IP licences and state-based transfer duty

Transfers of intellectual property (IP) are not usually considered to be dutiable transactions pursuant to state-based Duties Acts.  That said the question is always whether the IP includes goodwill, which is dutiable and as a result whether the payment of transfer duty is required.

As quoted in the recent case of Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120 (Favotto) at [88] per Ward CJ, section 11 of the Duties Act 2009 (NSW) (Act) provides that dutiable property is:

 

11. What is “dutiable property”?

(1) “Dutiable property” is any of the following:

(a) land in New South Wales,

(g) a “business asset” being, at any relevant time:

(i) the goodwill of a business, if the business has supplied goods in New South Wales, or provided services in New South Wales, to a customer of the business during the previous 12 months

[…]

(h) a statutory licence or permission under a New South Wales law,

[…]

(j) goods in New South Wales, if the subject of an arrangement that includes a dutiable transaction over any dutiable property (other than intellectual property) elsewhere referred to in this section, not including the following:

(i) goods that are stock-in-trade,

[…]

(I) an interest in any dutiable property referred to in the preceding paragraphs of this section”.

 

This issue of whether IP included goodwill was considered by the Supreme Court of New South Wales in Favetto.

Dutiable transactions

Subsections 8(1)(a)-(b) of the Act imposes a duty on:

 

“…(a) a transfer of dutiable property, and

(b) the following transactions–

(i) an agreement for the sale or transfer of dutiable property,

(ii) a declaration of trust over dutiable property,

(iii) a surrender of an interest in land in New South Wales,

(iv) a foreclosure of a mortgage over dutiable property,

(v) a vesting of dutiable property by or as a consequence of an order of a court of this or another jurisdiction, whether inside or outside Australia,

(vi) the enlargement of a term in land into a fee simple under section 134 of the Conveyancing Act 1919,

(vii) a vesting of land in New South Wales by, or expressly authorised by, statute law of this or another jurisdiction, whether inside or outside Australia,

(viii) a lease in respect of which a premium is paid or agreed to be paid.

 

Section 8(2) defines these transfers at dutiable transactions (Dutiable Transactions).

What is goodwill?

Goodwill is not defined in the Personal Property Securities Act 2009 (Cth) and as such the Courts have relied on dictionary definitions and long-standing case law.  Ward CJ at [94] of the Favotto case, citing Commissioners of Inland Revenue v Muller & Co’s Margarine Ltd [1901] AC 217 at 223-4 (Muller & Co), defined goodwill as:

 

“… the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start.”

 

The Muller & Co definition is cited by the High Court of Australia in Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42 at [16] (Murry) and confirmed in Commissioner of State Revenue (WA) v Placer Dome Inc [2018] HCA 59 at [58] (Placer Dome).

Background facts of Favotto

Before detailing the facts of the case, it is important to provide some background as to the McDonald’s franchise system.  McDonald’s Corporation EIN 36-2361282 (McDonald’s) is the US parent entity that owns McDonald’s Australia Ltd ACN 008 496 928 (McDonald’s Australia) and McD Asia Pacific, LLC FN 4623057 (Delaware Division of Companies) (MAP).  There is a Master Licence between McDonald’s Australia and MAP for the use of the McDonald’s system which encompasses the parent entity’s IP and knowhow.  McDonald’s Australia further sub-licences these rights to franchisees, who are then granted a limited non-exclusive right to use the IP and knowhow, but only in accordance with the terms of the respective franchise documents in connection with the licenced business and for the duration of the lease.

 

The Favotto case concerned two (2) business transactions between Favotto Family Restaurants ACN 076 209 062 (FFR) and McDonald’s Australia.  On 6 November 2012, FFR ‘bought’ a restaurant from McDonald’s Australia by executing a:

  • sale of business agreement (Menai Agreement);
  • licence agreement (Menai Licence Agreement); and
  • lease agreement (Menai Lease Agreement).[1]

 

Altogether referred to as the Menai Agreements.

