The Tax Institute States Taxes Conference Duties Contemporary … · 2016-07-28 · The current tax...

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The Tax Institute States Taxes Conference

Duties Contemporary Valuation Issues

Michael Churchill

July 2016

Contents

About the author .................................................................................................................................... 1

1. Introduction ....................................................................................................................................... 2

2. The Duties Acts and landholder duty ............................................................................................. 3

3. Market value ..................................................................................................................................... 4

4. Putting a value on underlying assets .............................................................................................. 6

5. Accounting issues ........................................................................................................................... 11

6. Potential implications of Placer Dome ......................................................................................... 12

7. A comparison of Placer Dome with RCF III .................................................................................. 16

7.1 Resource Capital Fund ...................................................................................................... 16

7.2 Alacer .................................................................................................................................... 17

7.3 AP Energy Investments....................................................................................................... 17

8. Information: is Nischu Dead? ......................................................................................................... 20

9. The impact of Placer Dome on the treatment of goodwill (distinctions with Alcan) .............. 22

9.1 Alcan ..................................................................................................................................... 22

9.2 Origin ..................................................................................................................................... 23

10. Goodwill and portfolio value ......................................................................................................... 25

10.1 Regis ...................................................................................................................................... 25

11. Does Placer Dome change the Regis issues (top-down v bottom up) .................................... 27

12. Conclusions ..................................................................................................................................... 28

Duties Contemporary Valuation Issues | Page 1 file ref: 20160728 the tax institute paper

About the author

Michael Churchill BCom Grad Dip SFFin FCPA MAICD ATIA

Michael is CEO of Value Adviser Associates, a specialist valuation and advisory firm which has

a unique capability in relation to valuations required for tax purposes.

Michael’s career includes over 30 years’ accounting, valuation and corporate advisory

experience.

Michael has provided expert testimony in the almost all jurisdictions in Australia in relation to

shareholder disputes, managed investment schemes and a range of tax matters. He is co-

author of Business Valuations Digest and author of a wide range of published material in

relation to valuation, government business sales, regulatory cost of capital and tax valuation

matters. He is a regular speaker on valuation issues and a member of the Tax Institute’s

Disputes Resolution Committee.

The landholder duty valuation assignments Michael has led cover WA, Qld, Vic, NSW and NT

jurisdictions and include matters involving nickel, iron ore, gold, coal, uranium, LNG, coal-

seam gas, gas pipelines, airport infrastructure, medical services, hospitals and logistics.

Tax assignments include Division 149, Division 855 (TARP), tax consolidations, international

transfer pricing, intangible asset valuation, R&D syndicates, mining and exploration

information claims and small business retirement concession claims.

Important disclaimer

Valuation is often referred to as an art. Whilst I do not subscribe to this view, I do think there is

much valid debate to be had about many valuation “principles”, as valuation is

fundamentally about determining what is likely to happen in the future – a place and time

which is highly uncertain! Consequently, whilst the views in this paper are presented in good

faith, it is quite possible that individual case facts and circumstances could challenge the

applicability or relevance of those views. I ask that any reader consult with a valuer as to the

applicability of any statements or opinions in this paper prior to applying any of the views

expressed herein. No responsibility will be taken by the author or by Value Adviser Associates

Pty Ltd for any loss or damage suffered as a consequence of reliance on any of the views

expressed in this paper or the accompanying presentation.


1. Introduction

Ambrose Bierce’s Devils Dictionary (1911) defines litigation as “a machine which you go into

as a pig and come out a sausage” and a litigant as “a person about to give up his skin for

the hope of retaining their bones”!

The theme of this paper is the contentious issues associated with value allocation within

landholder duties matters, specifically:

Whether it is appropriate to use a top down or a bottom up approach in assessing the

value of specific assets within an acquired company balance sheet

(Alcan, Alacer, Placer cases)

Whether goodwill exists in mining companies and the broader issues pertaining to

allocation of ‘residual value’ (Alcan, Origin)

Can goodwill be created by having many of the same asset operating as a single

portfolio of assets? (Regis)

The appropriate methodologies for assessing the value of mining and exploration

information (RCF, AP Energy, Alacer, Placer)

The separability of information from the tenements to which it relates (Nischu, RCF,

Placer, AP Energy, Alacer)

As the case law currently stands (and at great risk of over- simplifying the principles and

decisions), the positions are as follows:

The top down approach to assessing component asset values within a balance sheet

is preferred

Goodwill does not exist in mining companies

Portfolios of assets can create value even though on their own, the individual assets

may not present an attractive force of custom (Regis)

Mining and exploration information should be valued using a deprival value

approach but the courts are not favouring an allowance for the opportunity cost

associated with the time taken to reinstate the assets

Information exists and is an asset but the courts are favouring a view that the

hypothetical vendor and purchaser would not separate the information from the

underlying tenement for the purpose of contemplating a sale transaction


2. The Duties Acts and landholder duty

The Duties Acts in each state seek to levy duty on land-like assets acquired via acquisition of

shares in an entity.

Fundamentally this is an anti-avoidance provision to ensure that stamp duty is paid on

dutiable assets that have been acquired via the acquisition of a controlling interest in a

company (which would otherwise only see a nominal amount of duty payable).

There is a reasonable degree of alignment between the various State Acts.

Nonetheless, one of the key issues for taxpayers which acquire entities that operate nationally

is the need to geographically allocate value across the assets acquired via the acquisition.

This essentially sets up a ‘tug of war’ between allocation to land vs non-land assets and this is

where the disputes and judgments ultimately come from – arguments about whether certain

assets are (or are not) land.

Principal amongst the current issues are:

The existence of goodwill in mining companies (i.e. value being allocated to an asset

which is not dutiable)

Mining and exploration Information – how it should be valued

Whether portfolios of dutiable assets have a higher value than the individual

component parts (e.g. hotels aged care centres, hospitals, infrastructure assets etc)


3. Market value

Duty is levied on the market value of dutiable assets. It is important to recall that this requires

an assessment of market value of assets which haven’t actually been transacted.

I refer to the challenge facing taxpayers and tax collectors alike as the ‘what’s in the box’ or

‘Domino’s’ problem as we all know the price that has been paid for the box (i.e. the target

company) but what is at stake is the allocation of that purchase price between land and

non-land assets (which is a very similar issue in Div 855 of the ITAA).

For many years I have been saying to audiences that valuers are only needed when there is

no deep secondary market in which we can observe a price for a particular transaction –

that valuation of (e.g.) cashflows to be generated by an asset is only necessary where such a

market does not exist. There is an inference here that share price equals value in such a

market.

Whilst obvious, we have found that many taxpayers embark on valuation exercises in an

apparent attempt to dissuade a revenue authority of the facts. That is, a valuation is

employed to consider the Spencer-like hypotheticals, often particularly considering the

prospect of a takeover by another party for some different amount to that which has already

occurred.

It is important to recall that the notion of “market value” has at its core the existence of a

market. Only when a market does not exist is it necessary to hypothesise about what a willing

and not anxious buyer and seller might negotiate as a transaction price

The centrepiece of most Australian (and, for that matter, international) definitions of market

value is the thinking which emerged in the Spencer case.

Now “celebrating” its centenary, the Spencer case dealt with the compulsory acquisition by

the Commonwealth of what one of the judges described as a “useless” piece of land (sand

hills) north of Fremantle.

There was no directly comparable asset for which a recent market price could be observed.

Mrs Spencer presented arguments which related to a plethora of potential uses for the land.

All were hypothetical and untested – none were actual uses of the land in its current state.

Obviously, Mrs Spencer sought the greatest possible amount for the acquisition to

compensate for her loss.

The Court held the view that, whilst all the possible uses for the land could potentially arise, it

was incumbent on Mrs Spencer and the Court to consider the most likely scenario in arriving

at a value for the land.

In so doing, the Court arrived at what is the most commonly used definition of market value

which is employed in Australia:

The price that would be negotiated between a willing but not anxious buyer and a willing but

not anxious seller acting at arms-length in a fully informed market

The ATO provides a guide titled “Market value for tax purposes” [“ATO guidelines”] to assist

taxpayers and their advisers (including valuers) on the processes to establish a market value

for taxation purposes.

The current tax law does not define market value in any general provision. As a result, 'market

value' usually takes the meanings given below, unless specially defined or qualified in a

particular provision of the ITAA.

