Symex Holdings Ltd v Commissioner of State Revenue

[2007] VSC 159

J30 April, 1–3, 24 May 2007[2007] VSC 159Stamp duty — Conveyance or transfer of real property — Assessment — Valuation — Manufacturing business — Management buy-out — Specific amounts of purchase price allocated to business and assets, working capital, land and buildings, and plant and equipment — Whether market value of plant and equipment exceeded agreed consideration — Whether commissioner’s valuation of plant and equipment shown to be excessive — Stamps Act 1958 (No 6375)ss 17(1), 33A(2),63(3), Heading VI, Sch 3..

Heading VI of Sch 3 to the Stamps Act 1958 relating to conveyance of real property and land transfer relevantly provided that a reference to the value of real property or property in relation to a conveyance on sale thereof was the consideration for the sale, or the amount for which the real property or property might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of the sale, whichever was the greater.

SH Ltd purchased a manufacturing business as a going concern pursuant to a management buy-out agreement (“the MBO”) which (a) allocated the purchase price ($14,594,823) to the business and the assets plus the working capital value ($9,094,823) calculated according to detailed criteria, and (b) attributed specific sums for the land and buildings ($2,749,800) and the plant and equipment ($2,749,800). After the company had paid duty in accordance with an assessment which was based on a land valuation of $10,806,000, the commissioner issued an amended assessment increasing the dutiable value of the property to $45,491,000 of which the value of the plant and equipment was increased to $27,410,400. The company appealed against the commissioner’s decision rejecting part of its objection to the amended assessment increasing the valuation of the plant and equipment, and requested that its objection be set down as an appeal to the Supreme Court pursuant to s 33B(1)(b) of the Act.

Held, allowing the appeal: (1) Although the MBO transaction was conducted at arm’s length between independent and capable commercial entities and individuals, there was no evidence of hard bargaining and the evidence overall left the impression that the vendor may have had reasons of policy and convenience for entering into it rather than offering the business on the open market. It had not been shown that there were not factors influencing the price in the MBO transaction other than those of a simple arm’s length transaction. The consideration in the expressed agreement therefore did not provide satisfactory evidence of, let alone constitute, the open market value of the plant and equipment. [104].

(2) Plant and equipment was comprised of profit-earning fixtures and/or chattels and if it was to be valued on a going concern basis, and in the absence of comparable sales evidence, such plant and equipment should be valued having regard to the probable earnings that it might produce. [108].

Spencer v Commonwealth(1907) 5 CLR 418; Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of South Australia(1947) 74 CLR 358; Re Marriott, deceased[1968] VR 260 applied. 17 VR 374

(3) The commissioner’s valuation did not provide any satisfactory or acceptable evidence of the amount for which the plant and equipment might reasonably have been sold in the open market on the date of the sale because:

• (a)

  Simple common sense dictated that the total current replacement, installation and commissioning cost (less depreciation) of plant and equipment existing as part of a going concern on a particular site might or might not represent the market value of that plant and equipment, as a going concern. [112];

• (b)

  The valuer had ignored the question what price might have been agreed between a willing but not anxious vendor and a willing but not anxious purchaser. [113];

• (c)

  The valuer’s definition of “market value for the existing use” contained an express qualification that the valuation must be expressed as “subject to adequate potential profitability” related to the value of the total assets, but his valuation did not have any regard to the question whether that qualification had any relevance to an open market valuation or a valuation for stamp duty purposes. [114].

(4) It followed that the amended assessment, in so far as it related to the plant and equipment, was excessive. [119].

(5) The appellant had not established that it was appropriate to value the plant and equipment at its auction realisation value. Neither of the two valuations of the plant and equipment for removal purposes was criticised by the parties and since it was not possible to prefer either one over the other (and assuming those valuations to be relevant) it was apprpriate to take a mid-point between the two as representing the assessable market value of the plant and equipment. [123].

Appeal

This was an appeal by the taxpayer against the Commissioner of State Revenue’s rejection of the taxpayer’s objection to a re-assessment of duty under the Stamps Act 1958. The facts are stated in the judgment.

R A Brett QC and C E Shaw for the appellant.A G Southall QC for the respondent.Cur adv vult.Mandie J.Introduction1This appeal arises out of the partial rejection by the Commissioner of State Revenue of an objection by the appellant, Symex Holdings Ltd (“the appellant” or “Symex”) to a re-assessment of stamp duty under the Stamps Act 1958 (“the Act”).1 The central question on the appeal relates to the value, for stamp duty purposes, of plant and equipment purchased in January 2000 by Symex and transferred to it as part of a “management buy-out” (“MBO”) of an oleo manufacturing business and the land and buildings where the business was conducted.2Section 17(1) of the Act imposes duty upon the instruments specified in Sch 3 and Heading VI of Sch 3 relates to conveyance of real property and land transfer and provides for the duty payable thereon. It is relevantly provided in Heading VI 1

The Act has since been repealed and replaced by the Duties Act 2000.

17 VR 375 that a reference to the value of real property or property in relation to a conveyance on sale thereof is the consideration for the sale, or the amount for which the real property or property might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of the sale — whichever is the greater.3Section 63(3) of the Act, which is the other key provision on this appeal, relevantly provides:

(3) Except as otherwise provided in this Act —

• (a)

  a reference in this subdivision or in the provisions of the Third Schedule under Heading VI to real property or property includes a reference to chattels not being stock-in-trade held or used in connexion with a business carried on or in connexion with the real property —

  • (i)

    that, by reason of the sale of or agreement to transfer the real property or property to the transferee, are sold or transferred to the transferee or a person who is related to the transferee (within the meaning of section 75(3));

  • … 
• (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 —

    • (A)

      to the sum of the consideration for the sale and the consideration for the transfer of chattels included in the real property or property by reason of paragraph (a); or

