vendor's currently subsisting contractual arrangements relating to the Business which are specified in SCHEDULE 1 (called Contractual Arrangements) and any orders or agreements for the supply of goods or

(Page 6)

services that are executory as at Completion (but excluding the Excluded Agreements);

(f) all billing systems, including all accounting, invoicing, debt control, credit control, debt collection, debt recovery, debt adjustment and all related processes and documentation and all data processing information, storage data and retrieval systems, computer records, software, tapes, disks, archives, library and all ancillary data systems, documentation and data storage equipment, inventory management system, and ancillary payroll records; and

(g) any other assets or benefits agreed to be sold or vested in the Purchaser under this Agreement.

3. Sale price

3.1 Sale and purchase

The Vendor agrees to sell and the Purchaser agrees to purchase the Business and the Assets and the Purchaser agrees to assume certain liabilities associated with the Business as identified in SCHEDULE 2.

3.2 Purchase Price

The Purchase Price of the Business and the Assets is $25,300,000 (based on the Business being a going concern)('

Purchase Price

') subject to adjustment in accordance with clause 12.

3.3 Apportioning

The Purchase Price, to be adjusted in accordance with clause 12 below, is apportioned amongst the Assets and the liabilities to be assumed by the Purchaser as follows:

(a) for Assets used in relation to and liabilities associated with Western Australia operations:

(Page 7)

(i) $7,811,358 for intangible assets in the nature of intellectual property, copyright, brand names, business names, information processes, copies of business records relating to the assets being acquired, the rights and benefits of business contracts, computer licenses and all goodwill associated with or incidental to the Business;

(ii) $3,528,000 for plant and equipment;

(iii) $7,629,350 for stock;

(iv) $(10,855,032) for debtors, other debtors, cash floats, creditors and accruals, employee entitlements and hire purchase liabilities as outlined in SCHEDULE 2;

(b) for Assets used in relation to South Australian operations:

(i) $5,300,139 for intangible assets in the nature of intellectual property, copyright, brand names, business names, information processes, copies of business records relating to the assets being acquired, the rights and benefits of business contracts, computer licenses and all goodwill associated with or incidental to the Business;

(ii) $955,000 for plant and equipment;

(iii) $2,790,499 for stock;

(i) $3,782,099 for goodwill and those items collectively comprised of or that are incidental to the intangible assets in the nature of intellectual

(Page 8)

property, copyright, brand names, business names, information processes, copies of business records relating to the assets being acquired, the rights and benefits of business contracts, computer licenses and all goodwill associated with or incidental to the Business;

(ii) $1,590,000 for plant and equipment;

(iii) $2,098,724 for stock;

(iv) $669,863 for prepayments as outlined in SCHEDULE 2;

3.4 Excluded asset

The Purchase Price does not include the land at 491 Ballarat Road, Sunshine, Victoria and no liabilities associated with that land are to be assumed by the Purchaser. This land is not being purchased and does not form part of the Assets."

7 Schedule 4 to the agreement listed some 46 registered business names associated with Marlows, 26 of those registered in Western Australia, and the remaining 20 in various other States (those mostly being the same name as registered in Western Australia). There were some 21 registered business names relating to Rocca Bros registered in various States, and some 21 registered trademarks, 20 of which were registered in Australia, and one in New Zealand, with the proprietor of 18 of those being described as "Marlows" and three described as "Rocca Bros". Of the Marlows trademarks, seven comprised Marlows logos and a further three incorporated the name Marlows.

8 On 26 May 2003, the Commissioner of State Revenue (Commissioner) issued a requisition seeking an itemised list of plant and equipment relating to Western Australia and any other supporting documents to assist in the assessment of the duty. Ernst & Young responded to that requisition by letter dated 24 July 2003. The reply noted that the total consideration, taking account of the assumption of liabilities, amounted to $36 155 032 over the three States where the business operated, namely Western Australia, South Australia and

(Page 9)

Victoria. In relation to the allocation of $7 811 358 to the intangible assets associated with Western Australia, Ernst & Young suggested an allocation to the individual intangible assets as follows:

Intangible Assets	Allocated Consideration/Market Value ($)
Intellectual property	Nominal
Copyright	Nominal
Brand names	Nominal
Business name	Average Value (1) 6,418,000
Information processes	Nominal
Copies of business records	Nominal
Rights and benefits of business contracts	Nominal
Computer licenses	Nominal
Goodwill	Balance of consideration 1,393,358
TOTAL	7,811,358
Footnote (1) (As per the Report the market value of business name is between $5,886,000 and $6,950,000)

9 The letter then asserted that the acquisition of the business name is not subject to duty in WA on the basis that:

• a business name is not real or personal property;

• a business name is not and cannot be, or form part of, goodwill; and

• the purported transfer of a business name is ineffective as a transfer at general law.

10 The letter acknowledged that ad valorem duty was payable on the value of the goodwill of the business in Western Australia, which Ernst & Young had assessed at $1 393 358. In relation to the plant and equipment, an asset register was attached identifying fixtures with a market value of $491 080, which were accepted as attracting liability for duty on transfer,
(Page 10)

with the balance of the plant and equipment being said to be exempt from duty pursuant to Item 2(7c) of the Third Schedule of the

Stamp Act 1921

(WA) (Stamp Act). Accordingly, the letter suggested that the total dutiable amount under the contract was the value of the goodwill and the plant and equipment comprising fixtures, namely $1 884 438.

11 In relation to the asserted value of the business name in Western Australia, Ernst & Young enclosed a report dated 20 May 2003 prepared by Mr Ken Pendergast, a partner of Ernst & Young, based in its Advisory Services Division.

12 The introduction to that report records that Ernst & Young Corporate Finance Pty Ltd had been requested to "value the identifiable intangible assets ('the Business Names') of the retail automotive spare parts business ('the Business') acquired by Super Cheap Auto Pty Ltd ('SCA') from Marlows Limited ('the Company'). The Company operates the Business under the Business Names of 'Marlows' in Western Australia and Victoria and 'Rocca Bros' in South Australia".

13 The letter continued:

3. The Nature of Intellectual Property

In order for intellectual property to be classified as an asset and be allocated a fair value, in practice, four fundamental criteria must be met, namely that the asset be:

• separately identifiable;

• protected legally or capable of protection through a defacto right;

• transferable (or capable of being exchanged for value); and

• enduring in nature.