The International Valuation Standards [“IVS”] provide the following definition of market value:

the estimated amount for which an asset or liability should exchange on the valuation date

between a willing buyer and a willing seller in an arm's length transaction, after proper

marketing, where the parties had each acted knowledgeably, prudently and without

compulsion.


The ATO guidelines state that the above definition is typically used by valuers of real property

and that business valuers in Australia typically define market value as:

the price that would be negotiated in an open and unrestricted market between a

knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious

seller acting at arm's length.

In determining market value, the ATO guidelines recognise that the value should be assessed

at the 'highest and best use' of the asset as recognised in the market. The concept of 'highest

and best use' takes into account any potential for a use that is higher than the current use.

The highest and best use is defined in the IVSC as:

…the use of an asset that maximises its potential and that is possible, legally permissible and

financially feasible.


4. Putting a value on underlying assets

Quantum and allocation are the two broad areas of valuation conflict and dispute.

The question of quantum arises where a transfer of assets or shares has occurred and the

price which has been paid is either not at arms-length or, whilst at arms-length, does not

specifically address the price being paid for the assets which are subject to some form of

taxation.

The allocation question arises as most transactions occur either in relation to purchase/sale of

the equity of a company or for the purchase/sale of an operating business. In the latter

event, there is often little commercial imperative on the part of purchaser or vendor to

consider a detailed allocation of the purchase price within the purchase/sale agreement. For

the most part, takeovers and transfers of businesses arise as the purchaser seeks to enjoy the

expected future cashflows of the company or business. The question of the value of the

underlying assets which give rise to those expected cashflows is usually a secondary (and

sometimes unimportant) question.

It is often only for income tax or stamp duty reasons that the purchaser or vendor have a

desire to orient or allocate purchase prices in a particular way.

However, there is sometimes an incentive on the part of purchasers to allocate a transaction

to best serve financial reporting presentation. For example, a purchaser may wish to

demonstrate that an acquisition is tangible asset-laden to minimise intangible assets which

will either need to be amortised or subjected to regular impairment-testing.

Valuations for tax purposes typically involve assigning value to each of the underlying assets

of a business such that the sum value of all of the assets (excluding cash) is equal to the

enterprise value of the business. Enterprise value is equal to the sum of the net debt and

equity in a business.

Before determining the market value to the underlying assets of a company, the valuer firstly

is required to identify all of the assets held by the company. The asset categories include

working capital, tangible assets, identifiable intangible assets and goodwill.

The company’s balance sheet is a useful source to identify the assets held by a company,

although not all intangible assets that have value may be included in the balance sheet.

The IVS identifies four principal classes of intangible assets. These are:

Marketing related intangible assets used primarily in the marketing or promotion of

products or services. Examples include trademarks, trade names, unique trade

design, internet domain names and non-compete agreements.

Customer or supplier related intangible assets, which arise from relationships with or

knowledge of customers or suppliers. Examples include service or supply agreements,

licensing or royalty agreements, order books, employment agreements and customer

relationships.

Technology-related intangible assets, which arise from contractual or non-contractual

rights to use patented technology, unpatented technology, databases, formulae,

designs, software, processes or recipes.

Artistic-related intangible assets, which arise from the right to benefits such as royalties

from artistic works such as plays, books, films and music from non-contractual

copyright protection.

Determining the value of each intangible asset typically requires a separate valuation

process.

Typically, the value of goodwill is equal to the difference between the enterprise value of the

company and the sum of the value of all identifiable tangible and intangible assets.

The exception is for exploration and mining companies where it is difficult to directly

determine the value of the reserves and resources using the three valuation methods


(market, income and value). For such companies, goodwill is unlikely to exist, so the above

approach for valuing goodwill can also be used to determine the value of reserves and

resources.

The following section discusses the application of Deprival Value in the context of mining and

exploration operations, noting that Edmunds J decision in RCF has been taken by ATO to

mean that information and tenements are inextricably linked and incapable of separate

valuation. Whilst this issue is still capable of much debate, it is possible that it remains moot

unless further unresolved cases challenge the RCF outcomes.

Highest and Best Use

As Exploration and Mining Information is a specialised asset that achieves its highest and best

use as part of the bundle of mining assets (tenement, mine development, milling plant,

mobile equipment, operations etc), the “in use” valuation technique for specialised assets,

where ready market comparisons do not exist, can be adopted. This in-use approach is

based on deprival value techniques, where the value is measured against a benchmark of

reproduction cost.

Deprival valuation methodology

The deprival approach measures the value of an asset by determining the value lost if the

enterprise were deprived of the asset. The value lost is calculated as the economic cost of

reproducing the asset in an optimal manner given its utility to the enterprise.

This approach is considered the most appropriate valuation methodology for Mining and

Exploration Information given this is a specialised asset, achieving its highest and best use in

conjunction with other assets. Furthermore, the deprival methodology adopting the optimised

replacement cost of information is used to recognise the real value of Mining and Exploration

Information in:

a. defining present resources;

b. mapping future discoveries; and

c. achieving an optimal mine plan.

In arriving at this preferred methodology, we will always consider alternative valuation

methodologies including market comparisons, income methods and option valuation

techniques. In this regard, we note that ready market comparisons of separate value for

Information assets do not exist. There is also the practical difficulty in isolating separate

streams of long-term cash flows for Mining and Exploration Information, as the cash flows

emanate from the bundle of mining assets deployed. These practical shortcomings preclude

the use of traditional valuation techniques using cash flows or earnings.

In any case, we note that the deprival methodology is consistent with the valuation

methodologies applied to other specialised assets, such as plant and equipment, which also

achieve their highest and best use (and therefore market value) in conjunction with other

assets.

As such, in our opinion the deprival valuation methodology is the most appropriate for the

purpose of assessing the market value of specialised in-use assets.

Optimisation as part of the deprival approach

Optimising the replacement costs of assets under the deprival approach considers

replacement value of the information adjusted for its economic utility.

In the first instance, the use of reproduction costs requires an economic test being that the

asset would be replaced if deprived. In the case of the Mining and Exploration Information

assets, they form a critical part of the bundle of assets in the mining operations, all of which

generate positive net present values [“NPV”]. As such, the economic test is satisfied.

A further condition requires consideration of the utility of the Mining and Exploration

Information. This utility reflects the position that a knowledgeable operator would place


higher (lower) value on drilling which covered areas of greater (lesser) prospectivity.

In order to recognise this utility, an optimised drilling programme should be designed. The

optimised drilling programme established a ranking of more valuable projects over less

valuable projects. By prioritising more valuable projects, the replacement order is optimised

as less valuable projects are deferred in the drilling programme, therefore properly reflecting

their lower utility (and therefore lower value) to the enterprise. To reflect reality, the optimal

drilling program typically recognises that not all of the projects can be replicated

immediately (or even concurrently) due to limitations on physical resources.

For Mining Information, this results in a time delay in reproducing the information and

therefore a delay in recommencing the mining operations – with a consequential loss of

value. This represents the opportunity cost of delays in mining while the information is being

reproduced. For Exploration Information, the opportunity to delay the reproduction is a timing

benefit, which lowers its value under the deprival method.

Deprival Value and Opportunity Cost for Mining Information

In determining the ODV of Mining Information, it is necessary to have regard to:

The time value of money and the associated risks, in that the value of $100 today is

worth more than $100 received (or outlaid) at a future date; and

The opportunity cost arising from needing to delay or interrupt mine production

due to the absence of Mining Information, whilst it is being reproduced.

In this way, Mining Information is inherently more valuable than Exploration Information.

In particular, the opportunity cost of not having the Mining Information is likely to be material.

This is because access to the Mining Information would enable current production to

proceed without delay or interruption and would enable projects that are not currently in

production to achieve the production stage significantly earlier.

Given that Exploration Information is used to supplement resource depletion, and that the

immediate cash flows of the business are not impacted by loss of Exploration Information,

provided it can be reproduced within a reasonable time, an opportunity cost is not included

in the Exploration Information values.

The International Valuation Standards and the ATO in TR98/3 support the proposition that the

value of information can include an opportunity cost.

The International Valuation Standards allow for the reproduction cost to include a factor

allowing for

“… undue time, inconvenience and risk …” that is suffered over the

reproduction phase1.