    • (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 the sale —

    • … 

  whichever is the greater …

Background facts4In 1856 the Kitchen family began a candle-making business in South Melbourne and in 1859 they purchased a factory and surrounding land in Port Melbourne. Subsequently John Kitchen and Sons was established and diversified into soap and tallow-rendering and the manufacturing of products such as stearine and glycerine. In 1924 John Kitchen and Sons amalgamated with Lever Brothers eventually becoming part of the multi-national corporation Unilever. In 1971 the name J Kitchen and Sons was again used for the oleo manufacturing division of Unilever at Port Melbourne. In 1978 the business came to be operated by Unichema Australia Pty Ltd, part of the global operation of Unichema International, but still remaining part of the Unilever group. In 1994 Michael Clevin Newton (“Mr Newton”) was appointed as managing director. In 1999 another multi-national corporation, ICI, acquired Unichema International and the Port Melbourne business, still operating on the same site, continued under the name of Uniqema Pty Ltd In the year 2000 Mr Newton and some other executives completed an MBO with ICI and Symex (a company incorporated for the purpose) became the independent owner of the business including the land and buildings (“the Symex land”), and the plant and equipment.5The MBO transaction was primarily constituted by a business sale agreement dated 17 January 2000 (“the sale agreement”) between Uniqema Pty Ltd (“the vendor”), ICI Australia (Holdings) Pty Ltd, and Symex (“the purchaser”). Under 17 VR 376 the sale agreement the vendor agreed to sell to the purchaser and the purchaser agreed to purchase from the vendor the assets2 and the business as a going concern.3 The components of the purchase price were the business and the assets plus the working capital value.4 The sale agreement provided that the purchase price (other than the working capital value and certain minor amounts)5 should be allocated as to land and buildings in the sum of $2,749,800, and as to plant and equipment in the sum of $2,749,800.6 The sale agreement then contained detailed provisions as to the calculation of the working capital value, involving a physical stocktake and calculation of the value of the stock and of the aggregate value of trade debtors (less trade creditors). The working capital value arrived at under these provisions of the agreement was $9,094,823. Thus the total price under the sale agreement was $14,594,823.6A contract of sale of the Symex land7 was executed between Uniqema Pty Ltd and Symex, dated 17 January 2000 (“the land contract”) with a purchase price of $2,749,800. Fourteen instruments of transfer dated 1 March 2000, covering the fourteen titles involved, were executed in which the consideration totalled the amount of the purchase price.7On 27 April 2000 Symex provided to the State Revenue Office (“the SRO”), by means of a letter settled by its solicitors, “the relevant transfers and chattel statutory declarations”. In the letter, Symex informed the SRO of the purchase price of the land under the land contract and said that the chattels (so called) were purchased for $2,749,800 under “an associated contract”.8 Symex said that the transaction was an arm’s length transaction between unrelated parties and submitted in the letter that the total consideration for the sale of $5,499,600 represented the market value of the property on the day of the sale and, accordingly, that this was the amount upon which stamp duty should be assessed. The letter enclosed two valuations of the Symex land. One valuation by Herron Todd White9 in the sum of $13m was stated to be for the purposes of security valuation and to be on the basis of redevelopment value and not relevant to the question of stamp duty. The second valuation was by A T Cocks Consulting10 in the sum of $9.86m and said to be on the basis of the current use. The Symex letter submitted that the contract price was the relevant value for stamp duty purposes or, in the alternative, that the A T Cocks Consulting valuation adopted a preferable methodology for assessment of the value of the land. 2

Assets were defined to mean, principally, the goodwill, the trade debtors, the land and buildings, the plant and equipment and the stock on hand at the completion date.

3

Clause 2.1.

4

Clause 3.1.

5

These minor amounts totalling $400, were for goodwill ($100), know-how ($100), contracts ($100) and leases ($100).

6

Clause 3.2 — it was not suggested that the “split up” between land and buildings and plant and equipment was anything other than arbitrary although the appellant contended that the total of these two amounts represented the market value of those assets.

7

The land is an “island site” of approximately 3.879 ha and is located at 14 Woodruff Street, 164–200 Ingles Street and 101 Boundary Street and is bounded by Woodruff, Ingles, Munro and Boundary Streets, Port Melbourne.

8

This later turned out to be a reference to the sale agreement.

9

This valuation can no longer be found.

10

This valuation is Ex 5 in this appeal but was tendered not as evidence of the value of the land, but rather to explain the history leading up to this appeal.

17 VR 377 8I note here that it was common ground that the plant and equipment, the value of which is the subject of controversy on this appeal, was mainly constituted by fixtures (and hence formed part of the land sold by the land contract and transferred by the instruments of transfer) and only to a lesser extent by “chattels”, within the meaning of s 63(3)(a) of the Act. Although that is so, the parties for the most part treated the valuation process as relating to land and buildings as one entity to be valued, on the one hand, and as relating to plant and equipment (comprising both fixtures and chattels) as a separate entity to be valued on the other hand.9By letter dated 26 May 2000 the SRO wrote to Herbert Geer & Rundle, the solicitors for St George Bank Ltd, who were providing mortgage finance to Symex. The SRO letter referred to the land valuations by A T Cocks Consulting and Herron Todd White and expressed the view that the appropriate land value for stamp duty purposes (being greater than the consideration expressed in the transfers) “should rest in the adoption of a mid-point figure between the two values determined by the Valuers”. The letter went on to request a copy of the contract of sale of chattels.10The SRO’s letter dated 26 May 2000 received a response from Symex’s solicitors, Minter Ellison, by letter dated 6 June 2000, in which the solicitors submitted that the average of the land values was inappropriate and in which they repeated the contention that the A T Cocks Consulting valuation should be preferred. The letter went on to say that the value of the chattels ($2,749,800) was apportioned across the titles on an area basis but the letter did not respond to the request for a copy of the chattels contract. The SRO made a further request for the chattels contract by letter to Minter Ellison dated 29 June 2000 to which Minter Ellison responded by letter dated 15 August 2000, supplying a copy of the sale agreement and further advising that (as the SRO had earlier requested) Herron Todd White was revisiting their land valuation.11By letter dated 17 October 2000 Minter Ellison supplied to the SRO a further land valuation by Herron Todd White in the sum of $11.7m11 and the letter said that the solicitors understood that the SRO proposed to assess on the basis of the new Herron Todd White valuation and the A T Cocks Consulting valuation and to average the two valuations to achieve a mid-point.12On 3 November 2000 the SRO issued assessments of stamp duty in respect of the 14 transfers of land (on the basis of a land valuation of $10.806m) in a total sum of $704,890 and Symex paid that amount without objection.13The following year, by letter dated 3 April 2001 from the SRO to Symex, the SRO advised that it was conducting an investigation to assess compliance with the Act in relation to the MBO transaction. The letter sought a number of documents including executed copies of the transaction documents and any evidence to substantiate the value of assets purchased. Minter Ellison responded by letter dated 7 June 2001 supplying copies of various documents previously provided and providing in addition a valuation report prepared by Taylor 11

This valuation is Ex 6 in this appeal and was tendered not as evidence of the value of the land, but rather to explain the history leading up to this appeal. I note that the approach adopted was a land value based on sales evidence that was also supported by fair net maintainable rental approach. The valuer noted that the property was ideal for redevelopment but appears to have considered the value to be less on that basis because the main administration building added value to the land in its existing use thus exceeding any redevelopment value.