Examples of intellectual property capable of being brought to account include brand and business names, copyrights, franchises, licences, mastheads, patents and trademarks. We have been asked to assess the value of the Marlows and Rocca Bros Business Names. We have not taken into account the value of other intellectual property that may be associated with the Business, such

(Page 11)

as the proprietary information system the Company developed.

The value of a business name is generally established over a number of years and usually involves a significant investment in time and money on advertising and promotion with the development of a suitable range of products, pricing strategy and level of quality, which are intended to be reflected by the business name. The resultant value of a business name is dependent on the benefits that possession confers upon the owner. This is generally reflected in one of two ways. Firstly, the ability of the business name to generate superior margins in comparison to its competitors'. Secondly, the business may be capable of generating a significant market share and consequently enjoy the benefits associated with economies of scale.

The value of intellectual property is generally determined by the expected future earnings or cashflow (that is, the future net economic benefits) that can be obtained from the use or sale of the intellectual property. In the case of business names, the value arises from consumer preferences and the loyalty attaching to the business names.

Customer loyalty takes time to establish and needs to be constantly nurtured. Business name recognition and preference by the customer allows the owner to:

• inhibit or impair the ability of competitors to enter the market by erecting a strong barrier which would be costly to overcome;

• readily extend its current product line into other products and markets;

• generate a significant medium to longer term market share which results in a profitable economies of scale; and

• focus its advertising expenditures to improve business name effectiveness.

(Page 12)

The management of the Business had developed unique livery for the Marlows and Rocca Bros stores including distinct and readily recognisable logos. The internal layout is similar across all stores. This strategy was developed to ensure consumers would readily recognise a Marlows or Rocca Bros store and ensure customers receive a consistent experience whilst shopping across all stores. The Company has registered the Marlows and Rocca Bros logos to protect them against unauthorised use. A schedule of the registered names is included in Appendix B."

14 Mr Pendergast then valued the "business names" by capitalising the value of the imputed royalty stream which he estimated that a third party licensee would be willing to pay for the rights to use the business name. In approaching the evaluation, Mr Pendergast noted that the Marlows business name is used in Western Australia and Victoria but that "to date the expansion into Victoria has not been as successful as anticipated and as a result we have excluded sales from Victoria from our assessment of Marlows maintainable turnover". Instead, Mr Pendergast had regard to information he was able to gather relating to the actual and forecast results in Western Australia only. He then assessed a hypothetical royalty rate, which he acknowledged was "extremely subjective". He, observed that "as part of the strategy to promote the Marlows business name and increase consumer awareness, the company spends approximately $2.5 million on marketing the Marlows business". He assessed an appropriate royalty rate of between 2.75% and 3.25% in valuing the "Marlows business name". Having then adopted a capitalisation multiple by reference to the relationship between the purchase price for the business and the earnings before income tax and depreciation (EBITDA), he calculated that the value of the Marlows business name as between $5 886 000 and $6 950 000. The figure attributed to the "business name" in the table contained in Ernst & Young's letter of 24 July 2003 (which was not written by Mr Pendergast, but by another person in Ernst & Young) was the midpoint of Mr Pendergast's range of values.

15 The figures as to the dutiable amount under the sale agreement were initially accepted by the Commissioner, and a stamp duty assessment notice was issued on 28 July 2003 for duty in the amount of $97 447.50, based on a dutiable value of the transaction of $1 884 438.

16 That assessment was subsequently reviewed by the Commissioner and a fresh assessment was issued on 11 August 2003 assessing duty

(Page 13)

payable as $652 804.50 based on a dutiable value of the transaction of $11 981 889 (comprising $11 217 820 for goodwill in Western Australia and $764 069 for fixtures).

17 There followed correspondence between the Commissioner and Ernst & Young during the course of which the Commissioner explained the re-assessment. The Commissioner explained that, in attributing a market value of $11 217 820 to Western Australian goodwill, the Commissioner took into account that Marlows was predominantly a well known and established Western Australian business, and that, given the comment concerning the Victorian operation in the 20 May report, it was considered there was little or no goodwill situated in Victoria. The explanation continued:

"In your submission dated 24 July 2003, you state that the value of the Western Australian goodwill is only $1,393,358. You have justified this figure by averaging Marlow Ltd's average net profits for the past 2 Years.

[A portion of the letter appears to have been lost in its reproduction and the parties were not able to locate a complete copy. It continued:]

allocated to the 'Marlows' business name and $3,078,000 to the 'Rocca Bros' business name. The balance of this amount ($7,397,596) was considered to be goodwill.

The remainder goodwill value has been apportioned as follows:

Western Australia $1,393,358

South Australia $2,222,139

Victoria

$3,782,099

$7,397,596

Apart from South Australia, the above apportionment of goodwill is totally unrealistic. As the EYCFPL report has indicated, the Victorian business is not living up to expectations and was not even included in determining the value attributed to the Marlows name. On this basis, it is totally unjustifiable that the value of the Victorian goodwill is almost 3 times greater than the value attributed to Western Australia.

(Page 14)

Even though I am of the opinion that there is no goodwill situated in Victoria, goodwill was apportioned using the following methodology:

Value of South Australian goodwill $2,222,139

South Australian turnover $19,041,000

Western Australian turnover $41,149,000

Proportion that Western Australian turnover

exceeds South Australian turnover

($41,149,000/19041,000) 2.16

Value of Western Australian goodwill $4,799,820

($2,222,139 x 2.16 = $4,799,820)

By deduction, the value of Victorian goodwill

would only be $375,637.

The total value of Western Australian goodwill has therefore been calculated to be $11,217,820 (business name goodwill of $6,418,000 + operating goodwill of $4,799,820)."

18 On 19 December 2003, a notice of objection to the assessment was lodged with the Commissioner. By letter dated 1 November 2004 the Commissioner disallowed the objection.

19 In April 2005, the applicant lodged his application for a review of the Commissioner's decision by the Tribunal. Subsequent to the commencement of the proceedings, the respondent obtained an expert report from Mr John K McGuiness, a partner of KPMG Forensic. Mr McGuiness was instructed to review Mr Pendergast's 20 May 2003 report and assess the value of the business names and the allocation of goodwill and intangibles across different States. Mr McGuiness' report concluded that the business names had little or no value. He considered that he did not have sufficient information to allow an assessment of the allocation of value of the overall business and the value of the intangible assets across States, and identified further information he would require to make that assessment. He also considered the value attributable to other identifiable intangible assets and concluded that, although he lacked sufficient information to assess a value attributable to other intangible assets, his conclusions in relation to the value of the business names (being the registered business names) led him to the view that it was

(Page 15)

unlikely that any hypothetical purchaser would attribute any significant value to any other identifiable intangible assets included in the purchase. On that basis, he considered that the residual of the purchase price over the value of net tangible assets as set out in the sale agreement represented the value of goodwill.