Additionally, a ruling by the Australian Tax Office (TR98/3) allows consideration for the losses

(the opportunity cost of losing the information) that would be incurred for not having access

to the Mining Information:

“…as a general proposition, its value would represent the present day costs of

reproducing the information, taking into consideration the losses that would

result from the consequential delay in the development of mining, quarrying or

prospecting right”. (TR98/3 paragraph 78)

Thus, the reproduction cost of Mining Information should properly include an opportunity cost

to compensate for these factors.

It should be noted that TR 98/3 was withdrawn by the ATO on 11 July 2012 because it was no

longer required to provide commentary on the tax treatment of mining, quarrying or

prospecting information as this is set out in detail in Division 40 of the ITAA. This ruling was not

1 International Valuation Standards, paragraph 9.2.1.3, p33


replaced so the withdrawn ruling still provides useful guidance on the ATO’s views on the

valuation of mining information and public access issues.

Valuation of Information over Relinquished and Mined-out areas

Information over relinquished and mined areas has a value.

We typically assume that mined-out information would be reproduced before the

relinquished information on the basis that mined-out information has more value to the

current operations than relinquished information. Mined-out information provides knowledge

of the geological and geophysical features of previously discovered ore bodies. Knowledge

of the actual geology and chemistry of hosted ore bodies from past mining activity is a

significant aid to future exploration activities.

Therefore, the value of this information is typically determined as the net present value of the

replacement cost of the information after all the higher utility Exploration Information has

been reproduced.

Service potential allowances

The ATO ruling (TR98/3, paragraph 78), which is now withdrawn but not replaced, as noted

above, adds certain qualifications to considering the service potential of data already

consumed:

“From this value it is appropriate to make deductions for all or some of

the following factors:

Knowledge that some of the information was available from public

records, such as reports available from State government authorities;

General knowledge that certain work need not be duplicated, for

example, a purchaser who had a knowledge of the Mining Information

for the purposes of negotiating a price for the tenement would know

that some exploration had revealed little or no evidence of

mineralisation in particular areas and would know that this work would

not need to be repeated; and

More recent test results that affect the accuracy of older information.”

In consideration of these qualifications, as noted earlier, we usually assume that a

knowledgeable operator would reproduce the information according to its prospectivity (or

economic utility).

The optimisation programme allows for this by assuming that lower value projects would be

deferred until the information was required, hence creating an order for the information

optimisation.

Conclusion

In consideration of the guidance provided by the ATO’s market value guidelines, tax rulings,

valuation authorities and valuation precedent, it is appropriate to adopt an ‘in use’ valuation

methodology to value Mining and Exploration Information. These are specialised assets

achieving their highest and best use in conjunction with other mining assets. The ODV method

should be used to identify the separate market value of the Mining and Exploration

Information.

The full reproduction cost should be adjusted to a market value by use of an optimisation

programme which:

a. for both Mining and Exploration Information, discounts the reproduction cost for

lower utility of the information (as determined by a knowledgeable operator) by

prioritising more valuable projects over less valuable projects; and


b. for Mining Information, allows for an opportunity cost resulting from delays in

reproduction.

Case study

VAA was engaged to assist a foreign taxpayer (an individual) in regard to the potential

application of Div 855 (TARP) in regard to a proposed transaction.

The client was closely involved in negotiations to introduce a major Chinese investor to an

ASX-listed explorer through the partial sell-down of his shareholding along with fresh equity.

VAA was engaged to undertake a pre-deal assessment of the likely TARP consequences for

the foreign shareholder.

The ‘tipping point’ was around the value of exploration information.

VAA’s analysis demonstrated that the proposed share issue price of $1.20 would trigger TARP

and make the sell-down 100% taxable. The consequence was that the foreign shareholder

was able to attract the Chinese investor at a lower price of $1.10 AND avoid any CGT on the

sell-down of his shares.


5. Accounting issues

The legal definition of goodwill is capable of being condensed to the words ‘the attractive

force of custom’

VAA has worked extensively with taxpayers and tax collectors on this issue and has

demonstrated time and again that there is little (if any) attractive force of custom amongst

producers of homogenous commodities such as gold, coal, iron ore etc.

However, the accounting conventions see acquisitions of mining and exploration operations

reflect an element of goodwill (e.g. MMG’s acquisition of Las Bambas saw some $100m of

goodwill brought to account). This is due to the inherent conservatism in accounting requiring

that the mineral reserves not reflect more than the current JORC resource. This is a fallacy as

further exploration is expected to enhance the resources and reserves (otherwise every

purchaser would be over-paying for the acquisition).

Where, in the acquisition of a gold mining company, a difference arises between the cost of

acquisition and the amount of the identifiable net assets acquired, that difference must be

accounted for in accordance with Accounting Standards AASB 1013 and AAS 18

"Accounting for Goodwill".

According to a PwC paper, (Financial Reporting in the Mining Industry, 2013) “It is expected

that any residual value after the initial fair value exercise will be recognised as goodwill

instead of being re-allocated to mineral properties (i.e. proved, probable and possible

reserves).

Consequently, purchasers will approach the ‘land’ valuation from the perspective of

accounting rules as it presents a lower amount of dutiable assets.


6. Potential implications of Placer Dome2

The Placer Dome decision covered some key territory:

There is no goodwill in mining companies

The ‘top down’ approach to allocating value is appropriate

Nischu is upheld but no information value separately ascribed

In 2006, Barrick Gold Corporation [“Barrick”] acquired 100% of the shares in PDI within the

within the meaning of s 76ATK(2) of the Stamp Act 1921 (WA) for approximately US$10.4

billion.

PDI was entitled to interests in land, including mining tenements located in WA. In 2013, the

Commissioner determined that PDI was a landholder and issued Barrick an assessment for

$54.8 million.

"WASAT considered the different valuation methodologies tendered by the parties’ expert

witnesses, particularly in relation to the valuation of the goodwill of PDI.3"

"Barrick had valued its land using the discounted cash flow valuation method, which required

the valuer’s assessment of future gold prices and the estimated life of the PDI's mines. This

method yielded a value of land considerably less than 60% of the value of the total property

of PDI.4"

The issue before the Tribunal was whether or not 60% or more of the value of Placer Dome's

property at the time of the acquisition, comprised land, which for the purposes of the Stamp

Act includes mining tenements. If that were the case, the applicant would be liable for stamp

duty on the value of Placer Dome's Western Australian land and chattels. A valuation was

undertaken by a number of expert witnesses.

"The Commissioner approached the valuation by a method of valuation commonly

described as the ‘top down’ approach. This involved firstly assessing the total value of the

property of PDI, then discounting from that figure all of the 'non-land assets' which it could

identify. As the Commissioner did not attribute material value to goodwill, the resultant value

of land was considerably more than 60% of the value of the total property of PDI.5"

The Commissioner took the view that the resulting amount was the value of the land. The

Commissioner then adopted the same discounted cash flow methodology as a check

valuation and concluded that the value of the land was considerably more than 60% of the

value of the total property.

The Commissioner's valuation was reached by including in its valuation higher future gold

prices than the applicant had used. The Commissioner also included more optimistic

estimates of the life of the mines concerned.

"The decision affirms the use of a ‘top down’ valuation approach in valuing land assets for

landholder duty transactions. For the purposes of establishing the legal value of goodwill in a

2 PLACER DOME INC (NOW AN AMALGAMATED ENTITY NAMED BARRICK GOLD CORPORATION) and COMMISSIONER OF STATE REVENUE [2015]

WASAT 141 (11 December 2015).

3 Mann, Geoffrey and Arudsothy, William, Ashurst Stamp Duty Bulletin - October 2015 to January 2016 Stamp Duty Developments, 11 February

2016.


2016.