17 VR 378 Lockwood dated January 1999.12 In addition, Minter Ellison confirmed that no specific chattels contract existed and that the relevant document was the sale agreement. Further correspondence followed between Minter Ellison and the SRO and the SRO also sought valuations from the Valuer-General.14By letter dated 14 March 2003 the SRO advised Symex that an assessment had been issued pursuant to s 32(8) of the Act13 (“the re-assessment” or “the amended assessment”) and that it had been determined that the dutiable value of the property was $45,491,000, the market value assessed by the Valuer-General, and that Symex was liable for additional duty, penalties and interest, due to the undervaluation of the property, in the sum of $2,670,464.17. An assessment worksheet attached to the letter set out the relevant calculations. I note that the worksheet refers to an item of property called the “Co-generation” assets or “Co-generation” plant and equipment — the whole question of the “Co-generation” assets need not be explained and can be disregarded, as these assets were subsequently excluded by the SRO from its re-assessment of duty and, further, it was common ground that their existence or value was not relevant to any issue on this appeal. Nevertheless it is convenient to set out the table contained in the assessment worksheet in order to understand how the duty was calculated:

Land & Buildings as per Valuer-General’s report	$10,400,000
Plant & Equipment as per Valuer-General’s report	$27,410,400
Subtotal	$37,810,400
Co-Generation — Plant and Equipment as per Valuer-General’s report	$7,681,000
Total Dutiable Value of Conveyance	$45,491,400
Duty Payable @ 5.5%	$2,502,027
Less Total Duty Paid	($704,890)
Duty Owing	$1,797,137
Plus Penalties @ 25%	$449,284.25
Plus Interest @ 13.95% pa for 2000/01	$142,865.01
Plus Interest @ 12.96% pa for 2001/02	$232,908.96
Plus Interest @ 12.84% pa for 1 July 2002 to 24 July 2002 for Land, Buildings Plant and Equipment (excluding Co-generation assets)	$11,046.18

12

On 25 January 1999 Taylor Lockwood Pty Ltd had prepared a valuation of the plant and equipment for the previous owner. That document is in evidence primarily because the commissioner wished to show that the appellant had a valuation of the plant and equipment available at the time when the transfers were submitted but did not disclose it — it being substantially in excess of the consideration in the transfers. The document is not evidence of the value of the plant and equipment because the valuer was not called and in any event the valuation is at a different date. Taylor Lockwood valued the plant and equipment as at 25 January 1999 on a “market value for existing use” at $28,555,640 and on a “fair market value” at $9,930,170.

13

Section 32(8) of the Act provides that the Comptroller of Stamps may re-assess the duty with which an instrument is chargeable if it appears to the Comptroller that an application for his opinion as to duty payable had not made a full disclosure of all material facts and that the relevant instrument was not duly stamped.

17 VR 379

Plus Interest @ 12.84% pa for 1 July 2002 to the 3 March 2003 — Co-generation Plant and Equipment	$37,222.77
Total Duty, Penalty & Interest Assessed	$2,670,464.17

15The amended assessment adopted the valuation of land provided by the Valuer-General of $10.4m. This was the amount of a valuation given to the Valuer-General by Frank Leonard Julier (“Mr Julier”), a valuer and property consultant employed by Rushton Valuers Pty Ltd.16I interpolate here that Mr Julier made an affidavit dated 22 September 2006 in which he set out his qualifications and experience and exhibited his instructions to value the Symex land as at January 2000 and his consequent valuation thereof prepared in May 2002. Mr Julier valued the Symex land as at 7 January 2000 in the sum of $10.4m. In the original assessment the commissioner says that the land was valued at $10.806m which is approximately half way between the A T Cocks valuation ($9.86m) and the Herron Todd White valuation ($11.7m), as the correspondence to which I have just referred confirms. In his valuation, Mr Julier said that he had “first valued the land as a development site using a direct comparison approach to sales of industrial sites within the Port Melbourne region”. He then said that he had “also” valued the property by capitalisation of the estimated net annual returns to determine if the buildings added value to the development potential of the land and he said that the buildings collectively only added nominal value. It is apparent from Mr Julier’s calculations that he did not value the land other than as a development site. He considered that the land, as a development site, was worth $9.82m but that certain of the buildings added to the value of the land as such a development site to the extent of $580,000, thus arriving at his total valuation of $10.4m. As I have said, this valuation was adopted by the commissioner in the amended assessment and thus the separate value of the land and buildings was reduced by the amended assessment from $10.806m to $10.4m.17In the amended assessment, the value of the plant and equipment was increased by nearly $25m having been valued at $27,410,400 in lieu of the amount allocated by the sale agreement ($2,749,800). The valuation in this amount was provided to the Valuer-General by Rushton Valuers Pty Ltd, and was carried out by Ian Jeffrey Henderson (“Mr Henderson”).18By notice dated 13 May 2003, Symex objected to the re-assessment of stamp duty pursuant to s 33A(1) of the Act.14 Symex objected, inter alia, to the re-assessment of the value of the plant and equipment and to the penalties and interest imposed.19Section 33A(2) of the Act provides:

(2) Where the assessment is an amended assessment, the person objecting shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased.

14

Section 33A(1) provides that a person who is dissatisfied with any assessment may within 60 days object in writing against the assessment stating fully and in detail the grounds on which he relies.

