Introduction
The recent Court of Appeal (WA) decision in Placer Dome Inc v Commissioner of State Revenue [2017] WASCA 165 largely reaffirms the previously generally accepted valuation methodology of land and chattels (including mining tenements) for landholder duty purposes – the 'bottom-up' approach.
The Court ruled in favour of the taxpayer deciding that the Commissioner's method of valuation, commonly described as the ‘top-down’ approach, was not appropriate in the circumstances. The 'top-down' approach involves assessing the total value of the property, then discounting or subtracting from that figure all of the 'non-land assets' which can be identified to derive a residual 'land' value. Using the 'top-down' approach, the Commissioner argued that the land value constituted more than 60% of the value of the total property of Placer Dome Inc (PDI), which, under the relevant legislation, meant it was a landholder so that the acquisition of PDI by the taxpayer resulted in a significant landholder duty liability.
While the Court stopped short of endorsing the taxpayer's 'bottom-up' valuation methodology, it remitted the matter back to the Western Australian State Administrative Tribunal (WASAT) for determination of what it called the 'critical fact' or issue – being the value of the land held by PDI at the time of the acquisition.
Implications From the Court's Decision
This case marks a departure from a general judicial trend of the use of the ‘top-down’ valuation approach in valuing land assets for landholder duty transactions.
While the Court noted there may be cases in which the top-down approach is appropriate, such circumstances require each and every asset held by the relevant entity to be identified, and values to be accurately and precisely allocated to each such asset.
In most cases, it will not be practicable or feasible to undertake this analysis so that the bottom-up approach is to be preferred.
The Court's decision brings back the focus for landholder duty purposes on the unencumbered value of the land (and goods in some jurisdictions) consistent with the statutory provisions, and not on the consideration or price paid for such assets.
Income tax considerations
The valuation principles established by the case may also be relevant when considering apportionment between assets for income tax purposes. Examples of situations where the decision may prove important are:
- Whether shares are subject to Australian CGT on disposal by a foreign shareholder, on the basis that the mine owner is effectively 'land rich' for Division 855 purposes.
- When performing calculations for tax consolidation purposes.
- Asset valuations for thin capitalisation purposes.
Background – WASAT Decision
On 11 December 2015, the WASAT in Placer Dome Inc v Commissioner of State Revenue [2015] WASAT 141 held that the Commissioner was correct in assessing duty on the February 2006 acquisition of all the shares in PDI on the basis that 60% or more of the value of its property comprised land (being the relevant statutory land rich test at the time).
PDI was entitled to interests in land, including mining tenements located in Western Australia. The WASAT considered different valuation methodologies submitted by the parties’ expert witnesses, including in relation to the valuation of the goodwill of PDI.
The taxpayer relied on a 'bottom-up' approach whereby it used a discounted cash flow (DCF) valuation methodology, which required an assessment by the valuer of future gold prices and the estimated life of PDI's mines. The result was a land value of less than 60% of its total property (so that it was not a landholder for landholder duty purposes).
The taxpayer argued that it was only the Commissioner who contended that the issue of goodwill was relevant because of the incorrect approach used by the Commissioner's expert valuers. The taxpayer stated that the statutory test did not refer to goodwill, nor was the WASAT required to value goodwill in conducting its review. The taxpayer argued that all that was required was for the WASAT to determine the land to be valued and for that value to be compared with the value of the total property, less excluded property. Nonetheless, the taxpayer argued that PDI had significant goodwill (a non-land asset) at the relevant date of approximately $6 billion.
Notwithstanding that the WASAT agreed with the taxpayer that there was no requirement under the relevant legislation that a value had to be attributed to goodwill, it stated that the 'subtractive' ('top-down') approach, which it held applied, required all non-land assets to be carefully identified. In this regard, the WASAT focussed on valuations of goodwill as a non-land asset and rejected the taxpayer's submission that PDI had goodwill of a substantial value (predominantly because it was not persuaded by the strength of the goodwill valuation evidence submitted by the taxpayer).
The Commissioner's duty assessment in the amount of $54.8 million was affirmed, and the taxpayer appealed to the Court.