2016.

http://www.austlii.edu.au/au/legis/wa/consol_act/sa192185/s76atk.html

http://www.austlii.edu.au/au/legis/wa/consol_act/sa192185/


mining business, it may be insufficient to rely solely on an accounting based approach to

valuation of goodwill.6"

"In reaching its decision, the WASAT followed on the approach approved by the WA Supreme

Court in Commissioner of State Taxation v Nischu Pty Ltd (1991) 4 WAR 437. The first step in this

approach is determining the total value of PDI’s property. Having valued the component

assets making up the total property, the value of non-land assets should be subtracted,

leaving the residual value to be attributed to the land assets. An arithmetic calculation would

then establish whether the balance attributed to land is 60% or more of the value of total

property. The WASAT concluded that the sum of the values of the total property should be

cross-checked with the acquisition price for PDI.7"

The Tribunal considered that the Commissioner's assessment of stamp duty was correct and

dismissed the applicant's application. The Tribunal accepted the valuation approach taken

by Mr Lonergan over other valuers. The tribunal found that the Commissioner’s assessment of

land value fell within the range of Mr Lonergan’s higher and lower valuations.

Each valuer relied on the ordinary principles of valuation and valuation methodologies to

assess:

Future value of gold;

Mining information;

Restoration costs;

Highest and best use; and

-Goodwill

However, the value of land arrived at under this method was considerably less than the

acquisition price of the shares in PDI. Barrick attributed a significant part of this difference to

'goodwill'.

Top down approach

"The Commissioner approached the valuation using the ‘top down’ approach by firstly

assessing the total value of the property of PDI, then discounted from that figure all of the

'non-land assets' which it could identify.8" The Commissioner took the view that the resulting

amount was the value of the land.

[at 288] To reach a valuation of PDI’s land, Mr Lonergan then adopts the process of

deducting the value of nonland assets acquired from the market value of the total property.

In other words, having valued the component assets making up the total property, the value

of non-land assets should be subtracted, leaving the residual value to be attributed to the

land assets.9

Mr Lonergan values all of the property to which PDI was entitled at between $13.287 billion

and $13.745 billion. These figures exclude property directed to be excluded by s 76ATI(4) of

the Stamp Act; 7 March 2014 report para 71.

Then, to calculate the value of PDI’s 's land, Mr Lonergan deducts from the value of all of the

property to which PDI was entitled the value of all identifiable nonland assets, principally

comprising receivables, intellectual property and earned in rights not already excluded from

the calculation of the total land and chattels. Mr Lonergan says that his residual based

approach implicitly assumes that improvements to the land (including mining works) are

fixtures and that no material unidentifiable intangible assets exist, 'as it is generally


2016

7Mann, Geoffrey and Arudsothy, William, Ashurst Stamp Duty Bulletin - October 2015 to January 2016 Stamp Duty Developments, 11 February 2016.

8 Mann, Geoffrey and Arudsothy, William, Ashurst Stamp Duty Bulletin - October 2015 to January 2016 Stamp Duty Developments, 11 February 2016.

9 Mann, Geoffrey and Arudsothy, William, Ashurst Stamp Duty Bulletin - October 2015 to January 2016 Stamp Duty Developments, 11 February 2016


conceptually illogical that a mining company will have material goodwill'; 7 March 2014

report para 72.

WASAT preferred the Commissioner’s top down valuation approach approved by the WA

Supreme Court in Commissioner of State Taxation v Nischu Pty Ltd (1991) 4 WAR 437. However,

Cross check with DCF

To cross check this top-down approach, the Commissioner adopted the same discounted

cash flow methodology as adopted by Barrick and concluded that the value of the land was

considerably more than 60% of the value of the total property.

Gold prices and life of mine

This was because the Commissioner's valuation used higher future gold prices and more

optimistic estimates of the life of the mines than Barrick, and the Commissioner did not

attribute material value to goodwill.

[289] Mr Lonergan agrees with PDI that the principal reason for the difference between the

valuation of the experts in this matter is the gold price used in the DCF calculations. Mr

Lonergan is in no doubt that the reason why Mr Patel and Mr Lee both arrived at valuations

so materially less than the value indicated by the consideration paid by Barrick is because Mr

Patel and Mr Lee both use gold price assumptions that were significantly below market prices

prevailing at the valuation date.

WASAT also preferred the Commissioner’s estimates of future gold prices and the life of the

relevant mines.

[381] In conclusion, I consider that the approach which Mr Lonergan has taken to the

valuation of PDI’s assets is the correct and preferable one. In my opinion, he has identified all

of the relevant assets and that his inputs into his discounted cash flow valuations, in particular

future gold prices and production assumptions, are to be preferred.

WASAT also concluded that the sum of the values of the total property should be

crosschecked with the acquisition price for PDI.

[Lonergan] He also takes into consideration the actual amount paid by Barrick to acquire

100% of the equity of PDI Mr Lonergan points out that, as a rule, where other objective market

value indicia exist, the DCF value should be cross-referenced against the market value of the

underlying equity. If there is a fundamental difference between the DCF value and the

market traded price, then Mr Lonergan says that this is an indication that the DCF value may

be incorrect. He is unsure whether Mr Patel and Mr Lee considered this test. However, he

notes that the DCF calculations undertaken by Mr Lee and Mr Patel resulted at values that

were a very significant discount from the value indicated by the Barrick takeover

consideration.

Goodwill

The WASAT considered the parties’ submissions on the valuation of the goodwill as a non-land

asset of PDI and cited the High Court decision of Federal Commissioner of Taxation v Murry

(1998) 193 CLR 605, as the leading and binding authority on the question of goodwill as

property.10

The goodwill of a business is the earning power of the business. Where the earning power of

the business depends on the earning power of the business' assets.11

In relation to Mr Patel's and Mr Lee's approach to goodwill, to which again I will refer shortly,

Mr Lonergan says that Mr Patel and Mr Lee have, in his view incorrectly, attributed the

10 Mann, Geoffrey and Arudsothy, William, Ashurst Stamp Duty Bulletin - October 2015 to January 2016 Stamp Duty

Developments, 11 February 2016.




difference between the value of total assets of PDI indicated by the purchase consideration

paid and the value derived from their DCF calculations, to goodwill.

In the absence of evidence from Barrick as to the sources and value from other than the

valuation of goodwill for accounting purposes to support the substantial value of goodwill

attributed to PDI, WASAT observed that goodwill for legal purposes is not necessarily valued in

the same as way as goodwill for accounting purposes.12

Interestingly, WASAT specifically referred to a statement made by the Commissioner's

valuation expert, Mr Lonergan, that it is 'conceptually illogical that a mining company will

have material goodwill'.13

Mr Lonergan says that the reason why he considers this to be erroneous is because the value

of an asset is represented by the future cash flows the asset is expected to generate. These

assets include any goodwill inherent within those operations. For goodwill to have any value,

it must generate future cash flows. Goodwill can only generate cash flows by operation of

other assets or through the sale of the business as a whole. Mr Lonergan says that the implicit

proposition of Mr Patel and Mr Lee that Barrick incurred some $15 billion in acquiring cash

flows with a present value of only some $5 billion indicates conclusively that their assessed

goodwill values are grossly overstated.

WASAT concluded that PDI’s assets at the date of acquisition did not include any materially

significant goodwill.

It follows that I consider that the value of the land to which PDI was entitled was greater than

$7.68 billion and that therefore at the relevant date PDI was a landholder for the purposes of

Div 3b of Pt IIIBA of the Stamp Act.

Value of Western Australian land and chattels

Mr Lonergan calculated the value of all Western Australian land and chattels in which PDI

held an interest by reference to the discounted cash flow model and market analysis of

Western Australian mining projects and properties. His valuation is as follows:

DCF value of Granny Smith

Low

$223 million

High

$225 million

DCF value of Kanowna $538 million $548 million

Less

Receivables

Inventory

$5 million

$47 million

$5 million

$47 million

Add

Intellectual property

Non-cash current liabilities

Market value of all Western Australian land and

chattels (US dollars)

Market value of all Western Australian land and

chattels (AUS dollars)

$4 million

$45 million

$758 million

$1,007 million

$4 million

$45 million

$770 million

$1,024 million

The Commissioner assessed stamp duty PDI's Western Australian land and chattels based on a

value of A$1,015,900,000. This amount is within the range of Mr Lonergan's higher and lower

valuations. Because I accept the valuation approach which has been taken by Mr Lonergan

over those of the other valuers, I consider that the Commissioner's assessment of stamp duty

was correct.



13 Above n 1.


7. A comparison of Placer Dome with RCF III14

7.1 Resource Capital Fund

RCF highlights the importance and reliance placed on valuations as a core element of the

Australian taxation system. It also highlights where can produce binary outcomes.