17 VR 380 20It was common ground that, by virtue of s 33A(2) of the Act, Symex was entitled to object to the increased valuation of the plant and equipment and the duty assessed thereon, but could not object to the assessment of duty on the land and buildings because the liability to duty in that respect had decreased rather than increased. That is not to say that the valuation of the land adopted by the commissioner, or the basis thereof, is necessarily irrelevant to the issues on this appeal.1521On 15 August 2005, Symex’s objection was allowed in part by removing the value of the Co-generation assets from the assessment and by reducing the penalty and interest accordingly. In the reasons for decision signed by the commissioner’s delegate, it was noted that Symex did not provide any valuations of the plant and equipment when lodging the transfers with the SRO despite having “information” that the plant and equipment was worth substantially more than the allocated consideration. These circumstances were said to constitute a failure to exercise reasonable care and to justify the application of a penalty of 25% together with market and premium interest. The total duty, penalty and interest, in the result, was reduced to $2,072,778.21, a reduction of some $600,000.22Following this decision, Symex requested that its objection be set down as an appeal to the Supreme Court pursuant to s 33B(1)(b) of the Act. I note that on such an appeal the burden of proving that the assessment is excessive lies upon the objector (or appellant)16 and that the court may make such order as it thinks fit and may by such order confirm, reduce, increase or vary the assessment.17

[His Honour then dealt with the evidence concerning events which surrounded the making of the MBO agreement, and the evidence given by the expert valuers (Mason and Murone) called by the taxpayer, and the expert valuer (Henderson) called by the commissioner, and continued:]

Submissions93There were two principal submissions advanced, as alternatives, on behalf of the appellant. It was submitted that the transaction between the vendor and Symex was a bona fide commercial transaction negotiated at arm’s length between unrelated parties, although, concededly, there was not much evidence of hard bargaining. It was submitted that the consideration agreed between the parties represented the open market value of the business purchased (and of each of its constituents). Alternatively, it was submitted that the value placed by the commissioner on the plant and equipment was excessive and that the open market value of the plant and equipment was either its auction realisation value ($874,800) or its “fair market value” ($8,395,300 as assessed by Mr Henderson, alternatively $9,171,000 as assessed by Mr Mason).94In relation to the appellant’s first submission, it was put that the vendor and Symex were independent commercial operators, with access to all necessary advice if required, who had negotiated and arrived at a price which was the best evidence of the open market value of the property sold and a more accurate 15

It was further common ground, although in the end irrelevant, that, by virtue of s 33A(2) of the Act, Symex could not succeed in having the assessable value of the plant and equipment reduced to any amount less than the amount adopted in the original assessment ($2,749,800).

16

Section 33C(1)(b) of the Act.

17

Section 33F(1) of the Act.

17 VR 381 measure of the market value of the plant and equipment than that provided by the valuations adduced by either side. Further there was no evidence of any motive for ICI to take less than the market value of the business. The evidence showed that ICI was a willing but not anxious seller and that Symex was a willing buyer, perhaps a little more anxious but that would have increased the price. Further both parties had knowledge of the relevant facts and circumstances relating to the subject matter of the sale — indeed ICI as a large multi-national corporation was well-placed to assess the best price that it might obtain. Accordingly it was submitted that the consideration paid, although not determinative of the open market value, was the best evidence thereof in all the circumstances.95In relation to the appellant’s second submission, it was contended that “market value for existing use” was not the proper basis on which to value the plant and equipment under the Act and, even if it was, the value placed upon the market value for existing use of the plant and equipment by Mr Henderson was excessive. It was submitted that Mr Henderson’s “market value for existing use” valuation was not done on the basis of an “exchange” value but simply on the basis of replacement cost less depreciation. Mr Henderson had not even considered what the plant and equipment would fetch on the open market if sold as part of a going concern on the site — he had not asked what any willing but not anxious purchaser would actually pay in those circumstances. Further, Mr Henderson had stated in his valuation that the “market value for existing use” method required that the entity had the ability to generate sufficient cash flows to justify carrying the asset at that value and the only expert evidence (that of Ms Murone) was that Symex at the date of sale did not have the ability to generate sufficient cash flows to justify carrying the plant and equipment at Mr Henderson’s valuation or anything near it.96The appellant submitted (it being common ground that the determination of value in accordance with s 63(3)(b)(i)(B) of the Act was to be carried out, as decided by the High Court in the Pioneer Concrete case,28 in accordance with the principles stated in Spencer’s case)29 that the sum of the amount for which the real property and the chattels might reasonably have been sold, free from encumbrances, in the open market on the date of sale was not the amount contended for by the commissioner and that the valuation relied upon by the commissioner did not value the plant and equipment in accordance with the principles stated in Spencer’s case.97If the valuation of the plant and equipment on an existing use basis was incorrect, the appellant submitted that, the commissioner having adopted a valuation of the land as a development site, a purchaser for development purposes would have sold the plant and equipment by auction and the correct value of the plant and equipment was therefore the auction realisation value. Alternatively, the value of the plant and equipment was the fair market value as assessed by Mr Henderson (that being lower than the fair market value assessed by Mr Mason).98On the other hand, it was submitted on behalf of the commissioner that the transaction between the vendor and Symex was not arrived at as a consequence of hard bargaining between vendor and purchaser at arm’s length. The MBO was not an open market transaction. 28

Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd(2002) 209 CLR 651.

29

Spencer v Commonwealth(1907) 5 CLR 418.

17 VR 382 99It was next submitted on behalf of the commissioner that the Symex business was sold as a going concern and that the “market value for existing use” of an asset was simply the market value of that asset based on its current use continuing as part of the going concern on the land, whereas the “fair market value” referred to by the valuers was a value for removal purposes. It was submitted that the evidence of Ms Murone was irrelevant and, in any event, flawed for a number of reasons. Accordingly, it was submitted that Mr Henderson had approached the valuation of the plant and equipment on a correct basis and that the appellant had failed to show that his valuation, and hence the amended assessment, was excessive.Reasons100I do not accept the appellant’s submission that the consideration for the plant and equipment in the MBO transaction constitutes or represents its open market value.101The appellant relied on what was said by Gillard J in Re Marriott, deceased:30

Experience in this type of litigation demonstrates that the value of real property at a given period is essentially a matter of opinion and that frequently there is a great variation in opinion thereon. As counsel felicitously expressed it, a valuation has all the appearance of mathematical exactitude but none of reality …

On the other hand, having regard to the difficulties in accurate valuation, if parties to a contract or sale of land are at arm’s length and after hard bargaining arrive at a price which was introduced into a contract, then it would be extremely difficult for any court to say, even in the face of a battery of expert testimony to the contrary, that at the precise time of the contract, the value was any different to this price …

But where there are patently factors influencing the fixation of the price stated in the contract other than the hard bargaining between a prospective vendor and purchaser at arm’s length, then different considerations should apply. The price in such circumstances does not necessarily reflect the value of the land. This is particularly so where there are circumstances (such as an intention to confer a benefaction) which would provide a motive for an understatement of price.