Issues for the Court of Appeal
The key grounds for appeal to the Court were that the WASAT erred:
(a) in its approach to the value of the land, specifically that it failed to distinguish between the value of the land and the value of the business conducted using that land; and
(b) when determining the value of the land, by accepting the evidence of value of gold futures given by an expert of the Commissioner when the evidence established that gold futures were financial instruments and were not a reliable estimate of the future price of gold.
Findings - Ground One: Land Value Compared to Business Value (Including Land Value)
The Court held that while the price paid for all of the property of PDI was to be taken into account when valuing its land, it was incorrect to conclude, in every case, that it was necessary to attribute values to each and every item comprising the individual assets making up PDI's property.
The total property of PDI consisted of all the rights which together enabled it to conduct a very large business, and included value attributed to components or attributes of the business which did not correspond to specific assets or identifiable items of property. As such, the top-down approach could only be applied if the individual assets comprising the total assets, and the value carefully applied to each of those individual assets, could be ascertained with certainty. This was not such a case because all the property to which PDI 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 added value to that business did not necessarily correspond to identifiable assets.
The Court held that WASAT's failure to distinguish between the value of PDI's land on the one hand, and the value of its business on the other, involved a fundamental misconception of the task required by the relevant legislation. The Court held that the value of PDI's land had to be determined, and then compared to the value of all its property (in effect its business) instead of treating them as one.
Goodwill Issue
The Court stated that the WASAT made the same error in valuing the goodwill associated with PDI's business.
The Court noted that the WASAT correctly observed that the legislation did not require attribution of any value to the goodwill of a business, but as it had adopted the top-down approach, had found it necessary to identify and attribute a value to all of PDI's non-land assets, including goodwill.
The Court noted that goodwill is valued by accountants using the bottom-up method of deducting the value of identifiable assets from the value of the business and this methodology will usually provide a
reliable means of valuing legal goodwill. In this way, goodwill is valued as the residual remaining after the value of all identifiable assets have been deducted from the value of the business. This analysis necessitates an accurate valuation of all tangible assets, including land, before the value of goodwill can be assessed.
The Court held that such approach to the valuation of goodwill was fundamentally inconsistent with the top-down approach accepted by the WASAT. Specifically, the WASAT adopted the approach of valuing the land by deducting the value of the non-land assets (essentially goodwill) from the value of PDI's business. It was only for this reason why the issue of the value of the goodwill of PDI's business arose.
In any event, the Court stated there was ample evidence of substantial goodwill, and the WASAT had confused the sources of goodwill, and its valuation, and the goodwill itself.
Findings - Ground Two: Valuation of Future Gold Prices
The WASAT noted that all valuers who had valued PDI's land assets used DCF methodology to arrive at their values, and the outcome of this valuation methodology depended critically upon its various inputs, including the estimated revenues likely to be derived from future mining operations, which in turn depended critically upon estimates of future gold prices.
The taxpayer challenged the WASAT's acceptance of the expert evidence given by a witness of the Commissioner whose DCF valuation relied upon the price of gold futures (and not the price of gold itself) at the date of acquisition where available, and where not available, escalating those prices indefinitely at an annual rate (real) of 2%.
The taxpayer argued that the evidence was flawed because gold futures are, in effect, financial instruments, and do not provide and are not seen by the market to provide any reasonable estimate of the price at which gold will be bought and sold in the future. In addition, the assumed escalation in (real) gold prices at 2% per annum was also arbitrary and entirely unjustified based on historical movements in the gold price.
For various reasons (including the fact that it was not the methodology used by the participants in the transaction, and that it was not a methodology in common use in the market), the Court held that the WASAT should not have accepted the Commissioner's expert witness' valuation.
Conclusion
The issue then for the Court was whether the Court could and should determine the issues on the basis of the material before it, or whether it should remit the matter to the WASAT differently constituted for determination in accordance with the Court's reasons.
As the Court did not have the benefit of viewing all expert witnesses and hearing their oral evidence, it t decided to remit the matter to the WASAT, specifically to determine the total value of all PDI's land assets and whether that value results in the conclusion that PDI is a landholder corporation, and the value of PDI's land assets in Western Australia.