In RCF, the valuation issue was that of the value of exploration information. Exploration

information is an “asset” which is important (or at least was important until the last federal

Budget) for the purpose of deductibility on first use under s 40-80 ITAA97.

The issues have been well known for a long time: is there a market for exploration information

and, if not, is deprival value an appropriate basis to assess value?

The parties argued completely opposite points of view: one that the information was

worthless and one that the information was worth (essentially) the cost to reproduce in the

event that the owner was hypothetically deprived of the asset.

The court determined (in a truly Australian way) that the answer lay in neither of the views

presented by the experts but in the middle — a place that no logic could take the court to —

rather a place of convenience.

It is a fact of life that there will be occasions when valuations can reasonably be expected to

have a binary outcome (often nil value and substantial value) or can produce a binary

outcome (eg taxable Australian real property results in either no tax or 100% tax on the gain).

Equally, there are occasions when valuation outcomes are reasonably infinitely variable

depending on the appropriateness of assumptions employed.

Edmonds J found [at 156] For the purpose of valuing SBM’s mining information on the

hypothesis that it is the only asset offered for sale and on the further assumption referred to in

[102] above, the hypothetical price of the mining information, as the determinant of its

market value, would be negotiated in a range somewhere between a low point, being the

amount to be realised by the hypothetical vendor if no transaction is done (zero), or an

equivalent nominal amount on its sale to a purchaser not being the owner of the mining

rights, and a high point, being the cost, time delay as well as outlay, to the hypothetical

purchaser of re-creating the mining information.

[157] While there is an upper and lower point to the hypothetical negotiation range, there is

no logical intermediate point guided by any business or financial principle. It follows, that if

the task were to predict the outcome of such an actual negotiation, as a question of fact,

the Court has no assistance and no evidentiary basis for doing so. But that is not the task here:

the task under s 855-30(2) is to ascertain a market value, and the hypothetical sale

transaction is no more than a useful and conventional method for doing so.

Edmonds J continues: I agree with RCF’s submission that an appropriate basis for ascertaining

market value in such a case is one which fairly arrives at a value, and that the fair valuation is

one which shares equally between the holder, and the potential user, of the relevant asset

the benefit to the user of immediate acquisition of the asset. That value is ascertained by

dividing the notional “bargaining zone” equally. In this way, the hypothetical price of the

mining information, as the determinant of its market value, is arrived at as a mid point

between the maximum that the hypothetical purchaser, as the owner of the mining

tenements, might pay to acquire the information (being the amount of outlay and the value

of loss of cashflow suffered to re-create it) and the maximum the hypothetical vendor of the

14 Resource Capital Fund III LP v Commissioner of Taxation [2013] FCA 363 (26 April 2013)


information could realise from any other disposal of the information. This is depicted in the

table below for each of EY and LEA at the relevant dates:

However, Edmonds J’s findings were overturned on appeal and reinforced by the Full Court

and the High Court of Australia. The Full Court held: (if it were necessary to decide) RCF’s

membership interest in SBM did not pass the “principal interest test” in s 855-30 of the 1997 Act

because the market values of SBM’s non “taxable Australian real property” (“TARP”) assets

exceeded the market values of SBM’s TARP assets, and therefore the shares were not

“taxable Australian property” (“the second issue”).

The Full Court found that it was unable to agree with either of the conclusions of the primary

judge (Edmonds). In our view, the correct analysis as to the second issue, we disagree with

the primary judge’s construction of s 855-30 of the 1997 Act and consequently with the

valuation hypothesis adopted by the primary judge in determining the market values of SBM’s

assets.

7.2 Alacer15

"The Tribunal found that Avoca Resources Limited (the target) had no non-current intangible

assets (such as goodwill or contractual rights). While mining information was seen as having a

value, the Tribunal held that the value of such information formed part of the land and

chattel value. "16

As there had been an actual sale under which a price had been paid for indirect ownership

of the land and chattels in issue, that price represented the value of the land and chattels.

Avoca's only assets comprised land and chattels in Western Australia and the 'excluded

assets' (eg cash, receivables, gold (trading stock)).

While mining information is not property, it does have a value and that value was reflected in

the value of the chattels containing that information.

Any synergy value (eg the value of all of the assets together being greater than the sum of

the value of the individual assets) was captured in the land and chattels. As the DCF

valuations were commissioned for the purposes of the Tribunal proceedings, they were not

contemporaneous with the acquisition and therefore of limited use.

That a willing but not anxious seller would not allow for a discount to the price as suggested

by the 'restoration methodology' (ie the cost and time delay of replicating certain assets to

establish an operating business).

7.3 AP Energy Investments17

"Subsequent to the first instance decision in RCF, the Administrative Appeals Tribunal (AAT)

was called upon to consider the principal asset test and valuation of mining information in AP

Energy Investments Limited v FC of T 2013 ATC 10-355 (AP Energy).18"

AP Energy concerned the sale in December 2007 by a Chinese registered investment

company of most of its 21.4% shareholding in Abra Mining Limited (Abra), an Australian listed

gold exploration company, to another non-Australian resident company. The question was

whether Abra satisfied the principal asset test, such that the gain on the sale was subject to

Australian CGT.

15 ALACER GOLD CORP AND HILL 51 PTY LTD (FORMERLY ALACER GOLD PTY LTD) and COMMISSIONER OF STATE REVENUE [2016] WASAT 31 (6

April 2016).

16 Deveson, Nathan and Shaw, Sarah, MinterEllison Alert Alacer, Stamp Duty Case Marks a Departure from Generally Accepted Valuation

Methodologies, 29 April 2016; http://www.minterellison.com/publications/alacer_stamp_duty_case/

17 AP Energy Investments Limited and Commissioner of Taxation [2013] AATA 626 (2 September 2013)

18 Trethewey, Jane of Johnson, Wither & Slattery, RCF – the Final Chapter (February 2015) http://www.jws.com.au/en/acumen/item/584-rcf-the-

final-chapter

http://www.minterellison.com/publications/alacer_stamp_duty_case/

http://www.jws.com.au/en/acumen/item/584-rcf-the-final-chapter



The AAT said that the ‘discounted cash flow’ (DCF) method may be appropriate for valuing

the assets where the entity is a producer (as in RCF) but, where the entity is an explorer (as

in AP Energy), the market value of mining information should be determined on the basis of

the price that would be paid in a hypothetical sale to a buyer who would need to recreate

the mining information to continue exploration. The AAT found that, in this case, the ‘sunk

cost’ valuation method adopted by the taxpayer was acceptable and more appropriate

than DCF.19"

[167] The Tribunal was informed by the Court’s decision in RCF that:

an appropriate basis for ascertaining “market value” for the purposes of the PAT in s 855-30 of

the ITAA 1997 is one which fairly arrives at a value;

the use of “market capitalization” and the “residual method” were not rejected outright by

the Court in RCF and provide an acceptable valuation methodology in the present case

(Abra being an explorer and not a producer like SBM in RCF);

Mr Longworth’s valuation of Abra’s “mining information” as at 3 December 2007 is consistent

with the reasons for judgment in RCF, and is a reliable specialist valuation of the fair “market

value” of Abra’s “mining information” asset at 3 December 2007;

The sunk cost methodology adopted by Mr Longworth is acceptable in determining the

“market value” of “mining information”.

Mr Longworth’s valuation is a fair mid-point market valuation of Abra’s “mining information”

as at 3 December 2007; and

The residual intangible or “marriage value” of the “specialised assets” - mining information,

mining rights and plant and equipment, is not a TARP asset.

On appeal, The Federal Court found that there was no error of law in AAT's findings in relation

to mining company's information asset and that the correct test for valuation and

methodology adopted for ascertaining market value was applied.20

The earlier decision (which favoured a deprival value/replacement cost approach to valuing

mining information) was upheld. That is a major loss for the ATO.

The applicant taxpayer was a Chinese company that disposed of 15 million of its 18 million

shares in Australian company A in 2007.

The Respondent (The Commissioner) assessed the applicant's income tax for year ended 30

June 2008 as including a capital gain of over $6m on disposal of shares.

The Applicant objected on the ground that the disposal did not pass the principal asset test in

under the Income Tax Assessment Act 1997 (Cth) s 855-30 and therefore shares in A were not

indirect Australian real property interest.

The Commissioner maintained that the applicant's membership interest in A at the time of the

share disposal passed the Principal Asset test and that capital gain on disposal could not be

disregarded in the circumstances.

