This article was written by Katrina Parkyn, Stuart Courtney, Ari Rosenbaum and Michael Evans
In a much anticipated decision, the High Court of Australia has allowed an appeal by the Commissioner of State Revenue (the Commissioner), finding that land-rich duty in the order of $55 million was payable on the acquisition of shares in Placer Dome Inc (Placer) by Barrick Gold Corporation (Barrick).
Although the case concerns the old land rich provisions in the Stamp Act 1921 (WA) (the Act), the judgment contains significant guidance on the identification and valuation of goodwill. The case represents the High Court’s most detailed consideration of goodwill since Federal Commissioner of Taxation v Murry.
In 2005, Barrick acquired 100 per cent of the shares in Placer, which was a listed company with significant goldmining interests around the world, including in Western Australia.
The Commissioner assessed the acquisition to land-rich duty, on the basis that Placer was a ‘listed landholder corporation’ under the Act.
Whether Placer was a ‘listed landholder corporation’ turned on a single issue – did the value of all of Placer’s land, regardless of its location, represent 60 per cent or more of the value of all of Placer’s property?
Barrick objected to the Commissioner’s assessment, claiming that the value of Placer’s land was below the 60 per cent threshold.
What did the Court decide?
After Barrick’s initial objection was disallowed by the Commissioner, Barrick applied to the WA State Administrative Tribunal for review of the decision. The Tribunal dismissed Barrick’s review application.
Broadly, the Tribunal concluded that Placer’s land should be valued using a “top down” approach, which essentially involved starting with the total value of all of Placer’s property and subtracting the value of the non-land assets, to produce a residual value for the land assets.
Barrick appealed to the Court of Appeal of the Supreme Court of Western Australia.
Court of Appeal decision
The Court of Appeal held that the “top down” approach favoured by the Commissioner and accepted by the Tribunal was incorrect.
The Court of Appeal decided that Placer’s land should be valued, using conventional valuation principles, and then all other property should be identified and valued to reconcile the value of the land with the value attributed to all of Placer’s property (in other words, a “bottom up” approach).
The problem with the top down approach to valuing land, according to the Court of Appeal, was that its reliability depended on being able to identify and value all non-land assets, both tangible and intangible. The Court of Appeal explained the position in these terms:
“…the top down approach can only be applied if the individual assets comprising the total assets of the relevant corporation, and the value properly applied to each of those individual assets can be ascertained with certainty. This is not a case in which either of those conditions can be satisfied, essentially because all the property to which Placer was entitled was all the rights which together conferred the right to conduct a business as a going concern, and the attributes or components which add value to that business do not necessarily correspond to identifiable assets.”
Put simply, if you cannot reliably identify and value all of the non-land assets (including goodwill), then a residual value approach essentially captures the value of the goodwill in the value of the land.
High Court decision
In a majority decision the Commissioner’s appeal was allowed. The majority found that the “top down” method was appropriate, and that Placer was a land-rich corporation. Barrick did not establish that the value of Placer’s land, as a percentage of the value of all of its property, was below the 60 per cent threshold.
Relevantly, the majority held that:
- In the circumstances of this appeal, the direct land valuation approach (with the residual allocated to goodwill) was inappropriate.
- One the reasons for rejecting the direct land valuation approach contended for by Barrick was the fact that it resulted in a large, unexplainable gap between the value of Placer’s land assets and the purchase price paid for the shares. As the majority put it:
“That gap necessarily raised a question about the reliability of the DCF valuations [relied upon by Barrick] and, in turn, a question about the content of the $6.506 billion allocated to goodwill in Barrick’s accounts”.
- The $6.506 billion that had been allocated to goodwill was based on the conventional accounting practice of allocating to Placer’s assets amounts nominated as their “fair value”, and allocating the residual of the purchase price to “goodwill”.
- The amount that was recorded in the accounts as goodwill was not legal goodwill.
- Further, a number of the “sources” of goodwill that had been identified by Barrick should not have been taken into account as part of the statutory valuation exercise under the land-rich rules and, of those sources that could be taken into account, a number were of no material value.
- It followed that the direct valuation approach of valuing Placer’s land was inappropriate, in the circumstances, as it was not a reliable method of valuing Placer’s assets.
Goodwill – attraction of custom vs going concern value
In analysing whether Placer’s assets included goodwill, the majority took the opportunity to clarify and confirm the statements made by the High Court in Murry.
Importantly, the majority emphasised that the legal definition of goodwill should be distinguished from the accounting concept of goodwill.
Crucially, goodwill for legal purposes depends on being able to identify factors that attract custom to a business, and does not extend to include every positive advantage and “whatever adds value” to a company.
The majority rejected Barrick’s contention that goodwill for legal purposes should be treated as synonymous with going concern value.
Going concern value is the ability of a business to generate income without interruption even where there has been a change in ownership. Goodwill, on the other hand, is the right to conduct the business by “means which have attracted custom to the business”. The critical distinction is that, for goodwill to exist, it is necessary to be able to point to factors that attract custom to the particular business (these being the sources of goodwill).
The majority found that none of the sources of goodwill identified by Barrick (for example, personnel, innovative mining techniques and other systems that enabled Placer to harvest efficiencies and economies of scale) could generate legal goodwill of any material value, because Barrick had not established that any of them could attract custom to Placer’s business. Put another way, while some of these things may have contributed to the going concern value of the business, they did not contribute to the existence of any legal goodwill.
The majority’s observations about the treatment of synergies arising from the acquisition are also worth noting. Barrick’s evaluation of the potential acquisition of Placer had identified potential synergies realisable from the acquisition, the value of which was reflected in the price that Barrick was prepared to pay. This value was, in turn, reflected in the residual amount of $6.506 billion that was allocated to goodwill in the accounts. However, the majority found that these synergies were not property of Placer, but rather were an asset of the post-acquisition, amalgamated entity.
While the case concerned the former land-rich provisions in Western Australia (since replaced by the current landholder duty provisions), the case reinforces a number of important principles regarding the identification and valuation of goodwill.
In this particular case, it would have been to the taxpayer’s advantage to be able to maximise the value of goodwill, but that will not always be the case.
For example, for those states which still impose duty on a transfer of goodwill (which includes Western Australia), the case raises important issues about how such goodwill may be identified and valued. Importantly, the majority did not specifically address the quantification of Placer’s landholdings - the focus was on the existence and value of goodwill.
While the majority found that there were no sources of goodwill that could explain the $6.506 billion that had been treated as goodwill for accounting purposes, it did not automatically follow that all or even part of that amount should be included in the relevant land values.
With landholder duty being an ever increasing focus for the various state revenue offices, the decision will inevitably be closely scrutinised by both revenue authorities and taxpayers alike. If you are considering acquiring shares or units in a landholding entity, the principles in this case will be critical in evaluating the potential income tax and stamp duty impacts on the transaction. We have a significant experience in this area and can assist you with working out the best approach to valuation issues.
 Commissioner of State Revenue v Placer Dome Inc  HCA 89
 The majority judgment was delivered by Chief Justice Kiefel and Justices Bell, Nettle and Gordon. While agreeing with the orders of the majority, Justice Gageler had separate reasons for allowing the Commissioner’s appeal.