FEDERAL COURT OF AUSTRALIA Orica Ltd v Commissioner of Taxation [2010] FCA 197 Citation: Orica Ltd v Commissioner of Taxation [2010] FCA 197 Parties: ORICA LIMITED (ACN 004 145 868) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: VID 232 of 2005 Judge: SUNDBERG J Date of judgment: 10 March 2010 Catchwords: INCOME TAX – capital gains – whether assessment excessive – parent company assessed – whether subsidiary should have been assessed instead – asset disposed of – rights under distribution agreement – whether parent or subsidiary owned asset on disposal – identification of disposal giving rise to capital gain – right to payment of amount to be ascertained by valuation process – whether debitum in praesenti solvendum in futuro – release of prospective but not accrued liabilities – whether novation – market value of asset on disposal – valuation evidence – penalties – whether taxpayer's position reasonably arguable when return lodged. Legislation: Corporations Act 1974 (Cth) Part 2M.3 Income Tax Assessment Act 1936 (Cth) ss 160Z(1)(a), 160ZD, 160ZH, 160ZO, 160M, 226K, 222C(a) Taxation Administration Act 1953 (Cth) s 14ZZO Cases cited: Byrne v Australian Airlines Ltd (1995) 185 CLR 410 considered Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 467 cited Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 cited Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 cited O'Keefe v Williams (1910) 11 CLR 171 cited Olsson v Dyson (1969) 120 CLR 365 cited Re Ahearn; Ex parte Palmer (1906) 6 SR (NSW) 576 cited Walker v Corboy (1990) 19 NSWLR 382 applied Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1995) 130 ALR 415 cited Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 followed Webb v Stenton (1883) 11 QBD 518 cited Weldwood‑Westply Ltd v Cundy (1965) 50 DLR (2d) 744 cited Date of hearing: 5-6 October 2009 Date of last submissions: 6 October 2009 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 230 Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Applicant: AJ Myers QC, SKP Steward SC, L Hespe Solicitor for the Respondent: Australian Government Solicitor Counsel for the Respondent: DH Bloom QC, MF Wheelahan SC, KJ Deards IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 232 of 2005 BETWEEN: ORICA LIMITED (ACN 004 145 868) Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: SUNDBERG J DATE OF ORDER: 10 MARCH 2010 WHERE MADE: MELBOURNE THE COURT DECLARES THAT: The net capital gain amount of $264,540,764 included in the applicant's amended notice of assessment issued on 11 October 2004, in respect of the year ending 30 September 1998, is excessive. THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The amended assessment issued by the respondent on 11 October 2004 be set aside. 3. The matter be remitted to the respondent for determination in accordance with these reasons. 4. The parties make written submissions as to costs, not to exceed 5 pages, in accordance with the following timetable: (a) the applicant on or before 26 March 2010; and (b) the respondent on or before 9 April 2010. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 232 of 2005 BETWEEN: ORICA LIMITED (ACN 004 145 868) Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: SUNDBERG J DATE: 10 MARCH 2010 PLACE: MELBOURNE REASONS FOR JUDGMENT THE PROCEEDING 1 The applicant (Orica) appeals against the decision of the respondent (the Commissioner) disallowing its objection to an amended notice of assessment in respect of the year ending 30 September 1998. By that notice, issued on 11 October 2004, a net capital gain of $264,540,764 was included in Orica's assessable income. The issue for determination is whether the assessment is excessive. THE FACTS 2 The facts relevant in this proceeding date back to 1935 and encompass several agreements between different parties. Not surprisingly, over this long period of time, some of the companies have changed their names. These name changes make a complicated story even more so. For ease of reference, I propose to refer to the parties by the names by which they were known in 1998. 3 Before reviewing the facts in chronological order, it is helpful to provide a succinct background to the events that gave rise to the assessment. 4 From 1935 to 1998 Orica, either itself or by its subsidiary Orica Australia Pty Ltd (Orica Australia), carried on a pharmaceuticals business (the Business). The Business involved formulating, warehousing, manufacturing and distributing in Australia pharmaceutical products, most of which were acquired from (or at least derived from active ingredients acquired from) Imperial Chemical Industries Limited (ICI), a company incorporated and listed in the United Kingdom. 5 During this period, the distribution arrangement between ICI and Orica was governed by two agreements: a deed entered into in 1935 and an agreement entered into in 1993. The need for the 1993 agreement arose after ICI sold its pharmaceuticals business to a demerged entity, Zeneca Ltd (Zeneca). 