Syttadel and Holdings Pty Ltd and Commissioner of Taxation [2011] AATA 589 (26 August 2011)

Last Updated: 26 August 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 589

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2010/1912

TAXATION APPEALS DIVISION		)
	Re		SYTTADEL HOLDINGS PTY LTD

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Deputy President P E Hack SC

Date 26 August 2011

Place Brisbane

Decision

The decision under review is affirmed.

............Signed....................
Deputy President

CATCHWORDS
TAXATION – income tax assessment – capital gains tax (CGT) – small business CGT concession – maximum net asset value test – valuation of assets – market value - objection decision affirmed

Income Tax Assessment Act 1997 Div. 152

Spencer v The Commonwealth (1907) 5 CLR 418

REASONS FOR DECISION

26 August 2011

Deputy President P E Hack SC

INTRODUCTION

1. For some purposes of the revenue laws dealing with capital gains tax it is necessary to determine the “net value” of a GST asset. The applicant in these proceedings, Syttadel Holdings Pty Ltd (Syttadel) sold a GST asset – a marina – in August 2006 for $8.9 million. In these proceedings Syttadel contends that, despite that sale, the value of the marina at the time of the sale was not $8.9 million but was $4.5 million.
2. The respondent, the Commissioner of Taxation, did not accept that contention when making an assessment of Syttadel’s taxable income in the year of sale. Syttadel seeks a review of the Commissioner’s decision to disallow its objection to that assessment. That decision, and the Commissioner’s assessment, proceeded on the basis that the value of the marina exceeded $5 million thereby precluding concessional treatment under Division 152 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
3. The sole issue in the proceedings is the market value of the marina in July 2006.

FACTUAL BACKGROUND

4. The underlying facts are not in dispute. The asset in issue was the Spinnaker Sound marina at Sandstone Point. It was on the mainland side, and to the north, of the Bribie Island Bridge. Syttadel acquired the asset, comprising land, buildings, marina berths, goodwill and plant and equipment, in June 1996 at a price of $1.675 million.
5. The venture was not initially profitable and by 1999 Syttadel had accumulated losses in excess of $500,000. Its situation did improve such that it made net profits of $171,234, $164,328 and $280,306 in the years ended 30 June 2004, 30 June 2005 and 30 June 2006 respectively. The majority of the revenue was earned from the hiring of wet berths and dry storage however some income was received from the lease of commercial premises within the marina and the sale of fuel.
6. Mr Edward Godden was a director and member of Syttadel. His evidence of strictly factual matters was not disputed but his opinions as to market value were. Over the years he received, or became aware of, several enquiries and offers to purchase the marina. One, at $2.5 million was made in 2004. It was rejected because the proposed purchaser wanted vendor finance. What Mr Godden describes as “the first serious offer” was made in mid-2005. It was a verbal offer to purchase the marina at $3.7 million. A written offer of $4 million was made by that entity in February or March 2006. It was not accepted as Mr Godden “was hoping for a price closer to $4.5 million”. Mr Godden considered $4.5 million to be a good price at that time although no valuation had been obtained.
7. Whilst these dealings were taking place further enquiries had been made by a local real estate agent on behalf of a consortium of investors led by a Mr Wayne Drinkwater. Mr Godden was asked what price he wanted for the marina. He replied “$9 million”. That response, he says, was made “tongue in cheek” and the figure of $9 million was “completely over the top”. Nonetheless the consortium was prepared to negotiate with Mr Godden on this basis. A written contract for the sale and purchase of the marina at $8.7 million was executed in early December 2005. It was due for completion on 19 January 2006. A deposit of $20,000 was paid by the purchaser, World Housing Corporation Pty Ltd. An extension, by of one month, of the time for the purchaser to complete was granted by Syttadel in (I assume) January 2006 but was made subject to the deposit being increased to $435,000 (which was paid) and “interest” of $200,000 being added to the purchase price. A further extension to 15 March 2006 was then granted. The purchaser failed to complete and Syttadel treated the deposit as forfeited.
8. Thereafter Mr Godden had further dealings with Mr Drinkwater which led to the execution of a new contract, dated 4 July 2006, by which Spinnaker Sound Joint Venture Pty Ltd agreed to purchase the marina as a going concern for $8.9 million. That contract was completed on 14 August 2006.
9. In early November 2008 Syttadel submitted a private ruling request to the Commissioner. It sought a determination that, despite the sale at $8.9 million, the market value of the marina was in the range of $4 million to $4.5 million. The Commissioner made a ruling on 25 November 2008. In essence, the Commissioner concluded that the value of the asset was its sale price and that Syttadel did not qualify for concessional capital gains tax treatment. Syttadel objected to the ruling on 15 February 2010. Because, by that stage, an assessment had been made, evidenced by a notice of assessment dated 3 June 2008, the Commissioner treated the objection as an objection to the assessment. By letter dated 12 March 2010 the Commissioner notified Syttadel that its objection had been disallowed.
10. These proceedings followed shortly thereafter.