 

A few years later, on 29 March 2015, FFR ‘bought’ a second restaurant by executing the:

  • sale of assets agreement (Lakemba Agreement);
  • licence agreement (Lakemba Licence Agreement); and
  • lease agreement (Lakemba Lease Agreement).[2]

 

Altogether referred to as the Lakemba Agreements.

 

The question for the Court was primarily if the sales made under the Menai and Lakemba Agreements amounted to dutiable transactions because they transferred goodwill from McDonald’s Australia to FFR, therefore giving a rise to an obligation to pay transfer duty.

 

FFR argued that the transactions did not give rise to a Dutiable Transaction because goodwill stayed with the Franchisor, McDonald’s Australia.  The Chief Commissioner of Taxation (Chief Commissioner) contented that the Menai and Lakemba Agreements did in fact transfer goodwill from McDonald’s Australia to FFR and therefore were Dutiable Transactions as defined in the respective Act.

Was there a transfer of goodwill?

The Court applied the Coles Myer test, which states that for there to be a transfer, the person receiving the asset must hold the same rights as was held by the person transferring the asset.

 

In Murry, it was recognised (see at [22] per Gaudron, McHugh, Gummow and Hayne JJ) that the legal concept of goodwill has three different aspects (property, sources and value) and that “[w]hat unites [those] aspects is the conduct of a business” (noting, at [24], by way of example that much goodwill “derives from the use of trade marks or a particular site or from selling at competitive prices”). The High Court noted (at [25]) that “[m]any of the sources of goodwill are not themselves property” (for example, “the efficient use of the assets of the business, superior management practices and good industrial relations with employees”) though others (for example, the location of the business) will be; and (at [20]) that the attraction of custom is central to the legal concept of goodwill. The existence of goodwill thus depends (see at [12]) “upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.”

 

On inspection of the transaction documents read as a whole, FFR acquired a limited right to use the premises and the McDonald’s system for the purposes of running a McDonald’s restaurant (for a limited time and on strict conditions).

 

On termination of the licence, FFR would no longer benefit from any goodwill of the businesses; its rights to use the goodwill simply come to an end.  Importantly the Court said this amounted to temporary enjoyment, rather than a transfer, of goodwill.

 

Further, the fact that the documents treat the transaction as a sale/purchase (and that McDonald’s recorded a decrease in goodwill in its ledgers) is not determinative.  The character of the transaction is a right to conduct the business under the terms of the licence agreements.

 

Ultimately the Court found that there was no transfer of goodwill as a result of the transactions, and therefore no transfer duty was payable by FFR.

 

 

In Murry, it was recognised (see at [22]ff per Gaudron, McHugh, Gummow and Hayne JJ) that the legal concept of goodwill has three different aspects (property, sources and value) and that “[w]hat unites [those] aspects is the conduct of a business” (noting, at [24], by way of example that much goodwill “derives from the use of trade marks or a particular site or from selling at competitive prices”).[3]

 

The High Court noted (at [25]) that “[m]any of the sources of goodwill are not themselves property” (for example, “the efficient use of the assets of the business, superior management practices and good industrial relations with employees”) though others (for example, the location of the business) will be; and (at [20]) that the attraction of custom is central to the legal concept of goodwill.

The existence of goodwill thus depends (see at [12]) “upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.”

 

Key takeaways

When engaging in transfers of IP care must be taken not to transfer goodwill as part of any transaction.  Otherwise, there is a potential for liability for state based transfer duty to arise.

 

Links and further references

Related articles

Transfer duty exemption for small business restructures

Transfer Duty and loans

Legislation

Duties Act 2001 (Qld)

Cases

Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120

Further information

If you need advice on any aspect of a transfer of intellectual property and goodwill please contact me us for a confidential and obligation free discussion:

 

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.

Legal Practice Director

Telephone: (07) 3221 0013 (preferred)

Mobile: 0419 726 535

e: mburrows@dundaslawyers.com.au

 

 

 

 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

 

[1] See Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120, [28]-[38].

[2] See Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120, [69].

[3] See Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120, [96].

Send this to a friend