The Respondent objected to tender of witness statement by applicant's witness made in

response to criticism of respondent's report on market value of A's 'mining information' on

ground that it did not comply with AAT's Guidelines on Expert and Opinion Evidence.

Background

Under Subdivision 855- A of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997),

foreign residents are subject to Australian capital gains tax (CGT) only where a CGT

19 Jane Trethewey of Johnson, Wither & Slattery, RCF – the Final Chapter (February 2015) http://www.jws.com.au/en/acumen/item/584-rcf-the-final-chapter

20 LexisNexis; Commissioner of Taxation v AP Energy Investments Pty Ltd [2016] FCA 577

http://www.austlii.edu.au/au/legis/wa/consol_act/ma197881/s30.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/



event, that ‘happens’ on or after 12 December 2006, ‘happens’ in relation to “taxable

Australian property”, which includes direct or indirect interests in Australian real

property and certain mining rights: s 855-10(1) of the ITAA 1997.

Issue

1. Whether a foreign resident Chinese company, AP Energy Investments Limited (AP

Energy), can disregard the capital gain or loss from a CGT event being the part

disposal of its shares in an Australian (resident) company, Abra Mining Limited (Abra),

on 3 December 2007, pursuant to s 855-10(1) of Subdivision 855-A of the ITAA 1997?

2. This turns on whether AP Energy’s membership interest in Abra, as at 3 December

2007, passed the “principal asset test” (PAT) in s 855-30 of the ITAA 1997; and in

particular, the “market value” of Abra’s “mining information”, and the resulting

residual amount for Abra’s mining rights and the intangible value created by Abra

holding both mining information and mining rights.

3. Whether the sum of market value of test (Australian resident) entity’s assets that are

“taxable Australian real property” (TARP) exceed the sum of the market value of its

assets that are not “taxable Australian real property”(non-TARP)?

Found

The Tribunal found that AP energy proved on a balance of probabilities that the

Commissioner’s assessment was excessive. Given residual for 'mining rights', A did not pass test

in s 855-30 and respondent's assessment was excessive.

[167] The Tribunal was informed by the Court’s decision in RCF that:

4. an appropriate basis for ascertaining “market value” for the purposes of the PAT in s

855-30 of the ITAA 1997 is one which fairly arrives at a value;

5. the use of “market capitalization” and the “residual method” were not rejected

outright by the Court in RCF and provide an acceptable valuation methodology in

the present case (Abra being an explorer and not a producer like SBM in RCF);

6. Mr Longworth’s valuation of Abra’s “mining information” as at 3 December 2007 is

consistent with the reasons for judgment in RCF, and is a reliable specialist valuation of

the fair “market value” of Abra’s “mining information” asset at 3 December 2007;

7. The sunk cost methodology adopted by Mr Longworth is acceptable in determining

the “market value” of “mining information”.

8. Mr Longworth’s valuation is a fair mid-point market valuation of Abra’s “mining

information” as at 3 December 2007; and

9. The residual intangible or “marriage value” of the “specialised assets” - mining

information, mining rights and plant and equipment, is not a TARP asset.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s855.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s855.html

http://www.austlii.edu.au/au/legis/wa/consol_act/ma197881/s30.html


8. Information: is Nischu21 Dead?

The Nischu judgment noted that where a purchase of a tenement is to be made by

negotiation in respect of which substantial information exists, an opportunity is given to the

purchaser to examine the information and for the purchaser to determine the price he or she

is prepared to pay: “This sort of acquaintance would not suffice to subsequently enable the

purchaser to proceed to exploit the tenements”.

In Nischu the court said in respect of the public access issue:

“The amount of information which had been gathered was substantial. It was

described by one of the witnesses as 'some 80 boxes of material stored away as

well as what would be the equivalent of a room full of plans and maps and

sections in their offices here in Perth.’ Evidence was led, which was accepted

at first instance, that the quantity of information was such that i t could not be

effectively utilised without access to the objects and records containing it. The

Joint Venture also had compiled a substantial core library. The mining

information had two important qualities:

A substantial part of the information could not be reproduced from publicly

available records or from the records of the Department of Mines…

The information, or that part of it which was not publicly available, was

necessary to carry out mining operations on the tenements.”

The nature of the information held at a Mines Department, being in summary and non-digital

form only, would not materially assist a third party purchaser in a reproduction effort and

hence does not materially dilute the value of the Information. Moreover, the Information

would not be available to a purchaser for at least 10 years.

As a consequence:

a. Mining Information would not normally be discounted since it is needed

immediately to recommence operations; and

b. the applicable discount for public access to Exploration Information would not be

a material dilution of value, i.e., would be less than 5%. Nonetheless, we have

conservatively employed an allowance of 5%.

AP Energy Investments22

The decision made by the AAT (Administrative Appeals Tribunal) was appealed to the

Federal Court of Australia. It was found here that AP Energy was not liable to pay capital

gains tax on sale of part of shares in mining company.

The Federal Court found that there was no error of law in AAT's findings in relation to mining

company's information asset and that the correct test for valuation and methodology

adopted for ascertaining market value was applied.23

Alacer24

Alacer (found in favour of the Commissioner) is a very recent 2016 case and anticipated to

be appealed.

21 Nischu Pty Ltd v Commissioner of State Taxation (WA) (1990) 90 ATC 4391

22 AP Energy Investments Limited and Commissioner of Taxation [2013] AATA 626 (2 September 2013)

23 LexisNexis; Commissioner of Taxation v AP Energy Investments Pty Ltd [2016] FCA 577

24 ALACER GOLD CORP AND HILL 51 PTY LTD (FORMERLY ALACER GOLD PTY LTD) And COMMISSIONER OF STATE REVENUE [2016] WASAT 31 (6

April 2016)


The Commissioner, using a 'top-down' approach, argued that the best evidence of the value

of the land and chattels was the price paid by Alacer to acquire indirect ownership of them

as calculated below:

Consideration for Avoca equity: $1,146,335,000.

Add liabilities of Avoca: $107,140,000.

Deduct excluded assets: $114,110,000.

Consideration for land and chattels (and therefore the dutiable value): $1.14 billion.

The taxpayer, using a 'bottom-up' approach, argued that the valuation should be based on

adjusted discounted cash flow (DCF) forecasts.25

WASAT ruled in favour of the Western Australian Commissioner of State Revenue. It found in

favour of an assessment of landholder duty on land and chattel using a ‘top-down’ valuation

methodology. This is contrast to the ‘bottom-up valuation methodology argued by the

taxpayer.

Revenue offices may consider equity consideration as the dominant factor in determining

land and chattel value for landholder duty purposes. This will likely impact companies who

enter into takeover arrangements and a control premium or synergy premium can be

inferred when the implied purchase price is compared with the land and chattel value.26 “In

our experience, the revenue offices accept a 'bottom-up' approach whereby each asset is

valued individually and a going concern valuation is not appropriate. Indeed, the preferred

approach has been that each asset of the landholder is valued, and valued in isolation from

the other assets. It is acknowledged that the ownership of some property can enhance the

value of other property, but that they do have separate values which must be identified.” 27

25 Nathan Deveson, Sarah Shaw, MinterEllison Alert Alacer, Stamp Duty Case Marks A Departure From Generally Accepted Valuation

Methodologies, 29 April 2016; Http://Www.Minterellison.Com/Publications/Alacer_Stamp_Duty_Case/

26 Nathan Deveson, Sarah Shaw, MinterEllison Alert Alacer, Stamp duty case marks a departure from generally accepted valuation

methodologies, 29 April 2016; http://www.minterellison.com/publications/alacer_stamp_duty_case/

27 Deveson, Nathan and Shaw, Sarah, MinterEllison Alert Alacer, Stamp Duty Case Marks a Departure from Generally Accepted Valuation

Methodologies, 29 April 2016; http://www.minterellison.com/publications/alacer_stamp_duty_case/





9. The impact of Placer Dome on the treatment of goodwill (distinctions with

Alcan)

9.1 Alcan28

The Court of Appeal of the Northern Territory recently handed down a decision in relation to

the Alcan (NT) Alumina case.

In the original decision, the judge found that there was no goodwill in the purchase of Gove

Alumina Ltd (GAL) by Alcan because there was no evidence that GAL had an attractive

force of custom which added to the value of the business.