The relative legislative provisions

20 The potential liability of the two documents for stamp duty arises under s 74(1) of the Stamp Act which now, and at the relevant time, provides:

74. Certain contracts to be chargeable as conveyances on sale

(1) Every contract or agreement, howsoever executed, for the sale of any estate or interest in any property shall be charged with the same

ad valorem

duty to be paid by the purchaser as if it were an actual conveyance on sale of the estate, interest or property contracted or agreed to be sold."

21 To be liable for duty under that section, the agreement must relate to the sale of "property". The amount of the duty that is payable is determined by Item 4 in the Second Schedule to the Stamp Act, which relevantly provides:

"CONVEYANCE OR TRANSFER ON SALE OF PROPERTY	Duty Payable $	Person liable to pay duty
(1) Transfer of land under the Transfer of Land Act 1893 on a sale thereof or conveyance or transfer of any other property (except any marketable security or right in respect of shares) -	The purchaser
Where the amount or value of the consideration -
…

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(e) exceeds $500,000

$21 300 and $5.50 for every $100 of the amount or value of the

consideration and every fractional part of $100 by which the consideration exceeds $500 000"

22 Section 75 of the Stamp Act provides that where the unencumbered value of property exceeds the consideration payable in respect of that property, the instrument will be chargeable with duty under Item 4 of the Second Schedule as if that unencumbered value were the consideration paid.

23 At the relevant time, s 75A of the Stamp Act entitled the Commissioner to require a purchaser to furnish him with a statement concerning the unencumbered value of property or such other evidence of that value as the Commissioner thinks fit, and to assess the duty in accordance with the evidence of value produced. The Commissioner was further given the power to cause the property, or the consideration concerned, to be valued, and to assess the duty in accordance with that valuation.

The principal issues

24 The Commissioner contends that the total amount of the consideration allocated to intangible assets in Western Australia under the agreements is subject to duty as consideration paid for goodwill. It is accepted by both parties that goodwill is property for the purposes of the Stamp Act. It is also common ground between the parties that it is appropriate to assess goodwill by assessing the value of the identifiable intangible assets conveyed by the agreements and deducting that amount from the total consideration paid in relation to intangible assets. The figure thus produced represents the value of the goodwill. The Commissioner contends, however, that the identifiable intangible assets have no separate value (except, possibly, the trade marks) so that the whole of the consideration for intangible assets represents consideration paid for goodwill.

25 The applicant contends that there are identifiable intangible assets comprising "a package of complementary assets including such items as the brands, business names, trademarks, development of the unique livery of the Marlows and Rocca Bros stores and the distinct and recognisable

(Page 17)

logos". At the hearing, these assets were referred to as the "KP Business Names", a label given to them by the two experts. For the purposes of these reasons, I will refer to them as the "Brands". References in these reasons to "business names" will be a reference to the registered business names. The respondent contends that, while the Brands have a value of around $6 million, they are not "property" for the purposes of the Stamp Act. Thus Super Cheap argues that duty is payable only on the value of the goodwill, namely the difference between the consideration allocated to intangible assets in Western Australia and the value of the Brands.

26 As well as contending that the brands have no value, the Commissioner contends that the true consideration for goodwill in Western Australia is the total of the amounts allocated for intangible assets in Western Australia and Victoria, less a small allowance for goodwill in Victoria calculated in the manner identified in the Commissioner's letter of 22 October 2003 and set out in [17] above. Super Cheap contends that there is no basis upon which the Commissioner (and thus the Tribunal) can reallocate the consideration, specified in the agreement as consideration paid for intangible assets associated with Victoria, as consideration for goodwill in Western Australia.

27 The principal issues to be determined are therefore:

1) what is the value of the Brands?

2) to the extent that the Brands, or any component of the Brands has a value independent of goodwill, is the conveyance of that asset subject to ad valorem duty; and

3) to what extent should the consideration expressed to be for intangible assets in Victoria be treated, for stamp duty purposes, as goodwill located in Western Australia?

The value of the Brands

Conferral between experts

28 In accordance with the usual practice of the Tribunal, the experts to be called by either side were required to confer in advance of the hearing, and identify those matters upon which they agree, those on which they disagree, and their reasons for disagreement. This case is an excellent example of the value of that process. Initially the experts had approached their valuations from fundamentally different perspectives, because the subject matter of their valuation was not the same. Their differences

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emerged as the issues in these proceedings began to crystallise. The conferral process provided opportunity for them to address the substance of their different approaches, and for each to identify his position on value having regard to the approach of the other. The subsequent opportunity for them to discuss their position with the Tribunal, and counsel, at the hearing, helped to elucidate the evidence much more than would have resulted from the traditional adversarial approach.

29 The fundamental difference in their initial approach arose from the fact that Mr Pendergast's report of 20 May 2003 which valued "the business names", was taken to be a valuation of the registered business names, rather than the Brands. That construction of Mr Pendergast's report was reinforced by the table contained in Ernst & Young's letter of 24 July 2003 (set out in [8] above) which attributed nominal market value to intellectual property, copyright and brand names, and attributed value only to "business name" and "goodwill". Accordingly, Mr McGuiness was instructed to assess the value of the business names, and not the Brands. His initial report was prepared on that basis.

30 During the course of the proceedings, it was revealed that, although he used the expression "business names" in his report, Mr Pendergast had in fact valued a "package of complementary assets", being the Brands.

31 Mr Pendergast did agree that the value of the business names would be less than the value of the Brands, but declined to allocate a separate value to the business names. He accepted, however, that the methodology applied by Mr McGuiness in determining the indicated value of the business names was reasonable.

32 Having identified that difference in approach, the experts were then able to consider their position as to the separate value of either the business names or the Brands. They were also able to agree as to the appropriate valuation methodology, namely the "relief from royalties" method. They also agreed that, after obtaining an indicated value by the application of that method, it is appropriate to review the reasonableness of that indicated value to establish that the business had the capacity to incur notional royalty costs. They agreed that, if the business had no capacity to incur a notional royalty cost, then the asset for which the notional royalty might be paid has no value. They agreed that, whether a business has the capacity to incur notional royalty costs is dependent upon the assessment of the return which the business earns on the capital applied by the business in earning its income.