102However, although I accept, on the evidence, that the MBO transaction was conducted at arm’s length between independent and capable commercial entities and individuals, there is certainly no evidence of hard bargaining and the evidence overall left me with the impression that ICI may have had reasons of policy and convenience, that were mentioned in Mr Newton’s evidence, for entering into the MBO transaction rather than offering the business on the open market. I am not satisfied that there were not factors influencing the price in the MBO transaction other than those of a simple arm’s length transaction.103Furthermore, the total price under the sale agreement of $14.5m looks decidedly inadequate when one takes into account that the working capital (stock and net debtors) was valued at $9m and that the plant and equipment has since been valued by two valuers, for removal purposes, at around $8–$9m. These two items substantially exceed the total sale price before one even gets to take into account the value of the land. The same disparity is apparent if one commences the calculation and comparison with a land value of $10.4m. 30

[1968] VR 260, at 268–9.

17 VR 383 104I conclude that the consideration in the sale agreement does not provide satisfactory evidence of, let alone constitute, the open market value of the plant and equipment.105At this juncture, it is as well to refer to what was said in Spencer’s case. In that case, Griffith CJ said:31

In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

106And Isaacs J said:32

To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.

107Commissioner of Succession Duties (SA) v Executor Trustee in Agency Co of South Australia33 (“Clifford’s case”) was concerned with the valuation of shares in an unlisted company, forming part of a deceased estate. Latham CJ, Rich and Williams JJ said:34

In estimating the price at which a reasonably willing vendor would sell and a reasonably willing purchaser would buy the shares if they entered into friendly negotiations for that purpose on the date of death, the price must represent the full value of the shares to the vendor, so that … probably the most practical form in which the matter can be put is that the vendor is entitled to that which a prudent purchaser would have been willing to give for the shares sooner than fail to obtain them.

The main items to be taken into account in estimating the value of shares are the earning power of the company and the value of the capital assets in which the shareholder’s money is invested. But a prudent purchaser does not buy shares in a company which is a going concern with a view to winding it up, so that the more important item is the determination of the probable profit which the company may be reasonably expected to make in the future … In order to estimate the rate of dividend that a prudent purchaser could reasonably require on his investment it is necessary to examine the nature of the business and the risks involved …

31

(1907) 5 CLR 418, at 432.

32

At 441.

33

(1947) 74 CLR 358.

34

At 361–2.

17 VR 384 108In the above quotation from Clifford’s case, I note the emphasis placed, in valuing the shares, on the determination of the probable profit which the company might reasonably be expected to make in the future. Plant and equipment is comprised of profit-earning fixtures and/or chattels. It therefore seems to me that, if plant and equipment is to be valued on a going concern basis, and in the absence of comparable sales evidence, such plant and equipment should be valued having regard to the probable earnings that it might produce.109Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd35 was a case involving a contract of sale of land that contained a partly worked-out quarry and the issue related to the value of the land for the purposes of the Act, having regard to the number of special features of the transaction. For present purposes, I would refer to what was said by Gleeson CJ, Gummow, Kirby and Hayne JJ:36

In considering the true construction of s 63(3)(b)(i), and, in particular, par (B), two principles must be kept in mind. First, the statutory provisions in question in this case impose a duty on instruments, not on transactions. Secondly, liability to duty arises because the dutiable instrument transfers an estate or interest in real property, and it is by reference to the value of that which is transferred that duty is imposed.

Those two principles were applied by Mason J in DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW):

“It is a fundamental principle of the law relating to stamp duties that duty is levied on instruments, not on the underlying transactions to which they give effect … [I]n the case of a conveyance the statutory command is that it attracts duty on the property conveyed; in the case of the declaration it attracts duty on ‘the property comprised therein’. Consequently the issues are: (1) What was the property conveyed by the transfer?; and (2) What was the property comprised in the declaration? The decision on these issues hinges on the interpretation of the two instruments, that is, on the description given by them of the relevant estate or interest as applied to the facts of the case. It is a matter of ascertaining what is the property with which each instrument deals, according to its terms.

We cannot substitute for the issues prescribed by the statute a different issue having no foundation in the statutory provisions. Nor can we substitute for the property which the parties have chosen by their instruments to convey and make the subject of a declaration of trust the interest in property which in a practical sense represents the alteration in [the transferor’s] position brought about by the combined operation of the two instruments.”

…

Once it is accepted that the real property to be valued is an estate in fee simple in the land referred to in the relevant certificates of title, unqualified by any exception or reservation, or any other outstanding proprietary interest, then it follows that the exercise required by par (B) is a determination of the amount for which such an estate might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of the sale. The determination of such an amount is a familiar task, to be carried out in accordance with the principles stated in Spencer v The Commonwealth. The subject of the valuation is the unencumbered estate in fee simple. In determining the value there is no warrant, either in the language of the statute or in principle, for departing from the hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together. The purpose of making the inquiry hypothetical is to isolate the value of the estate or interest to be transferred from factors that are extraneous to the purpose for which such a value is to be ascertained.

35

(2002) 209 CLR 651.

36

At 663, [34]–[35] and 667, [44].

17 VR 385

To introduce into the exercise a special condition for which, on a particular occasion, a particular vendor chose to stipulate, and to which a particular purchaser chose to agree, is to depart from the statutory requirement, which is to determine the value of that which was transferred. It is, rather, to value the net benefit which the transaction conferred upon the purchaser. It is to treat stamp duty as a tax on a transaction. [Footnotes omitted.]