However, in the most recent decision two of the three appeal judges overturned this finding

that goodwill cannot exist. Both Angel J. and Southward J. found that an attraction of

custom and therefore goodwill can exist in an alumina mine and refining operation.

Based on this finding, the judges have instructed the Commissioner of Territory Revenue to

reassess what proportion of GAL’s tangible and intangible property comprises land. The clear

implication from this decision is that if most of the difference between the consideration paid

for GAL and the DORC valuation of its tangible assets can be regarded as goodwill, then GAL

may not be regarded as land-rich.

By contrast, VAA has undertaken a valuation of a mine and refinery operation for stamp duty

purposes in Western Australia. The circumstances of this case are very similar to that of the

GAL case and our valuation sought to allocate the total value of the business across the

various assets.

VAA adopted an approach to determine the sources of value for the company - one that is

well tested in economic theory and the strategy literature. On the basis that the cash flows

supported the consideration paid, to ascertain where the value resides we investigated the

drivers and nature of the cash flows. Given the company operates in an international

commodity market, VAA concluded that its value is derived from its source of competitive

advantage, i.e. its low operating cost relative to other producers worldwide. By

understanding the source of this advantage and the quantum of profits it delivers, we were

able to determine the value of the company’s assets.

The following hypothetical scenario best illustrates our thinking.

Consider two known but undeveloped bauxite resources. The resources are identical except

the bauxite in Resource A is close to the surface and will cost less to extract than Resource B

which is deeper in the ground. As a prospective investor, I would pay more for Resource A

because, if developed with a mine and alumina refinery, the value of its future net cash flows

would be greater than for Resource B. Given there is no established business, the difference in

value between A and B cannot be goodwill – it must be in the land.

Now consider ten years in the future and both resources have been developed with a mine

and alumina refinery of the same capacity. Again, as a prospective investor, I would pay

more for mine and refinery A because the value of its future net cash flows would still be

greater than for mine and refinery B because of its lower operating cost.

In this case, where would the difference in value between A and B reside? To suggest that

the value of land at A and B are the same and that the difference is due to goodwill

because they are going concerns is not plausible. The land value of A does not shift to

goodwill just because a business has been created. If the only difference between A and B is

the mining operating cost, which is a function of the resource in the ground, the difference in

value between A and B must still be attributable to the land.

28 Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1


Our approach in the Western Australian case was to benchmark the operating cost

components of the mine and refinery to other operations around the world to determine

where the cost advantage resides and therefore what the difference in value can be

attributed to. VAA concluded that the low operating costs (and therefore profits) were

derived from the location of the ore body close to labour, shipping and energy and are

inseparable from the ore body. That is, the profit levels experienced and expected are

unlikely to arise unless the operation is co-located with the ore body. This is akin to “site

goodwill” and therefore attaches to the mining rights (i.e. land).

VAA’s valuation resulted in a land-rich ratio that suggested the company was liable to pay

stamp duty. We believe that our valuation approach, if applied to the Alcan case could

result in a similar outcome. The matter in Western Australia was settled by the parties shortly

before it was due to be heard in court. Therefore, the approach remains to be tested in the

courts.

A refresher on Goodwill

[112] In Murry, the court distilled the following attributes of goodwill:

It is inseparable from the conduct of a business;

It is an indivisible item of property and an asset that is legally distinct from the sources

that have created it;

It is the attractive force that brings in custom;

it has multiple sources, including site, personality, service, price or habit that obtains

custom;

It does not inhere in the identifiable assets of a business -- thus, the sale of an asset

that is a source of goodwill, separate from the business itself, does not involve any

disposition of the goodwill of the business; and

It is the legal right or privilege to conduct a business in substantially the same manner

and by substantially the same means, which in the past have attracted custom to the

business, and is acquired when a person acquires that right or privilege.29

The concepts developed in Murry were applied in Commissioner of Territory Revenue v Alcan

(NT) Alumina Pty Ltd (2008) 156 NTR 1 (Alcan) where the Court of Appeal of the Northern

Territory.

9.2 Origin30

Origin purchase of co-generation plant at Worsley Alumina (WASAT 2007)

What was purchased: goodwill or contracts?

The purchase price of the shares clearly reflected the value of the generation plant but it also

reflected an intangible asset.

The evidence (copies of share sale and purchase agreement, a suite of some 10 contracts

between Worsley Alumina and the generator, a cashflow model and numerous other

documents) clearly showed that the purchaser assessed the value of the shares based

on cashflows which almost entirely reflected the contractual rights and obligations

There was no ‘room’ in the valuation of the shares for there to be goodwill

There was no attractive force of custom as the revenues, profits and cashflows of the

generator were (nearly) entirely as a consequence of the contractual rights and obligations,

not an ‘attractive force of custom’

29 As discussed in Regis Aged Care Pty Ltd v Commissioner of State Revenue [2015] VSC 27

at 112

30 ORIGIN ENERGY POWER LIMITED and COMMISSIONER OF STATE REVENUE [2007] WASAT 302 (23 November 2007)


WASAT found in favour of the Commissioner: there was no goodwill

[298] In the particular factual circumstances presented to the Tribunal, the expert opinion of

Mr Churchill supports the view that the legal notion of goodwill is not satisfied in this case. In

essence, he takes the view that without the suite of contracts the business of FCSWCG would

in effect be worthless. The obvious assets to attach the principal value to, as the experts

agree, are the MEA, to a lesser extent the PPA, and to some extent the Site Licence.


10. Goodwill and portfolio value

10.1 Regis31

Regis was an appeal against the Commissioner of State Revenue’s assessment of stamp duty.

The Court’s primary objective was to determine the appropriate approach to land-rich

calculation and valuations.32

The Commissioner argued that there was no material goodwill value in PGI, relying on the

High Court decision in Commissioner of Taxation v Murry (1998) 193 CLR 605. The

Commissioner’s position was largely based on the contention that as a regulated aged care

provider, PGI was taken to be a passive recipient of custom.33 The Commissioner also

contended that given the nature of PGI’s business, any goodwill necessarily inhered in the

value of its land.34

Based on the evidence before it, the Court did not accept that PGI had no material

goodwill. The Court preferred the view of Regis’ experts that effective management

combined with a skilled workforce could significantly impact the profitability of a residential

aged care facility.

[323] … I do not accept Dr Chu’s (valuer for the Commissioner) proposition that PGI had no

goodwill (or goodwill of no material value) as at 2 July 2007. In my opinion, the expert

evidence adduced by the Commissioner on this point was unreliable. It strongly reflected a

pre-determined view based on Dr Chu’s conceptual framework for the assessment of

goodwill. In light of Dr Chu’s limited experience in the aged care sector, his investment in and

rigid commitment to his conceptual framework for the assessment of goodwill, and the

absence of objective verification or corroboration of his theories, Dr Chu’s opinion that PGI

had no material goodwill as at the relevant date cannot be relied on. I accept the contrary

opinions of Mr Ferrier and Mr Kompos to the effect that PGI had significant goodwill as at the

relevant date.

The Court also rejected the proposition that substantially all of the efficient characteristics of

the business (i.e. the goodwill) would inhere in the value of PGI’s land, on the basis that the

contrary conclusion would produce “improbable results”.35

[327] … even with a (small company risk) premium, the value of PGI’s land holdings

comprised less than 60 per cent of the unencumbered value of all its property within the

meaning of s 71(2)(b) of the Act as at 2 July 2007. It follows that the answer to question 1 in

each appeal is ‘no’. PGI was not a ‘land rich’ landholder as at 2 July 2007. Accordingly

question 2 does not arise.

It was the Commissioner’s position that the appropriate basis for valuing the land held by PGI

was on a portfolio rather than a standalone basis and that no small company risk premium

was appropriate.

Regis’ land valuer in contrast, valued PGI’s land holdings on a standalone basis rather than as

a portfolio of assets. That is, the land was valued as if it had been sold in individual parcels

rather than as a collection of assets. However Regis’ land valuer also admitted that based on

his research and experience relating to the aged care industry, a valuation on a portfolio

basis could have provided a small company risk premium or a discount of up to 10%.