THE LEGISLATION

11. It is unnecessary for present purposes to do more than briefly examine the relevant legislation. At the material time, Division 152 of ITAA 1997 provided for concessional taxation treatment of capital gains where, amongst other things, the “net value” of an entity’s GST assets did not exceed $5m.^[1] By virtue of s 152-20(1) of ITAA 1997 a relevant component for determining net value was the “market value” of the entity’s assets. Section 995-1 of ITAA 1997 directs attention to Subdivision 960-S of the Act which, somewhat opaquely, notes,

“The expression ‘market value’ is often used in this Act with its ordinary meaning. However, in some cases that expression has a meaning affected by this Subdivision.”

There was no suggestion that its meaning was affected by Subdiv. 960-S in this case; the parties accepted that the relevant enquiry was as to market value according to its ordinary meaning.

THE PROPER APPROACH TO VALUATION

12. The legal principles are not in doubt. Both parties made reference to well-known passages from Spencer v The Commonwealth^[2] where Griffith CJ said^[3],

“In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor will to sell it for a fair price but not desirous to sell?’ ”

and where Isaacs J said^[4]

“To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.”

13. Similarly, both parties accepted, and their respective valuation proceeded on the basis that the market value of the land had to take into account the highest and best use of the land.

THE VALUATION EVIDENCE

14. I had the benefit of the evidence and reports of two experienced valuers, Mr John Kendall, commissioner by Syttadel, and Mr Paul Murphy, commissioned by the Commissioner. Mr Kendall was of the opinion that the market value of the marina as at 4 July 2006 was $4.5 million. Mr Murphy, who had earlier expressed the opinion that the market value on that date was $6.3 million, ultimately came to the view that the market value was $5.3 million. That revision came about after he, quite properly, considered further information provided to him about the marina that not been earlier available.

Mr Kendall

15. Given that Syttadel bears the onus, the practical reality of the proceedings is that it does not discharge that onus unless I accept Mr Kendall’s opinion of the market value of the marina. For the reasons that follow I do not accept his opinion.
16. Mr Kendall’s opinion is expressed in a detailed report dated 15 April 2011. The initial pages of the report are devoted to a description of the property and its components. There is no suggestion that any of the detail recorded is incorrect. Mr Kendall noted that the marina, when he inspected it in early 2011, was in a “lacklustre” condition. It seems likely that its condition was similar in July 2006. Mr Kendall noted as well the existence of other marinas and sources of competition in the surrounding areas.
17. In chapter 10 of his report Mr Kendall concluded that, apart from the sale of the marina in July 2006, there had been no marina sales that he would regard as being comparable. The sales he noted were superior to the subject property. Again there is no dispute about that conclusion. Mr Kendall exposes his methodology in chapter 11 of the report. He recorded some detail about the sale by Syttadel of part of the real property in 2001 and the details of sub-leases to wet berths granted between 2000 and 2004.
18. Then, having recounted the history of offers made for the property, Mr Kendall concluded that the purchase of the marina was, “bold”. He made it plain, as did Mr Murphy, that the purchase price was of $8.9 million was in excess, and, on his view, far in excess, of the market value. Mr Kendall continued,

“From the above events relayed to me by Syttadel, the factual nature of which I have no reason to doubt, I believe that the amount of $4,500,000 which Syttadel was prepared to accept, at or about the relevant date, is far more supportable on a valuation rationale basis than the price of $8,900,000 contracted by SSJV. In this regard, I have adopted a going concern market value for the Property of $4,500,000, with my reasoning being outlined below.”