110Finally, I would refer to what was said by Ormiston JA in Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue:37

It does not follow that one should ignore, for the purposes of the Stamps Act, the true value of the land transferred. It is the “statutory command”, as Mason J described it, a description the court in Pioneer Concrete accepted, which requires the ascertainment of “the amount for which the real property … might reasonably have been sold … on the open market” on the relevant date. That requirement demands consideration of what was comprehended by the estate or interest sold and of the relevant factors which must be taken into account. If sale in the open market is the test which the court in Pioneer Concrete accepted as incorporating the principles stated in Spencer v Commonwealth, then those factors which legitimately might affect the not unwilling vendor and the not too anxious purchaser must all be relevant. On the face of it one should only exclude factors which are personal to vendor or purchaser or which do not relate to the actual subject matter of the sale. [Footnotes omitted.]

111I turn to Mr Henderson’s valuation, which constituted the only evidence supporting the commissioner’s valuation of the plant and equipment. In my opinion Mr Henderson’s valuation does not provide any satisfactory or acceptable evidence of the amount for which the plant and equipment might reasonably have been sold in the open market on the date of the sale for the following reasons.112In my opinion it is simply common sense that the total current replacement, installation and commissioning cost (less depreciation) of plant and equipment existing as part of a going concern on a particular site may or may not represent the market value of that plant and equipment, as a going concern, in the sense laid down by Spencer’s case. The market value, in that sense, may well be much less than the depreciated replacement cost but, of course, it might also in a given case be more.38 Mr Mason confirmed that proposition from the point of view of an expert when he said, in effect, that this approach could produce distorted information (as well as accurate information).113Although Mr Henderson, in his written valuation, paid lip-service to the notion of “market value”, I am satisfied that he did not give any or any due consideration under his “market value for existing use” heading, to the essential questions raised by Spencer’s case. It is clear that he valued the plant and equipment on the basis of current cost of replacement, installation and commissioning (less depreciation) without having any regard to the question what price might have been agreed between a willing but not anxious vendor and a willing but not anxious purchaser. 37

(2004) 12 VR 351, at 376, [61].

38

In that regard see s 294(4) of the Corporations Law as it existed in 1997 — a provision which is expressly mentioned in the API standard in this context under the heading “Recoverable Amount”.

17 VR 386 114Further, in his written valuation, the definition of “market value for the existing use” that Mr Henderson adopted contained an express qualification, namely, that the valuation must be expressed as “subject to adequate potential profitability” related to the value of the total assets. He did not in his valuation have any regard to the question whether that qualification had any relevance to an open market valuation or a valuation for stamp duty purposes. When it came to his oral evidence, he appeared to vacillate between the position that the profitability of the plant and equipment was irrelevant to its open market value and the position that its profitability was indeed relevant but that that aspect was a matter for those skilled in that area. In passages set out in the last-mentioned paragraphs, he appears to accept that his approach was only a starting point and that other factors come into play in determining what a person would be prepared to pay for plant and equipment.115The qualification as to “adequate potential profitability” was, of course, derived from the API standard.39 The API standard is expressed to be applicable for the purpose of financial reports and for no other purpose. Nevertheless, it is clearly aimed at achieving where possible the reporting of the market value of plant and equipment assets in financial reports. For that reason “market value for the existing use” is defined as being “based on market data” or, in the alternative, on a depreciated replacement cost basis. However in the case of the latter basis, the API standard expressly provides that the valuation must be expressed as “subject to adequate potential profitability” related to the value of the total assets. The API standard then explains that this test requires that the entity has the ability to generate sufficient cash flows to justify carrying the asset at that valuation. The API standard thus recognises that, if plant and equipment is valued not on the basis of market data40 but on the basis of depreciated replacement cost, a market valuation is not achieved unless the factor of profitability is taken into account.116I note further that the API standard refers to “Deprival Value” and says:

The Deprival Value concept is adopted as a conceptual framework in the assessment of Market Value for the Existing Use. It is a concept upon which non-current physical assets can be considered. On this basis, an entity normally measures its non-current physical assets by reference to the minimum cost of replacing the services potential rendered by those assets.

Deprival Value is described as the cost to an entity if it were deprived of an asset and was required to continue to provide goods and services or to deliver programs that depend on that asset. Under this concept, assets are valued at an amount which reflects the loss that might be expected to be incurred if the entity were deprived of the service potential or future economic benefits of the assets at the reporting date.

The Deprival Value of an asset excludes incidental losses arising from deprival, such as loss of profits, that could be avoided by replacing or reproducing the future economic benefits embodied in the asset. Accordingly, the maximum amount of an asset’s Deprival Value is the current replacement or reproduction cost of the future economic benefits embodied in the asset. [Emphasis added.]

39

The qualification relating to adequate profitability is to be found in the definition of market value for the existing use (1.4) and is also referred to in the sections on depreciated replacement cost (6.4) and “Responsibility For Adequate Potential Profitability Test” (7.5).

40

The API standard says that depreciated replacement cost “should not be used as a substitute for direct market-based valuation methods, if market evidence is available” (6.7).

