Ad Valorem Duty: Appropriate Company Valuation [2018] HCA 59

Tuesday 11 December 2018 @ 9.54 a.m. | Corporate & Regulatory | Legal Research | Taxation

In the Commissioner of State Revenue v Placer Dome Inc (now an amalgamated entity named Barrick Gold Corporation) [2018] HCA 59, the High Court of Australia unanimously upheld the Commissioner of State Revenue’s (‘the Commissioner’) assessment that the Barrick Gold Corporation (‘Barrick’) was liable to pay the ad valorem duty arising from its acquisition of Placer Dome Inc (‘Placer’).

Facts

Placer was a gold mining enterprise operating globally with land and mining tenements. One of these tenements was located in Western Australia. Under Part IIIBA of the Stamp Act 1921 (WA) (‘the Stamp Act’), a buyer of an entity that is defined as a "listed land-holder corporation", one that principally derives its underlying value from land, will be subject to ad valorem duty. Under section 76ATI of the Stamp Act, a company falls under this definition a listed land-holder corporation, if:

  1. At the time of acquisition, the entity is entitled to land in Western Australia with an unencumbered value of A$1 million and above, and
  2. Where 60% and upwards of the underlying value of the entity is land (regardless of the location of the land)

The High Court summarised the issue before the Courts at [5]-[7]:

“Whether Placer was a "listed land-holder corporation" caught by Div 3b of Pt IIIBA of the Stamp Act turned on a single issue – did the value of all of Placer's land, regardless of its location, meet or exceed 60 per cent of the value of all of Placer's property, namely 60 per cent of $12.8 billion ($7.68 billion). Section 76ATI(2)(b) of the Stamp Act required a comparison to be drawn, at the date of acquisition, between the value of all the land to which Placer was entitled and the value of all the property to which Placer was entitled, other than certain excluded property. The statutory purpose for which the values were to be determined was to ascertain whether Placer's underlying value was principally in its land or non-land assets. In undertaking that statutory valuation exercise, the parties did not agree on the valuation methodology to be used or whether the value of all of Placer's land met or exceeded the 60 per cent threshold. A key question was whether Barrick was correct to contend that the property of Placer, prior to its acquisition by Barrick, included goodwill with a value of $6.506 billion. If it did, then the value of Placer's land was less than the 60 per cent threshold.”

In Barrick’s acquisition of Placer, the Commissioner issued a statement under the Stamp Act stating that an ad valorem duty of A$54,852,300 was payable. Barrick objected, the Commissioner disallowed the objection. Barrick then applied for review by the State Administrative Tribunal, however, was also unsuccessful before the Tribunal. However, at the Court of Appeal, Barrick’s appeal was allowed, as the Court held that the Tribunal did not distinguish between the value of Placer’s land and the value of the business. The Court of Appeal found that the top down method was unsuitable as Placer held non-land assets that were substantial in value.

The Commissioner used a ‘top down’ valuation method, which begins with the company’s value of total property, followed by subtracting the value attributed to land, and finally ending up with a value that is then attributable to land. In doing this valuation method, the Commissioner found that Placer’s land value exceeded the 60% threshold.

Barrick argued that this valuation should have been conducted through the discounted cash flow methodology. Additionally, Barrick presented that the top down methodology adopted by the Commissioner was incorrectly calculated as it did not take into account Placer’s property being goodwill that was valued at more than $6 billion.

High Court Decision

At the High Court, the Court held that Barrick did not establish that the land held by Placer did not amount to less than 60% of the company’s value. Goodwill for legal purposes was held to be distinct from goodwill for accounting purposes. Legal goodwill comprises of sources which generated and added value to business by attracting custom. Placer was a land rich company which had no material property comprising of legal goodwill. Furthermore, Barrick’s contention that goodwill for legal purposes should be treated as “added value” or “going concern” value was rejected.

The High Court concluded at [140]-[143]:

“First, any valuation exercise must be undertaken in the legal and factual context in which it arises. The statutory valuation exercise in s 76ATI(2)(b) requires a comparison between the value of "all land to which the corporation is entitled" and "all property to which [the corporation] is entitled". That statutory context is one which requires comparison of the value of land as part of the going concern with the total property of the going concern at the acquisition date.

Second, at the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. Put in different terms, the danger identified by the majority in [the Murry case] of attributing a value to goodwill which actually inheres in an asset was readily apparent.

Third, goodwill has sources, not elements, and the sources of goodwill for legal purposes are those which generate or add value (or earnings) to the business by attracting custom. But, in seeking to identify the sources that generate the custom of the business, it is important to recognise that goodwill has no existence independently of the conduct of that business; goodwill cannot be severed from the business which created it.

At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. Barrick has not demonstrated that the value of all of Placer's land, as a percentage of the value of all of Placer's property, did not exceed the 60 per cent threshold. There is, however, a remaining issue to be determined about the form of the orders to be made.”

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Sources:

Commissioner of State Revenue v Placer Dome Inc (now an amalgamated entity named Barrick Gold Corporation) [2018] HCA 59 transcripts and summaries.

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