6 Until 1997 ICI was the majority shareholder in Orica. Then, in September 1998, the Business was sold to Zeneca BV, a subsidiary of ICI. The agreements effecting the sale and various related agreements gave rise to the assessment. The 1935 Deed 7 The starting point is the deed entered into between ICI and Orica (Imperial Chemical Industries of Australia and New Zealand Ltd as it was then known) on 17 January 1935 (the 1935 Deed). Clause 4 provided that in consideration of the issue of certain deferred shares in Orica: [ICI] for itself, and for all its constituent companies, hereby covenants with [Orica] that it will give to [Orica], free of any payments therefor in so far as it has the rights to dispose of the same for Australasia, full information with regard to and the right to use in Australasia all present and future patents and inventions secret ‑ and other manufacturing processes technical and other information calculated to be of interest or service to [Orica] and/or to its Constituent and Controlled Companies… 8 The expression 'Constituent Company' was defined as a company in which ICI or Orica holds or controls 100% of the issued share capital and 'Controlled Company' as a company in which either of them holds or controls more than 50% but less than 100% of the issued share capital or voting rights. 9 Clause 5 provided: ICI hereby covenants with [Orica] that it will if required by [Orica] so to do appoint or procure the appointment of [Orica] or one or more of its Constituent or Controlled Companies as sole agent or agents for the sale in Australasia of its (ICI) products and the products of its Constituent Companies … upon such terms as may be agreed upon subject to the rights of now and then existing agents for the sale of any such products. 10 In clause 6 ICI covenanted that it would not, without Orica's consent, compete with Orica by engaging in the sale or manufacture of any pharmaceutical products to which the 1935 Deed related. 11 The 1935 Deed did not prescribe a duration for the agency relationship which it established. Thus the arrangement was to be perpetual. The 1979 reorganisation 12 In 1979, as a result of a company restructure that saw Orica become the holding company of a series of operating subsidiaries, Orica transferred the Business to Orica Australia (ICI Australia Operations Pty Ltd as it was then known). In support of this reorganisation, Orica relied on a note for a board meeting of Orica on 10 September 1979 which summarised the anticipated state of affairs once the restructuring was completed in October 1979. The note stated that Orica Australia would become a wholly‑owned subsidiary of Orica and that Orica Australia would conduct in its name, all the manufacturing and selling operations of the wholly-owned businesses. 13 The note is not itself a board minute. It is an annex to the board minute of 10 September. The board minute was not in evidence, but it is to be inferred that the board did in fact make a resolution to the above effect. The transfer of the Business is recorded in the financial statements of both Orica and Orica Australia for the years ended 30 September 1979 and 30 September 1980. In addition, Orica Australia's Directors Report for the year ended 30 September 1980 stated at par (n)(i) that: The company purchased the operating assets and assumed certain liabilities and provisions of [Orica] and has taken over the marketing and manufacturing operations previously conducted by [Orica]. 14 Although there was a transfer of the Business, Orica did not expressly assign its rights under the 1935 Deed to Orica Australia. However, this was not a prerequisite to Orica Australia operating the Business, because the 1935 Deed appointed Orica, or one of its subsidiaries, to act as ICI's agent in Australia. 15 From 1979 Orica Australia carried on the Business in its own right and purchased pharmaceutical products from ICI under the terms of the 1935 Deed. Until sometime around 1992, the relationship between Orica Australia and ICI was conducted pursuant to 'operating guidelines' agreed between the parties from time to time. 16 There was in evidence a document titled 'Operating Guidelines in Respect of Pharmaceuticals for Human Use'. The parties to this non-legally binding document were Orica Australia and ICI (or more specifically, ICI's Pharmaceuticals Division). Clause 1 is headed 'General Relationship' and provided: [Orica Australia's] primary role is to act as the Australian agency for all [ICI] products for human use ('the Products') currently as listed in the attached Appendix. These guidelines cover some of the main principles governing the relationship … [Orica Australia] will seek and follow [ICI] manufacturing, technical, development, medical and marketing advice in respect of the Products. Under the heading 'Marketing', clause 2 stated that "[Orica Australia] is regarded by [ICI] as its vehicle for sale of the Products in Australia". The guidelines also provided for, amongst other things, notifying Orica Australia of new products and regular meetings between Orica Australia and ICI. Distribution Agreement 17 On 30 July 1992 ICI announced that it would demerge its pharmaceuticals business into a separate company which later became known as Zeneca. Following this announcement, ICI, Orica and Zeneca entered into discussions to determine the effect of the proposed demerger on the Business, or more specifically, on Orica's rights under the 1935 Deed. ICI's preliminary view was that the rights granted under the 1935 Deed would not legally bind Zeneca. 