By Amrit MacIntyre, Partner, Baker McKenzie
The High Court has handed down an important decision regarding the identification and characterisation of goodwill in the case of Commissioner of State Revenue v Placer Dome Inc 2018 ATC ¶20-677  HCA 59. The High Court in considering whether a gold mining business held valuable goodwill concluded that it did not. In doing so, the Court confirmed that goodwill represents the “attractive force” of a business that brings in custom but with the added qualification that only attributes of the business that attracted custom could be regarded as sources of goodwill.
The main aspects of the decision and its likely implications are as follows:
- The High Court accepted a “top down” valuation methodology for the assets of a mining business, which after other assets were valued, left a residual value going to mining tenements.
- Particular advantageous attributes of the business were not sources of goodwill unless they generated or added value (or earnings) by attracting custom to the business.
- Where some residual going concern value remains, difficulties will arise in allocating that value if it does not go to goodwill.
- For legal, tax and stamp duty purposes, valuers and advisors will need to consider carefully where to attribute excess going concern value over and above the value of specific identified assets — rather than simply attributing it to goodwill as has been the conventional approach to date.
The Commissioner of State Revenue (the Commissioner) issued an assessment under the former Stamp Act 1921 (WA) (Stamp Act) which stated, relevantly, that a target entity Placer Dome Inc (Placer) was a “listed land-holder corporation” and ad valorem duty of A$54,852,300 was payable on its acquisition.
Whether Placer was a “listed land-holder corporation” caught by Div 3b of Pt IIIBAAA 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% of the value of all of Placer’s property, namely 60% of $12.8b ($7.68b). The key question was whether the taxpayer was correct to contend that the property of Placer, prior to its acquisition, included goodwill with a value of $6.506b. If it did, then the value of Placer’s land was less than the 60% threshold.
The High Court majority accepted a “top down” valuation methodology for the assets of a mining business, leaving little or no value for goodwill. The taxpayer, therefore, did not succeed. A “top down” approach was described as a shorthand description of a valuation methodology which starts with the value of the total property, before subtracting the value of assets (including goodwill) which are not land, in order to produce a residual value which is then attributed to land. The taxpayer had identified a number of “sources” for purported goodwill: personnel; technological capabilities; innovative mining techniques; management; size, structures and systems; ability to harvest efficiencies and economies of scale; ability to expand its business; “synergies”; and going concern value. These were found not to be sources of goodwill because these “sources” could not on the facts generate or add value (or earnings) by attracting custom to the business.
As an established business, the High Court accepted that the relevant business may have had some residual going concern value over and apart from the information and intellectual property. But, the taxpayer did not establish, and could not establish, going concern value as a source of goodwill for legal purposes.
Gageler J in a separate judgment took a more conventional approach as to how goodwill related to its sources. His Honour held that it did not follow that “attractive force is essential to goodwill or, if it is, that goodwill is exhaustive of the value that inheres in an entitlement to conduct a business as a going concern”. Nevertheless, Gageler J found that despite the differences in his position with that of the majority set out above, the taxpayer had failed to discharge the burden of proof in showing the claimed value of goodwill and agreed with the views of the majority that the taxpayer failed in the proceedings.
If the High Court’s decision in Placer Dome stands for the proposition that goodwill can only exist where there are specific attributes of the business that are shown to attract custom, implicitly, what may follow is that the mere existence of custom of itself, however profitable, will be insufficient to prove the existence of goodwill. Such an outcome appears problematic and stands at odds with the conventional understanding of goodwill. The conventional understanding is that the actual identity of customers and the nature of the product sold are matters “beside the point”; what is relevant to the existence of goodwill is whether the business has ongoing patronage or custom, and the fact that a business has been a going concern and operating profitably for many years demonstrates it has an attractive force that brings in custom, and hence goodwill.
Where some residual going concern value remains (a possibility that the High Court acknowledged), difficulties will arise in dealing with that value if it does not go to goodwill. It may, on the one hand, need to remain unallocated. Otherwise, it may go to the value of other assets. In Placer Dome, the majority stated that in the context of the land rich exercise, “if and insofar as the going concern value of the corporation may inhere in the value of the land, there is no statutory or other warrant for stripping going concern value out and attributing it with a value separate from the land. It is part of the value of the land”. However, if that going concern value has to be distributed amongst the value of land (or other assets), on what basis that can happen under ordinary valuation principles without the risk of inflating the true value of individual assets is not clear.
A top-down methodology is not usual and generally, it is submitted, more accurate values are derived if specialist valuers value each asset of a business including land, plant and intangible assets.
It is further submitted that the decision in Placer Dome may not have wide application beyond similar cases, that is, mining business that produce generic commodities that are the same as those produced by a competing business (ie no specific “attractive force” can be found bringing customers to the particular business). If the approach accepted by the High Court were confined to mining business such as that in Placer Dome, the above difficulties may not have a wider relevance.
Even in the case of mining business of the kind considered by the High Court, the decision in Placer Dome should not be taken to stand for the general principle that assets such as personnel; technological capabilities; innovative mining techniques; management; size, structures and systems can never be sources of goodwill. If in a particular case, some or all of these things are shown on the facts specifically to attract custom, valuable goodwill may, even on the narrower approach of the High Court majority, arise.
It is respectfully submitted that the views of Gageler J set out in his separate judgment appear to better accord with a conventional understanding of goodwill.