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33 Having agreed to that approach, the experts, in substance agreed that a notional royalty rate of 3% is "not unreasonable", and on that basis that the Brands have, applying the relief from royalties method, an indicated value of AU$5.9 million. They disagreed, however, as to whether the business had a capacity to pay a royalty rate of 3% (or indeed any lower percentage), and thus whether the Brands had any value in the context of this business.

34 The different determinations as to whether the business had the capacity to pay a royalty in relation to the use of the Brands turned upon the experts' different conclusions as to the business' cost of capital. As already noted, they agreed that it is only if the returns being earned by the business exceed its cost of capital that the business demonstrates an ability to meet a notional royalty cost.

35 There was disagreement between the experts as to whether it is appropriate to look to the trading figures of the business across the three States for the purposes of the calculation of return, or whether it is appropriate to undertake the calculation only in respect to the Western Australian part of the business. The principal disagreement in relation to that issue turned upon questions raised by Mr McGuiness as to the reliability of the information used to assess the Western Australian trading performance. In relation to the cost of capital, the different conclusions reached by the experts turned substantially upon the selection of certain multiples applied in the accepted formula for calculating cost of capital. Those multiples are what are referred to as the beta factor and the size premium.

General conclusions on the experts' evidence

36 Also in accordance with the Tribunal's usual procedures, the experts gave their evidence concurrently. That process enabled the Tribunal to question the experts and discuss various aspects of their opinions, allowed the experts to discuss the matter between themselves, and allowed counsel for the respective parties to ask questions of each expert. Both experts applied themselves conscientiously, professionally and helpfully to that process.

37 Both experts agreed that, in relation to some important aspects of their calculations, quite subjective decisions need to be taken as to the application of source information to the valuation methodology being employed. For example, the choice of beta factor and size premium involves a judgment as to the comparability between the business being

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valued, and the businesses in respect of which public information as to cost of capital (such as the beta factor and size premium) is available.

38 Overall, in relation to matters of expert judgment and objectivity, I preferred the evidence of Mr McGuiness. His approach was particularly careful and thorough. He gave careful and reasoned consideration to his task at all stages of his engagement, from his initial report through to his evidence at hearing. While I do not wish to criticise Mr Pendergast, there were aspects of his evidence which suggest an approach designed to support and justify his original conclusion in the face of the forceful criticisms of it by Mr McGuiness.

39 Mr Pendergast assessed the value of the Brands using the relief from royalties method. He did not, in his initial report, apply any cross checks as to the reasonableness of the indicated value which that method produced. That is so, notwithstanding his agreement during cross-examination that it is important to conduct reasonableness cross checks before concluding what, if any, value is ascribable to the Brands. He said he did not conduct those cross checks because the information required to do so was not readily available. It was only after receiving Mr McGuiness' initial report that Mr Pendergast investigated further sources of information to conduct reasonableness cross checks.

40 In response to Mr McGuiness' report, Mr Pendergast did undertake reasonableness cross checks. His first cross check involved an assessment of whether the notional royalty provides a reasonable split of the hypothetical returns of using the brand name between licensor and licensee. He relied upon comments in the United States Tax Court in Ciba-Geigg Corp v Commissioner 85 TC 172 which suggested a share of net profits in the propositions of 25% and 75% as an accepted standard, and another US decision that considered a split of 30% to the licensor as reasonable. Mr Pendergast then calculated the average split to the notional licensor in relation to Marlows over the period 2000 to 2003 at 38.76% with annual figures ranging from 33.55% (2003) to 56.51% (2001). After excluding the 56.5% figure on the basis that "the relatively low level of sales revenue and EBIT … resulted in a disproportionate level of profit accruing to the licensor in that year", he relied upon the figures for 2003 (30%) and estimated figures for 2004 (35%) as satisfying the "rule of thumb" that the return to the licensor should be 25-30%.

41 During oral evidence it became quite apparent that Mr Pendergast had not considered the issue of responsibility for expenditure on maintenance, promotion and protection of the brand in applying the "rule

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of thumb". The issues of whether the licensor or the licensee pays for promotion seriously impacts on the comparability of the figures. Mr Pendergast's failure to consider that aspect for the purposes of his cross check and the arbitrary exclusion of the unfavourable 2001 split, render his reliance on the cross check questionable. Nor did he adequately explain his conclusion that a split of 34-35% of the licensor met a rule of thumb where the upper end of the range for return to the licensor was 30%.

42 His second cross check considered his return on assets. In applying that test, he initially accepted, for the purposes of the calculation, Mr McGuiness' calculation as to the cost of capital. When he undertook his cross check initially, Mr Pendergast applied the cost of capital to the book value of the assets of the business, and on that basis concluded that the business had a capacity to meet a notional royalty payment for the Brands. However, in the context of the joint experts' conferral, Mr Pendergast agreed with Mr McGuiness that an appropriate measure of capital employed by the business is the market value of the assets rather than the book value. Taking the market value of the assets for the purposes of the calculation, Mr McGuiness' figure for cost of capital demonstrated that the business did not have the capacity to meet a notional royalty payment, with the result that the Brands had no value. It was after that conclusion was demonstrated, that Mr Pendergast undertook a review of the figure attributed by Mr McGuiness to the cost of capital. That involved him making his own selection of the beta factor and the size premium, and in both cases he chose a substantially lower factor. By applying those factors to model for assessing the cost of capital, Mr Pendergast produced a reduced figure for cost of capital which, he argued, could justify expenditure by the business on a notional royalty for the Brands.

43 In summary, I have formed the view that Mr Pendergast's approach to his calculation of value was generally tailored to justifying his original valuation, rather than bringing an entirely independent mind to the calculations as the process progressed. As I observed to counsel during closing submissions, I assessed both experts as approaching the task of giving evidence in a professional manner. It is the case, however, that to a degree, Mr Pendergast's independence is, when viewed objectively, compromised by the fact that he is a partner of the firm of accountants acting for the purchaser of the business (who is liable for the stamp duty), both in relation to the particular transaction and the dealings with the respondent in relation to the assessment of duty, and as advocates in these proceedings.

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44 My conclusions concerning the selection of a size premium, which are discussed later in these reasons, also lead me to prefer McGuiness' evidence generally over Mr Pendergast's evidence.

45 Mr McGuiness, on the other hand, is independent of the respondent and, in general terms, provided a cogent and well reasoned explanation for each step in his process of assessment.