17 VR 387 117I conclude that Mr Henderson’s valuation and testimony does not provide acceptable evidence of the market value of the plant and equipment as a going concern.118I have reached the above conclusion independently of any consideration of the evidence of Ms Murone. However, I think that further support for the conclusion is provided by Ms Murone’s evidence to this extent. Ms Murone’s evidence concerning the open market value of the business (even if her valuation is regarded as conservative which I think it is) tends to show that Mr Henderson’s valuation of the plant and equipment must be flawed and is excessive. Further, Ms Murone’s evidence concerning the inadequate profitability of the plant and equipment at the value placed upon it by Mr Henderson again tends to show that Mr Henderson’s valuation of the plant and equipment must be excessive.119It follows, for the foregoing reasons, that the amended assessment, in so far as it relates to the plant and equipment, is excessive.120The question next arises: what does the evidence show as to the market value of the plant and equipment?121I reject the appellant’s dubious contention, for which there is no evidence, that a developer would prefer to auction the plant and equipment rather than have conducted an orderly private sale thereof. I therefore do not accept that it would be appropriate to value the plant and equipment at its auction realisation value.122As to private sale of the plant and equipment, there is a valuation in evidence, that of Mr Mason, and that valuation, as I have said that I understand it, relates to the value of the plant and equipment for removal purposes. That valuation is in the amount of $9,171,000. There is a further valuation of the plant and equipment for removal purposes in evidence, that of Mr Henderson, and that valuation is in the amount of $8,395,300.123Neither of these valuations were criticised by the parties and I am unable to prefer either one over the other. In those circumstances I think that, assuming these valuations to be relevant, I should take a mid-point between the two as representing the assessable market value of the plant and equipment, that is, the sum of $8,783,150.124In that regard I note that, as I have found, there is no satisfactory valuation before the court of the market value of the plant and equipment as a going concern. Indeed, as it seems to me, a proper valuation on this basis would need to have regard to the open market value of the land, buildings, plant and equipment as a total package because the question must be, once a going concern basis is adopted, what would the total package fetch on the open market having regard to the hypothetical position of the willing but not anxious vendor and willing but not anxious purchaser.125However, in this case, in the amended assessment the commissioner adopted a valuation of the land for redevelopment purposes. That course, it seems to me, is inconsistent and incompatible with obtaining or adopting a valuation of the plant and equipment as a going concern. In those circumstances, I am of the view that the valuations of the plant and equipment for removal purposes by Mr Mason and by Mr Henderson are the relevant ones for the purpose of a proper assessment under the Act. It would be inappropriate, having valued the land for redevelopment purposes to value the plant and equipment for its existing use — but that is what the commissioner has purported to do. Indeed, this may well have 17 VR 388 been an independent and valid basis for rejecting the amended assessment in so far as it relates to the plant and equipment.126It was common ground that, if the court reached conclusions along the lines that I have in fact reached, it would be necessary to remit the matter to the commissioner to reconsider all questions of penalty and interest in the light of this judgment generally and also in the light of the reduced amount involved.127Accordingly I would propose to make the following orders:

• 1.

  Appeal allowed.

• 2.

  Amended assessment set aside in relation to the value of the plant and equipment and in relation to penalty and interest.

• 3.

  Declare that the value of the plant and equipment for the purposes of the Stamps Act 1958 is $8,783,150.

• 4.

  Remit the matter to the Commissioner of State Revenue to amend the assessment accordingly and to reconsider the questions of penalty and interest (if any).

128I will hear the parties on the question of costs.129I would add as a postscript that, as I understand the position, the concept of market value for existing use is and has been for some years the subject of some controversy in accounting and valuation circles. Indeed, I am aware that it was removed from International Accounting Standard 16 in 1998. However, these matters were not the subject of evidence and I have paid no regard to them.

Appendix41

1.0 Introduction

…

(1.1)Scope of this Practice Standard

This Practice Standard applies to Members undertaking valuation of non-current plant, machinery and equipment assets controlled by private and public reporting entities including local government for the purpose of General Purpose Financial Reports and for no other purpose. It is applicable to plant, machinery and equipment assets held for continued use (operational), or held for disposal (non-operational), that is surplus to requirements. This Standard does not apply where valuations are required for the reporting entity’s private or internal purposes, insurance purposes, or other purposes that do not meet the criteria for financial reporting.

…

(1.3)Going Concern & “Value in Use”

The valuation of plant, machinery and equipment assets forms part of the process of reflecting the “going concern” value of the entity through its balance sheet comprising the net value of its assets less liabilities. The value of individual assets which make up a part of the going concern is based upon their contribution to the whole, commonly referred to as their “value in use”. The concept of Going Concern assumes that the entity will continue in operational existence for the foreseeable future without any significant reduction in the scale of its operations.

(1.4)Market Value for the Existing Use

41

The IPA Practice Standard refers to paragraph numbers but these need to be inferred as they are not expressly set out — for ease of reference I have inserted them in bold.

17 VR 389

Where plant, machinery and equipment assets are valued as part of a “going concern”, the appropriate basis of valuation is “Market Value for the Existing Use” based on market data or a depreciated replacement cost basis, where “cost” includes installation cost.42 In the case of the latter, the valuation must be expressed as “subject to adequate potential profitability” related to the value of the total assets. This test requires that the entity has the ability to generate sufficient cash flows to justify carrying the asset at the “Market Value for the Existing Use” valuation. This test is similar to the “recoverable amount” test referred to in para 1.6.

…

(1.6)Recoverable Amount

Profit seeking entities should determine if the entity is able to justify the carrying amounts of the valuations completed in accordance with this Standard and arrived at on the basis of Market Value for the Existing Use by applying the “Recoverable Amount” test detailed in Accounting Standards AAS10 and AASB1010 and by observing the requirements of s 294(4) of the Corporations Law.

…

4.0 Bases of valuation

Two Bases

The two bases of valuation of assets for financial reporting are:

(4.1)Market Value [Ref MV] highest and best use [Ref H&B]

The first basis is Market Value (as defined) based on the Highest & Best Use of the asset, which may not necessarily be the existing use. Net Market Value (Net Realisable Value) is defined as Market Value less costs incurred in the disposal of the asset.

(4.2)Market Value for the Existing Use [Ref Ex Use]

The second basis is Market Value (as defined) for the Existing Use. It is the value of an asset based on the continuation of its existing use, assuming the asset could be sold as part of a continuing business operation regardless of whether that use represents the highest and best use.

(4.3)Definition Adopted

The basic definition above should always be adopted, as this concept of Market Value is consistent with that enunciated in the High Court decision of Spencer v Commonwealth of Australia(1907) 5 CLR 418.

(4.4)Variable Factors Impacting

There are, however, a number of variable factors which can have a significant impact on the Market Value of plant, machinery & equipment. The two most significant factors are:

• •

  the anticipated method of sale; and

• •

  whether the equipment will be removed from the site (ex-situ) or remain on site (in-situ) following the sale.

• •

  The two most commonly encountered methods of sale for plant, machinery & equipment are private treaty and public auction.

(4.5)Market Value Ex-Situ

42

The Practice Standard says “where ‘cost’ includes installation cost” — the word “cost” where last appearing has dropped out of Mr Henderson’s definition but the omission is not material.

17 VR 390

Where the Valuer is required to determine the value of the assets for sale by way of a private treaty sale and it is assumed that the assets will be removed from the site following sale (ex-situ), the correct basis of value will be “Market Value (Ex-Situ)” and the Market Value definition referred to above should be followed by “The valuation further assumes that the assets will be sold by way of a private treaty sale where the assets will be removed from their existing location (ex-situ) following sale.”