19. Thereafter Mr Kendall undertook what the Commissioner’s submissions describe as a process of disaggregation. Having analysed the gross (not net) rental income of the commercial tenancies on Lots 1 and 12 he applied a capitalisation rate of 9% to reach the conclusion that those parts of the property had a value of $625,000. That on Mr Kendall’s analysis, led to the conclusion, having regard to his “adopted” market value of $4.5 million, that the marina component of the property had a value of $3.875 million. That figure was then justified by reference to an adjusted net profit for the marina of $225,212 (after the deduction of rental income) demonstrating a yield of 5.8%. Then it would seem that Mr Kendall applied a yield of 12% to the overall net profit of $280,306 resulting in a market value of $2.335 million thus leading him to conclude that the difference between that figure and his adopted market value was a “premium” for development potential.
20. Mr Kendall’s reasoning leaves me unpersuaded. It is a somewhat curious practice to adopt a market value by references to offers made and the sum at which a vendor was prepared to sell. The practice is not improved by a process of separating component parts and valuing them by reference to yield figures that, in my view, simply cannot be justified. I am left with the distinct impression that Mr Kendall adopted the value of $4.5 million for quite unconvincing reasons and then made assumptions necessary to rationalise that adopted value.
21. It follows that I do not accept that the marina had a market value of $4.5 million in July 2006.

Mr Murphy

22. Given that I do not accept Mr Kendall’s opinion of market value it is not strictly necessary for me to consider Mr Murphy’s opinions, set out in his reports of 6 December 2010 and 20 June 2011. The latter qualifies the former, and revises downwards the opinion of market value, to take into account the further information supplied.
23. Mr Murphy used two conventional valuation approaches in his supplementary report – the capitalisation of operating profit method and the direct comparison method.
24. As to the former Mr Murphy noted that the marina’s income for the three years preceding the sale, adjusted appropriately, had been $214,234, $167,324 and $283,070. He noted, in his supplementary report, that Syttadel had increased berth rents significantly from April 2006. By reference to actual monthly revenue in the months from April 2006 to July 2006 he concluded that annualised annual operating profit as at July 2006 was in the order of $328,000. He adjusted that figure downwards to $320,000 and applied an investment yield (or capitalisation rate) of 6% to conclude that the rounded going concern value was $5.3 million.
25. Mr Kendall and Mr Murphy used different yields – Mr Kendall adopted 12%, Mr Murphy 6%. I accept Mr Murphy’s conclusion that 6% is the appropriate rate having regard to the market evidence and the potential for future growth but taking account the generally poor condition of the marina.
26. On this basis Mr Murphy concluded that the marina had a market value of $5.3 million in July 2006.
27. He also achieved a similar result undertaking the direct comparison method by which he determined, by reference to the sales evidence, rates at which wet berths might be sold on a notional realisation and the value, on a similar basis, of the dry rack storage and commercial leases. Using this method produced a valuation of $5.365 million. Again, I accept Mr Murphy’s reasoning and his conclusions.
28. Mr Murphy concluded that the marina had a market value of $5.3 million in July 2006. I am satisfied that it was at least that amount.
29. I would then affirm the decision under review.

I certify that the 29 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

Signed: ..........Signed............................................................

Associate

Date of Hearing 15 August 2011

Date of Decision 26 August 2011

For the Applicant KPMG

Counsel for the Respondent Mr V A Brennan

Solicitors for the Respondent ATO Legal Services Branch

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^[1] The limit has since been increased to $6 million.
^[2] (1907) 5 CLR 418.
^[3] At p 432.
^[4] At p 441.