Assessment of cost of capital

46 The experts agreed that the assessment of the weighted average cost of capital (WACC) involves a formula which provides for adjustment for the measure of the relative risk of an investment or business operation, relative to a well diversified portfolio of investments – the beta factor. The beta factor captures what are referred to as systematic or non-diversifiable risks. Mr McGuiness explained the significance of the beta as being "the only risk that is priced into investor required rates of return, and that a beta greater than 1.0 implies that returns on a stock are, on average, more volatile than some general equity market index such as the All Ordinaries (Accumulation) Index, and hence the stock bears more risk than the market, whilst a beta of less than 1.0 implies the reverse".

47 A second factor which the experts agreed needed to be assessed for the purposes of determining the WACC is what is referred to as a size premium. The size premium is designed to take into account the additional risk associated with the size of a company, as opposed to the particular sector in which it operates, the risk profile of which is reflected in the beta.

48 Taking the beta and size premium adopted by Mr McGuiness, the WACC is 13.7%. Taking the beta and size premium adopted by Mr Pendergast, the WACC is 9.2%. There is no dispute that, if the WACC is 13.7%, the return on capital earned by the Marlows business, on any of the possibly acceptable measures identified by the experts, would be insufficient to support payment of a royalty for the Brands. It would follow, in that event, that the Brands have no separate value.

49 If the WACC is 9.2%, as Mr Pendergast contends, then the experts disagree as to whether the business has demonstrated a capacity to meet a royalty. Mr McGuiness' position is that even accepting a WACC of 9.2%, the earnings of the business are still insufficient to meet a royalty cost. Mr Pendergast contends that, on his measure of the returns of the business, a capacity to pay a royalty is demonstrated.

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50 In view of the critical significance of the WACC, it is useful to determine that issue between the experts first.

The beta

51 For the purposes of his calculations, Mr McGuiness adopted a beta factor in the range of 1.1 to 1.2. Mr Pendergast considered the appropriate beta factor to be in a range of 0.06 to 0.08, and adopted 0.7 for the purpose of his calculations.

52 The beta is adopted by endeavouring to identify comparable companies whose performance against a relevant index has been measured. Mr Pendergast selected a basket of six companies in respect of whom information was available. He identified Coventry Group Limited, Pacific Group and GUD Holdings as being involved in the manufacturing and distribution and sale of automotive parts, Berkeley Limited as being primarily manufacturers, distributors and retailers of "mainly mufflers and components like that", CMI Limited as being involved specialist 4 wheel drive components, and ION Limited which is a manufacturer of car components. He considered those to be the most comparable to the business of Marlows, although he was conscious that Marlows was not involved in manufacturing but rather was a retail distributor of automotive parts and accessories.

53 Mr McGuiness identified Berkeley Limited and three US companies, Autozone Inc, Pep Boys Inc and O'Reilly Automotive Inc as comparable companies. After "regearing" the published betas to take account of differing levels of debt between companies, the average beta of those companies was 1.08. Mr McGuiness then looked at some general industry comparables in the published data. The industries he had regard to were the automobile and components class (beta 1.21), the retail class (beta 1.11) and the consumer discretionary sector (beta 1.53). The industry information was derived from data published by the Australian Graduate School of Management, attached to the University of New South Wales, which provides a beta measurement service in respect of Australian companies. Mr McGuiness chose the three classes on the basis that the Marlows business was capable, at least in part, of coming within each of those classes. Within the automobile and components class, there were some 14 companies including the four of the six identified by Mr Pendergast. The retailing class comprised some 35 companies.

54 During their evidence the experts were asked to identify the nature of the particular activities engaged in by the various companies which each had included as comparable companies for the purposes of assessment of

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an appropriate beta factor. Not surprisingly, they had limited detailed knowledge of those companies. Both agreed that identification of a "mirror image" of a company being valued is never possible. The ultimate selection of the beta factor involves a degree of expert judgment.

55 On balance, I prefer the conclusion as to the appropriate beta reached by Mr McGuiness. I do so because the range of information which he took into account was broader, and probably more representative of the type of business in which Marlows was engaged. I acknowledge that Mr McGuiness had regard to some companies which conduct business in the United States, but his assessment included a substantial quantity of Australian information. Although the companies chosen by Mr Pendergast were all clearly relevant to the enquiry, most of them are apparently engaged in manufacture as well as distribution of automotive parts, and in that sense differ from the Marlows business. The retail component of Marlows business does not appear to me to be adequately represented in the companies chosen by Mr Pendergast. The broader range of information chosen by Mr McGuiness tends, in my view, to provide a more accurate reflection of the type of business in which Marlows was engaged.

56 I consider the selection by Mr McGuiness of a beta in the range of 1.1 and 1.2 to be a reasonable figure in the light of the information upon which he relied.

57 On that basis, I prefer the conclusion reached by Mr McGuiness as to the appropriate beta factor.

The size premium

58 Mr McGuiness adopted a size premium of 8%, and Mr Pendergast adopted a size premium of 2%.

59 Mr McGuiness' approach was criticised by the applicant on the basis that it was too heavily reliant upon United States data. He justified that approach on the basis that there is little published evidence in relation to size premium in the Australian market. He indicated, however, that he was aware of research in the United Kingdom which appeared to provide similar results to the information from the United States, which suggested to him that the "phenomena seems to flow across markets". He was aware of no empirical information which might suggest that the data does not apply in Australia. On the other hand, Mr Pendergast acknowledged that the studies referred to by Mr McGuiness were relied upon by him, and those in his firm, as support for the proposition that a small company

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premium is appropriate. I also note that Mr Pendergast was content to rely on United States standards in the context of his cross check on the basis of share of profits between licensor and licensee. I see no justification for reliance on United States data for one purpose but not for others.

60 There was also criticism of Mr McGuiness' approach in that the size of the companies which he used for comparison purposes exceeded the size of Marlows, and that the companies operated in a different market. The size premium chosen by Mr McGuiness reflects the US published data identifying a size premium of 8.42% as applicable to the lower half of the tenth decile of companies with a market capitalisation of up to AU$84.5 million. To that extent that the US data should be applied, it would appear that Mr McGuiness has drawn upon a reasonably comparable range of companies.

61 Mr McGuiness criticised Mr Pendergast's choice of a size premium of 2% on the basis that Mr Pendergast provided no explanation as to why he had chosen that figure. Mr Pendergast agreed that there was a lack of empirical evidence in the Australian context that might support the choice of a size premium, although he acknowledged that a size premium was appropriate. In deriving the figure of 2%, he indicated that it was chosen after discussion with his colleagues around Australia. He appears to have satisfied himself that it was an appropriate figure by assessing what practical effect the implication of a size factor had on the beta range. I accept Mr McGuiness' criticism of that approach as being a confusion of the function of each of the factors and as having no logical application as a test of the reasonableness of the figure chosen as a size premium.