(4.6)Market Value In-Situ

When instructed to determine the value of the equipment for sale by way of a private treaty sale and it is assumed that the assets will remain as a whole in-situ, the correct basis of value will be “Market Value (In-Situ)” and the Market Value definition referred to in 4.2 above should be followed by: “The valuation further assumes that the assets will be sold by way of a private treaty sale where the assets will remain in their existing place and location (in-situ) following sale.”

…

(4.11)Future Economic Benefits and/or Service Potential

The terms Market Value and Market Value for the Existing Use are expressions of the view of a hypothetical purchaser of the monetary equivalent of the future economic benefits and/or service potential to be derived from that asset.

(4.12)Highest & Best Use

Highest and best use in relation to Market Value is commonly defined as that use from among reasonably probable and legal alternative uses, found to be physically possible, appropriately justified and financially feasible which results in the optimum value for the asset valued.

(4.13)Existing Use Continuing

Existing use assumes the continued use of the asset for the use existing as at the date of valuation having regard to the asset’s capacity to continue contributing to the value of the entity but ignoring alternative uses.

(4.14)Value to a Particular Class of Owners

Market Value for the Existing Use is not the Special Value to the particular owner but the value to a particular class of owners that would continue the existing use.

(4.15)Bases of Valuation

Assets valued for financial reporting purposes shall, unless the circumstances and the adequacy of disclosures warrant, be valued as follows:

All Operational Assets shall be valued on the basis of Market Value for the Existing Use.

All Non-Operational Assets shall be valued on the basis of Market Value.

(4.16)Deprival Value

The Deprival Value concept is adopted as a conceptual framework in the assessment of Market Value for the Existing Use. It is a concept upon which non-current physical assets can be considered. On this basis, an entity normally measures its non-current physical assets by reference to the minimum cost of replacing the services potential rendered by those assets.

Deprival Value is described as the cost to an entity if it were deprived of an asset and was required to continue to provide goods and services or to deliver programs that depend on that asset. Under this concept, assets are valued at an amount which reflects the loss that might be expected to be incurred if the entity were deprived of the service potential or future economic benefits of the assets at the reporting date.

17 VR 391

The Deprival Value of an asset excludes incidental losses arising from deprival, such as loss of profits, that could be avoided by replacing or reproducing the future economic benefits embodied in the asset. Accordingly, the maximum amount of an asset’s Deprival Value is the current replacement or reproduction cost of the future economic benefits embodied in the asset.

…

6.0 Valuation methodology

The valuation methodology to be specifically applied to plant, machinery and equipment assets is outlined in this section.

(6.1)Operational Assets

Operational Assets are categorised as either Non-Specialised or Specialised.

(6.2)Non-Specialised Operational Assets

Non-Specialised Operational Assets are to be valued with reference to the following methodology:

Market Value for the Existing Use

The Market Value for the Existing Use of non-specialised operational assets is assessed by reference to market evidence of assets considered suitable for the particular use (the market comparison approach).

(6.3)Specialised Operational Assets

Specialised Operational Assets are those which have limited marketability due to unique features. They are rarely, if ever, sold in the market, except as part of the business or enterprise of which they are a constituent part. Particular assets controlled and occupied by public or local government authorities often fall within the category of specialised operational assets. Specialised Operational Assets, by their nature, lack market evidence on which to base a Market Value assessment and accordingly, having particular regard to the deprival value concept, these require a replacement cost valuation methodology. Consequently such assets are sub-categorised as replacement cost based assets and the Market Value for the Existing Use is derived by its Depreciated Replacement Cost (DRC) Approach.

(6.4)Depreciated Replacement Cost

In using the Depreciated Replacement Cost approach to establish Market Value for the Existing Use, it shall be noted that:

Equates to Written Down Current Cost Assumptions

• •

  Depreciated Replacement Cost equates to the concept of written down current cost as defined in Accounting Standards.

• •

  Valuations using the DRC method are made on the assumption that, in relation to private sector assets, the entity will continue in operational existence for the foreseeable future and are subject to adequate potential profitability of the enterprise. Valuations of public sector assets they are subject to the prospect and viability of the continuation of the use and/or continued availability of service potential.

Basis of DRC

• •

  DRC is based on the estimated current cost of replacement of the asset with a similar asset which is not necessarily an exact reproduction but which has similar service potential and function (plus where applicable

17 VR 392

• •

  an amount for installation), less an amount for depreciation in the form of accrued physical wear and tear and economic and functional obsolescence.

May Require Technical Input

• •

  Assessments of DRC may require technical input from the entity to enable the assessment of the economic life of specific assets and the degree of any functional, economic or technological obsolescence.

Depreciation

• •

  Depreciation in the valuation context includes not only deterioration of assets through wear and tear, but also includes loss in value due to functional, economic and technological obsolescence.

(6.5)Other Considerations … some assets will fall between Categories

Other matters for consideration include:

• •

  It is recognised that some assets will fall between the specialised and non-specialised categories. These are assets which trade in a market and which:

  • •

    have a degree of specialisation or are partially specialised; and/or

  • •

    have been developed for the purposes of the reporting entity and, which are only classed as specialised due to the nature of the construction, design or other aspect.

If such assets are utilised by the entity and the continuation of this use is envisaged for the foreseeable future the DRC approach may be applicable.

(6.6)Non-Specialised Assets Adapted for Specialised Use

• •

  Adaptations to an otherwise non-specialised asset to enable a specialised use should be valued by a combination of Market Value and DRC. In such circumstances the value of the asset would be assessed at Market Value, to which is added the DRC of the specialised section, again assuming adequate profitability.

(6.7)Market Evidence to be Used Where Available

DRC should not be used as a substitute for direct market based valuation methods, if market evidence is available.

…

7.0 Reporting requirements

…

(7.5)Responsibility for “Adequate Potential Profitability” Test

Where a valuation is dependent on the asset having adequate potential profitability, the valuation report must disclose that fact in relation to the asset and that it is the responsibility of the client’s board of directors, or governing body, to identify whether the “adequate potential profitability” test is met.

Appeal allowed.Solicitors for the appellant: Gadens.Solicitor for the respondent: Solicitor for the Commissioner of State Revenue.L W MAHERBARRISTER-AT-LAW