The Court held that the Act does not prescribe either the standalone or portfolio method of

valuation as the proper basis by which to determine the unencumbered value of land

holdings.36

31 Regis Aged Care Pty Ltd v Commissioner of State Revenue [2015] VSC 279

32 Geoffrey Mann, Kristina Popova, Ashurst Australia Stamp Duty Bulletin – 9 July 2015.

33 Above n 2.

34 Above n 2.

35 Above n 2.


The Court held that whether a portfolio or standalone basis of valuation was appropriate

depended on the application of the “Spencer principle” to the circumstances of the case.37

The principle in Spencer v Commonwealth (1907) 5 CLR 418 is that market value is determined

by considering:

“from the point of view of persons conversant with the subject at the relevant time, what,

according to the then current opinion of land values, a willing but not anxious purchaser

would have to offer to induce a not unwilling vendor to sell the land.”

(In the case of Regis) The Court decided that a portfolio basis appropriately reflected the

most profitable use to which PGI’s land could be put and that it correctly reflected

the Spencer test.38"

The Court further accepted the variance of 10% put forward by Regis’ valuer.

[326] … PGI’s land holdings should be valued on a portfolio basis, at least for the purposes of

determining whether that reflected the highest and best use of the land. I accept Mr

Willison’s valuation of PGI’s land holdings on an individual basis at $148.1 million and his

evidence that there usually is a premium for a portfolio sale of up to 10%. I accept that his

valuation would likely increase up to approximately $163 million on a portfolio basis.

This case contrasts with the HSH Hotels case (Glenelg, SA beach-front hotel) where it was

found that goodwill existed but it was to be regarded as site goodwill – the value arose as a

consequence of the location of the hotel and consequently resided in the land.

36 Perez, Michael and Courtney, Stuart of King & Wood Mallesons, Major Stamp Duty Victoria in Valuation Case - Regis Aged Care Pty Ltd v

Commissioner of State Revenue (18 June 2015)






11. Does Placer Dome change the Regis issues (top-down v bottom up)

Introduction

Regis was an appeal against the Commissioner of State Revenue’s assessment of stamp duty.

Regis clarifies the approach that should be adopted when considering goodwill and the use

of a portfolio (rather than standalone) valuation in appropriate circumstances.

Background facts

The stamp duty assessment related to a merger of two aged care providers on 2 July 2007;

Regis Aged Care [“Regis”] (the taxpayer and applicant in this proceeding) acquiring all of

the shares in Paragon Group Investments Pty Ltd [“PGI”]- a holding company that held

various land holdings and other property through its subsidiaries. At the time of the

acquisition, PGI owned residential aged care facilities in Victoria and Queensland.

In respect of the Regis' acquisition of the shares, the Victorian Commissioner of State Revenue

[the “Commissioner”] in 2011, assessed duty under the former land rich provisions in the Duties

Act 2000 (Vic) [“Duties Act”] and for penalty tax and interest under the Taxation

Administration Act 1997 (Vic) [“the TAA”].

The Commissioner contended that PGI was ‘land rich’ at the time of the transaction because

PGI’s land holdings comprised of 60% or more of the unencumbered value of all of its

property within the meaning of s 71(2)(b) of the Act.

The central question therefore was: [at 17]

1. As at 2 July 2007, did PGI’s ‘land holdings in all places, whether within or outside

Australia, comprise 60 per cent or more of the unencumbered value of all its property’

within the meaning of section 71(2)(b)of the Act?

[at 18] The parties also agree that if the answer to question 1 is ‘yes’, the following further

question arises:

2. What was ‘the unencumbered value of all land holdings of [PGI] in Victoria’ as

at 2 July 2007 for the purpose of section 83(1) of the Act?

Portfolio or standalone valuation of land holdings

It was the Commissioner’s position that the appropriate basis for valuing the land held by PGI

was on a portfolio rather than a standalone basis and that no small company risk premium

was appropriate.

Regis’ land valuer in contrast, valued PGI’s land holdings on a standalone basis rather than as

a portfolio of assets. That is, the land was valued as if it had been sold in individual parcels

rather than as a collection of assets. However Regis’ land valuer also admitted that based on

his research and experience relating to the aged care industry, a valuation on a portfolio

basis could have provided a small company risk premium or a discount of up to 10%.

The Court held that the Act does not prescribe either the standalone or portfolio method of

valuation as the proper basis by which to determine the unencumbered value of land

holdings.

The Court held that whether a portfolio or standalone basis of valuation was appropriate

depended on the application of the “Spencer principle” to the circumstances of the case.

The principle in Spencer v Commonwealth (1907) 5 CLR 418 is that market value is determined

by considering:

“from the point of view of persons conversant with the subject at the relevant time, what,

according to the then current opinion of land values, a willing but not anxious purchaser

would have to offer to induce a not unwilling vendor to sell the land.”


(In the case of Regis) The Court decided that a portfolio basis appropriately reflected the

most profitable use to which PGI’s land could be put and that it correctly reflected the

Spencer test.

The Court further accepted the variance of 10% put forward by Regis’ valuer.

[326] … PGI’s land holdings should be valued on a portfolio basis, at least for the purposes of

determining whether that reflected the highest and best use of the land. I accept Mr

Willison’s valuation of PGI’s land holdings on an individual basis at $148.1 million and his

evidence that there usually is a premium for a portfolio sale of up to 10%. I accept that his

valuation would likely increase up to approximately $163 million on a portfolio basis.

Value of goodwill from the merger

The Commissioner also argued that there was no material goodwill value in PGI, relying on

the High Court decision in Commissioner of Taxation v Murry (1998) 193 CLR 605. The

Commissioner’s position was largely based on the contention that as a regulated aged care

provider, PGI was taken to be a passive recipient of custom. The Commissioner also

contended that given the nature of PGI’s business, any goodwill necessarily inhered in the

value of its land.

Based on the evidence before it, the Court did not accept that PGI had no material

goodwill. The Court preferred the view of Regis’ experts that effective management

combined with a skilled workforce could significantly impact the profitability of a residential

aged care facility.

[323] … I do not accept Dr Chu’s (valuer for the Commissioner) proposition that PGI had no

goodwill (or goodwill of no material value) as at 2 July 2007. In my opinion, the expert

evidence adduced by the Commissioner on this point was unreliable. It strongly reflected a

pre-determined view based on Dr Chu’s conceptual framework for the assessment of

goodwill. In light of Dr Chu’s limited experience in the aged care sector, his investment in and

rigid commitment to his conceptual framework for the assessment of goodwill, and the

absence of objective verification or corroboration of his theories, Dr Chu’s opinion that PGI

had no material goodwill as at the relevant date cannot be relied on. I accept the contrary

opinions of Mr Ferrier and Mr Kompos to the effect that PGI had significant goodwill as at the

relevant date.

The Court also rejected the proposition that substantially all of the efficient characteristics of

the business (i.e. the goodwill) would inhere in the value of PGI’s land, on the basis that the

contrary conclusion would produce “improbable results”.

Conclusion

[319] In determining these appeals, I have decided that the (Commissioner’s) assessments

are incorrect and must be set aside. I have also decided that the appellant has discharged

its onus in making out its case that it was not land rich pursuant to s 71(2)(b) of the Act.

[327] … even with a (small company risk) premium, the value of PGI’s land holdings

comprised less than 60 per cent of the unencumbered value of all its property within the

meaning of s 71(2)(b) of the Act as at 2 July 2007. It follows that the answer to question 1 in

each appeal is ‘no’. PGI was not a ‘land rich’ landholder as at 2 July 2007. Accordingly

question 2 does not arise.

12. Conclusions

So long as landholder duty is a form of taxation by valuation, there will be a tension between

the revenue offices and taxpayers as to the ‘true’ value of land.

The tug of war continues and many issues which are dealt with in the judgments (and

therefore create precedents) relate to specific or idiosyncratic issues which must be

distinguished on the facts in each case.

For now there are some reasonably clear winners and losers amongst the more contentious


valuation issues.

The winners:

Top-down approach

Portfolio value is goodwill

(Optimised) replacement cost for valuing information

No goodwill in mining operations

The losers:

Bottom-up approach

Aspects of the information valuation equation (opportunity cost)

And the jury is still out on:

Separability of mining and exploration information and therefore whether it can be

excluded from dutiable assets

The Tax Institute States Taxes Conference Duties Contemporary … · 2016-07-28 · The current tax...

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