62 When pressed on the circumstances in which he would apply a 2% size premium, Mr Pendergast indicated that he had not analysed what percentage goes against any particular sized company, although he indicated that he had used 3% on some other valuation he had undertaken.

63 In my view, Mr Pendergast's explanation as to his reasoning for choosing a 2% premium lacked cogency and any empirical foundation. In the absence of any empirical Australian data, the best available information appears to be that which is available through the US studies. On that basis, I have concluded that Mr McGuiness' opinion as to the appropriate size premium is more soundly based than Mr Pendergast's conclusion, and I accept it as the appropriate figure to select.

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Conclusion as to the value of the Brands

64 It follows that I prefer the evidence of Mr McGuiness as to the applicable cost of capital for the Marlows business, namely 13.7%. That being the case, regardless of how one approaches the assessment of the company's return on capital, the analysis demonstrates that Marlows, whether taken purely in relation to its West Australian operation, or viewed as a single entity operating across three States, did not have the capacity to meet a notional royalty for the use of the Brands. The experts agree that, once that point is reached, the conclusion follows that the Brands have no value.

65 That conclusion is even more apparent if the return on capital is assessed in relation to the business in its entirety. I agree with Mr McGuiness that the information relied upon by Mr Pendergast to break down the trading results and estimates between States is not reliable because of its uncertain origin and veracity. The accounts of the business, as a single entity, are more reliable and provide the proper foundation for the assessment.

The value of goodwill

66 It is well established that goodwill is correctly identified as property for the purposes of the Stamp Act. That goodwill is property was confirmed by the High Court in FederalCommissioner of Taxation v Murry (1998) 193 CLR 605 which described goodwill as:

" … 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 identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business." (at [23] – citations omitted)

67 The Commissioner approached the valuation of the goodwill in this case by treating the excess of consideration over the underlying identifiable assets as being the value of goodwill. That approach was described in the Commissioner's Practice TAA 11.0 issued on 29 October 2003, subsequent to the assessment the subject of this review. In that document, that method of valuing goodwill was described as
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"arbitrary valuation of goodwill" and was identified as an alternative to a number of other approaches to the assessment of value of goodwill. It is an approach which is accepted by the applicant as appropriate, but the difference between the parties lies in the identification of the value of the underlying identifiable assets, and in relation to the treatment of the amount allocated in respect of intangible assets in Victoria as consideration related to Western Australia.

68 The conclusion which I have reached that the Brands have no separate value raises the question whether any of the intangible assets conveyed in the transaction have a separate value. If so, the question arises whether they are property in Western Australia in respect of which ad valorem stamp duty is payable.

69 Apart from the bundle of assets which I have described as Brands, there is no suggestion in any information before me that any of the intangible assets enumerated in clauses 2 and 3 of the sale agreement have a separate value, other than trademarks. The parties were agreed that the registered trademarks are property. They disagreed, however, as to whether a conveyance of a trademark was exempt from duty. The applicant argues that conveyances of trademarks, at least prior to the introduction of s 74C of the Stamp Act (which came into force after the execution of these agreements), are exempt from duty.

70 The applicant relies on item 7 of the Third Schedule of the Stamp Act which exempts from duty "a conveyance or transfer of any estate or interest in any real or personal property locally situated out of Western Australia". The applicant contends that a trademark, which is registered in Australia, is not locally situated within any particular State, regardless of where the trademark might be utilised.

71 Neither of the experts who gave evidence were asked to assess separately the value of the trademarks. If the applicant's contention is correct, it is necessary to deduct the value of the trademarks from the consideration payable in relation to intangible assets, in order to determine the value of the goodwill. The Commissioner contends that the trademarks are property locally situated in Western Australia, and accordingly are not exempt. If the Commissioner is correct, then the separate value of the trademarks does not need to be assessed, because the consideration for intangible assets will all be assessable for duty either as goodwill or as the value of trademarks.

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Were conveyances of trademarks exempt?

72 In Carnation Australia Pty Ltd v Commissioner of Stamp Duties(Qld) (1994) 2 Qd R 366, the Queensland Court of Appeal considered the status of trademarks in the context of s 54 of the Stamp Act 1894 (Qld). Section 54(2) of that Act exempted from duty "property outside Queensland". Fitzgerald P (at 376) relied on the statement by Fullagar J in Re Usines de Melle & Firmin Boinot's Patent (1954) 91 CLR 42 at 49 that the property in a patent, trademark or copyright exists by virtue of a grant from the Crown in right of the Commonwealth and "is locally situated in Australia, but cannot be regarded as locally situate in any State or territory of the Commonwealth". Davies JA (at 386) considered that the expression "outside Queensland" in s 54(2) was used in contrast with the phrase "property locally situated in Queensland", which is used elsewhere in the legislation, so that property not locally situated in Queensland was property "outside Queensland".

73 The respondent seeks to distinguish the decision in Carnation on several bases. The first is that the words of s 54 of the Queensland Act differ from the words of the Stamp Act. However, as Davies JA observed, words "outside Queensland" bear the meaning "not locally situated in Queensland". The words of the exemption in item 7 of the Third Schedule, namely "locally situated out of Western Australia", are materially the same as the words of the Queensland's legislation, and reflect quite precisely the words and concept considered by Fullagar J in Re Usines de Melle and Firmin Boinot's Patent.

74 The second basis for distinguishing the Carnation decision is said to be that the Court in that case was concerned that a conclusion that trademarks used throughout Australia might be dutiable in Queensland leads to a consequence that duty may also be payable in other States, resulting in multiple taxation. The respondent contends that the proper construction of the Western Australian exemption, which would avoid an unreasonable or unjust result of that kind, is that item 2(7) of the Third Schedule operates so as to exempt from duty a conveyance to the extent that it transfers property that is situated outside Western Australia. In my view, there is no basis for placing that construction on item 2(7). The enquiry to which item 2(7) gives rise first requires identification of where the property is "locally situated". In Re Usines de Melle and Firmin Boinot's Patent, Fullagar J expressly stated that trademarks are not locally situated within any State or territory. There is no basis to add into item 2(7), any words which qualify or extend the plain words used.

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75 Third, the respondent contends that the decision in Re Usines de Melle and Firmin Boinot's Patent should be distinguished because it concerned a determination of where a trademark was locally situated under the ordinary rules of private international law, and was not concerned with the question of situs under a revenue statute. In my view, that different context does not provide a basis to limit the clear proposition of law enunciated by the High Court.

76 The respondent also argued that a general rule is that tangible objects are taken to be situated in the place with which they have the closest association. He relied upon cases such as Haque v Haque (No 2) (1965) 114 CLR 98 at 136-139, and McCaughey v Commissioner of Stamp Duties (1945) 46 SR (NSW) 192 at 201. The Haque case concerns the situation of certain debts, and in my view provides little assistance in relation to the question of the situs of trademarks. Jordan CJ in McCaughey observed, at [201], concerning interests under a deceased estate, that, for proprietary rights not associated with a tangible object, "conventional rules have been adopted by which it is regarded as situated in the place with which it is most definitely associated". The Chief Justice then gave a list of examples including a reference to English Scottish & Australia Bank Limited v Commissioners of Inland Revenue [1932] AC 238 at 249 as authority for the proposition that "a patent is locally situated in the area in which the monopoly exists". In relation to a trademark registered in Australia, the monopoly exists in Australia. The observations of Jordan CJ are consistent with the position accepted by Fullagar J in Re Usines de Melle and Firmin Boinot's Patent.

77 In my view, the weight of authority clearly supports the proposition that a trademark is not locally situated in any State or territory. It follows that the conveyance of trademarks under the agreements is exempt from duty by reason of item 2(7) of the Fourth Schedule of the Stamp Act.

78 I note that that conclusion is consistent with the comments made at page 9 of the explanatory memorandum which introduced the Business Tax Review (Assessment) Bill (No 2) 2003 which introduced s 74C to the Stamp Act. The explanatory memorandum states:

"Under current arrangements, business assets such as patents, trademarks, tradenames, copyrights and other types of intellectual property are not subject to duty when transferred as part of a business sale. Amendments are proposed to include intellectual property transferred in conjunction with another business asset in the conveyance duty base and to provide an

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apportionment method for calculating the value of such assets that will be dutiable in Western Australia where the business operates in Western Australia and elsewhere."

79 In my view, s 74C did introduce into the Stamp Act, as the explanatory memorandum suggests, a basis for assessment of duty in relation to, inter alia, trademarks, which, prior to its introduction, was not unavailable under the Stamp Act.

The value of the trademarks

80 As mentioned above, the consequence of this conclusion is that, in order to assess the value of the goodwill, it is necessary to assess the value of the trademarks. That is not possible on the basis of the information presently before the Tribunal, since it is not a question that was specifically addressed by the parties.

81 In the course of submissions, the Commissioner accepted that the trademarks must have some value. I note that the trademarks formed part of the bundle of assets valued by the experts as Brands. I have accepted Mr McGuiness' opinion that the Brands have no separate value even if sold with, and as part of, the ongoing business. It would seem to follow that the trademarks themselves would equally have no, or only nominal, value. It is common ground between the parties, however, that, if I should reach the conclusion which I have, attempts will need to be made to assess a value of the trademarks in order to identify the final value of the goodwill.

The methodology for valuing goodwill

82 As indicated above, the parties accepted that the value of the goodwill should be assessed as the consideration paid for intangible assets less the value of any intangible assets not subject to ad valorem duty. I have concluded that the Brands have no separate value. The consequence is that, apart from the value of the trademarks, the whole amount of the consideration payable for intangible assets should be considered as goodwill.

83 In my view, that is consistent with the concept of goodwill as discussed by the High Court in Murry's case. In that case, the High Court noted the importance of care in distinguishing the sources of the goodwill of a business from the goodwill itself. The Court observed that goodwill must be separated from those assets and revenue expenditures of a business that can be individually identified and quantified in the accounts

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of a business. On the other hand, goodwill is "inherently inseverable from the business to which it relates". The applicant's contention was that the Brands, while not property, could be individually identified and quantified, and thus their value should not be treated as goodwill, but rather as a separate source of goodwill. However, it follows that if the value of the Brands is nil, the fact that elements of the Brands can be individually identified is of no significance.

84 In Murry the Court observed that many of the sources of goodwill are not themselves property, and nor are they assets for accounting purposes. Reference was made to the definitions of goodwill for legal purposes found in Inland Revenue Commissioners v Muller & Co's Margarine Ltd (1901) AC 217 where Lord Lindley said (at 235):

"Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own."

85 The Court also referred to Lord Macnaghten's definition of goodwill in the same case (at 223-224) where he said:

"What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade."

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86 Part 3 of Mr Pendergast's report of 20 May 2003 is set out at some length earlier in these reasons. It can be noted that he spoke of the value of the business names arising from "consumer preferences and loyalty attaching to the business names" and of the businesses "unique livery" and consistent internal layout. He noted the strategy of promoting the business name by spending approximately $2.5 million on marketing the business. The identification of the intangible assets said to comprise the complementary bundle making up the Brands was not done with much particularity. Many of those aspects of what Mr Pendergast identified as giving value to the "Brand names" are more properly categorised as aspects of the goodwill of the business which give value to that goodwill. The conclusion that, save for the value of the trademarks, the amount paid for intangible assets represents a payment for goodwill, rather than for an underlying asset that can be classified as a source of goodwill, is consistent with the definitions of goodwill identified in Murry's case.

Consideration for intangible assets in Victoria

87 As has been observed, both the heads of agreement and the sale agreement identified a purchase price for the business and assets and then specifically apportioned the purchase price in relation to assets in each of the three States in which the business operated. In relation to Victoria, an amount of $3 782 099 was attributed to intangible assets, including goodwill, in relation to the Victorian operations. The consequence of my conclusion in relation to the value of the Brand names is that (apart from the value of trademarks) the whole of the amount allocated to intangible assets must be considered as an allocation of value for goodwill. Based upon the observation by Mr Pendergast in his 20 May 2003 report that "the expansion into Victoria has not been as successful as anticipated" the Commissioner took the view that, apart from a relatively small allocation of goodwill value to Victorian business, the amount allocated to intangible assets in Victoria should be considered goodwill in relation to the business carried on in Western Australia. Mr McGuiness also expressed the opinion that while he was not in a position to assess any goodwill value because of the lack of adequate information, if, as appears to be the case, the Victorian business had incurred a loss in its short period of trading, then a hypothetical purchaser would not attribute any value to the goodwill of the Victorian business.

88 The manner in which the allocation of purchase price for intangible assets was calculated by Super Cheap was explained by Ernst & Young in a letter to the respondent dated 5 September 2003. That letter indicated that consideration was apportioned across jurisdictions on the basis which,

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in their client's view, best reflected the relative values of the business in these locations. The consideration allocated to intangible assets located in South Australia was agreed by the parties to be the price paid by Marlows for intangible property on the acquisition of Rocca Bros. That acquisition was said, erroneously, to have occurred two years prior to the agreements the subject of these proceedings, but in fact had taken place some 7 years before. Nevertheless, it was apparently agreed that, as the acquisition by Marlows of Rocca Bros had been negotiated on an arms length basis, and there had been no material change in the South Australian operations or its performance, the amount paid by Marlows for intangible assets was a reasonable amount to sell those assets to Super Cheap. The respondent accepts that approach.

89 In relation to the intangible assets located in Western Australia and Victoria, the allocation was made on the basis of store numbers in each State. Ernst & Young argued that, given the different elements and components which make up the goodwill of a business, including the location of a store relative to its customers, the allocation on the basis of store numbers was a reasonable basis upon which the parties struck their agreement.

90 The transaction between Super Cheap and Marlows was an arms length transaction. There is nothing in the evidence which suggests that the manner in which the parties struck their agreement as to consideration was other than as indicated above. The Commissioner's position is that the consideration expressed in the agreement as being payable in respect to the intangible assets in Western Australia and Victoria respectively is not the true consideration.

91 In support of his position, the respondent asserts the proposition that it is the substance of the underlying transaction, rather than the form of the instrument which affects the transaction, that is to be considered. The Commissioner relies on Earl Fitzwilliam's Collieries Co v Phillips (Inspector of Taxes) [1943] AC 570 at 581. The House of Lords there considered whether a payment under a lease expressed to be liquidated damages in relation to the use of land was in fact rent for the purposes of s 21 of the Finance Act 1934 (UK). Lord Wright observed (at 581) that "the description of these payments as liquidated damages cannot, in my opinion, prevent the respondent from insisting on their true character, if they come, as in my opinion they do, within the definition of rent given in the subsection".

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92 In Commissioner of Stamp Duties (NSW) v H Small and Company Pty Ltd (1950) 80 CLR 177 the High Court considered whether a document not containing any acknowledgement of delivery of goods or payment by cheque could be found to be a receipt within the meaning of s 90 of the Stamp Duties Act 1920 (NSW). McTiernan J observed (at 184) that "the Court, however, is not bound by the apparent tenor of the document. The test is the real nature of the instrument and in order to elucidate that the Court will receive extrinsic evidence". In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431, the High Court considered the nature of consideration for the purposes of s 66 of the Stamp Duties Act 1920 (NSW). Brennan J said (at 477) that "consideration for the purpose of s 66 is not necessarily the consideration stated in the instrument; it is the money or value which moves the conveyance, and evidence of extrinsic circumstances is admissible to show in what that consideration consists. I would agree with respect with the dictum of Latham CJ in his dissenting judgment in Collector of Imposts (Vic) v Cuming Campbell Investment Pty Ltd:

'It is obvious that, in order to determine whether a consideration is

bona fide

or adequate , it is necessary to go beyond the terms of the instrument, and that, for this purpose, extrinsic evidence must be admitted.' "

93 The difficulty with the Commissioner's position is that, in my view, nothing in the "extrinsic evidence" adduced in this case supports the proposition that the true consideration which moved the conveyance was other than as expressed in the agreement. This is not a case where there is any evidence that the true value of the goodwill, assessed by some measure of profitability, gross earnings, or otherwise, was $11 217 820, or indeed any other figure. The use of the method of valuation described as "arbitrary valuation" in Commissioner's Practice TAA 11.0 results in the value of goodwill for stamp duty purposes being determined by the figure which the parties agree to pay for a business less the value of the tangible assets included in the sale. Where the parties agree a figure which produces a goodwill component which is less than the true value of the goodwill, then s 75 of the Stamp Act enables the Commissioner to charge duty on the instrument as if the unencumbered value of the goodwill were the consideration paid. The Commissioner has the capacity, under s 75A to obtain information to assist him to assess the true unencumbered value of goodwill. That is not the course which the Commissioner has taken in this case. Rather, he contends that the consideration expressed in the agreement is not the true consideration for the intangible assets in Western
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Australia. The only basis for that contention is, in effect, that the method by which the parties have agreed the price to be paid does not reflect what the Commissioner considers is an appropriate way to determine the value of goodwill.

94 In my view, there is no basis which justifies the Commissioner reallocating the consideration which the parties have, at arms length, agreed to pay for the various assets which form the subject of the sale. While there has been no attempt to value the goodwill of the Western Australian business, other than by the arbitrary method, nothing in the evidence suggests that a figure of $7 811 358 (less the value of the trademarks) represents an undervaluation of goodwill in Western Australia. In other words, it cannot be said that the unencumbered value of the goodwill exceeds the figure allocated to intangible assets in Western Australia. In the absence of some basis for that contention, no reasonable foundation exists for an assumption that the true consideration for the agreement was for the payment of only nominal goodwill in Victoria, with the balance of the amount allocated for intangible assets in Victoria to represent payment for goodwill in Western Australia. To accept the Commissioner's reasoning amounts to a conclusion that the consideration expressed by the parties in relation to the Victorian transaction was, in effect, a sham. There is absolutely no basis for suggesting that the transaction was other than at arms length and that what the parties recorded by their agreements represented the true substance of the agreement between them.

Conclusion

95 It follows that, in my view, duty should be assessed on the basis of a dutiable amount comprising the value of the fixtures, namely $764 069, together with the value of the goodwill in Western Australia namely $7 811 358 less the value of the trademarks. The value of the trademarks, which I expect to be a relatively low figure, will need to be the subject of further consideration by the parties, and if necessary determination by the Tribunal in the light of any expert evidence the parties wish to bring on that issue. The Commissioner should be directed to issue a reassessment of duty accordingly, once the question of the value of the trademarks is determined.

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I certify that this and the preceding [95] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

___________________________________

JUDGE J CHANEY, DEPUTY PRESIDENT

Super Cheap Auto Pty Ltd and Commissioner of State Revenue

[2006] WASAT 326

10 NOVEMBER 2006

SUPER CHEAP AUTO PTY LTD and COMMISSIONER OF STATE REVENUE [2006] WASAT 326