18 Orica placed significant value on the exclusive rights in perpetuity that were granted in the 1935 Deed. In internal correspondence Orica noted that a: substantial part of the value of [the Business] relates to the exclusive rights in perpetuity to ICI products and processes which [Orica] enjoys in Australasia. 19 Accordingly, Orica did not want to lose its rights under the 1935 Deed. In order to assess the strength of its bargaining position with ICI and Zeneca, Orica obtained advice from Mr J D Merralls QC. Mr Merralls was of the view that: On balance, the weight of authority and the facts are inclined to favour ICI. On the other hand, [Orica] has a strong moral basis, and a legal basis which is not unsustainable. A document summarising the discussions between Orica and ICI was provided to the Orica board on 20 October 1992. Relevantly, it stated: [ICI] believe strongly that their legal advice is 'rock solid' and that under the demerger being proposed they are under no legal requirement to translate the provisions of the existing [1935 Deed] into the [new company] … they do acknowledge, however, the 'equity' of the situation, and propose a set of agreements be negotiated which reflect much of the provisions of the [covenants in the 1935 Deed]. 20 On 1 June 1993, after several months of negotiating and drafting, Zeneca and Orica entered into a distribution agreement (the Distribution Agreement), which is central to the issues to be determined in this matter. 21 Article 2 provided that, subject to default provisions, the agreement would continue for a minimum term of 8 years: [The relevant Articles] shall become effective on the Effective Date and, subject to prior termination of this Agreement under any of its provisions, shall continue until terminated at the expiration of not less than twenty four (24) months written notice given by either party to the other, such notice not to be given before the sixth anniversary of the Effective Date. For the avoidance of doubt it is hereby provided that this Agreement shall continue in full force and effect throughout the period of notice stated above. It is not necessary to set out the definition of 'Effective Date'. It is sufficient to say that that date passed, and the agreement came into effect. Article 3 was headed 'Appointment': Zeneca hereby appoints [Orica] to be its exclusive processor and distributor during the term of this Agreement for the sale of the Products in [Australia] and [Orica] agrees to act in that capacity, subject to the terms and conditions of this Agreement. Zeneca and [Orica] agree at all times to perform their obligations and exercise their rights under this Agreement in good faith. 22 Article 13 dealt with Termination. Article 13.1 provided for termination upon breach and 13.2 provided for termination by agreement. Relevant for present purposes, Article 13.3 provided a right to terminate upon a change of control of the Business: Either party hereto will have the right at any time by giving sixty (60) days notice in writing to the other party to terminate this Agreement if the other party is taken over, nationalised or closed down in whole or in part by the executive or judicial authorities in England or Australia, as the case may be, or there is a substantial change in ownership or control of its pharmaceuticals business. [emphasis added] 23 Article 14 was a comprehensive provision headed 'Consequences of Termination'. The first part of Article 14.1 provided that if the agreement was terminated under Article 13 then: Zeneca agrees to make a payment to [Orica] equal to the value of the pharmaceuticals business of [Orica] or of its Affiliate to which rights or obligations have been assigned pursuant to Article 21 … as at the termination date. 24 Article 21, headed 'Non‑Assignability/Performance through Affiliates', provided that neither party could assign its benefits or obligations under the Agreement without the prior written consent of the other party, however: either party may assign this Agreement in its entirety without the prior written consent of the other to a wholly owned affiliated company on the condition that such party remains liable to the other for any breach of the terms of this Agreement by such affiliated company. There was no such express assignment. 25 The remainder of Article 14.1 set out a procedure for determining the value of the Business. Each party was to appoint a valuer. If the valuers were unable to agree upon a value and their valuations differed by more than 15% of the lower valuation, they were to appoint a third valuer to make a valuation within the range of the valuations of the first two valuers. If the valuations of the first two valuers differed by 15% or less of the lower valuation, the median point between the two valuations was to be taken as the value of the Business. 26 Article 14.1 also provided the valuers with certain instructions on how to value the Business. In particular, Article 14.1.1(c)(i) stated that the Business shall be deemed a 'going concern' at the date of valuation. 27 Article 14.1.1(e) provided that: payment of amounts specified in this Article 14.1 shall be paid by Zeneca on the termination date to a bank account nominated by [Orica]. 28 Article 14.2 provided that "in consideration of the payment made by Zeneca to [Orica] in accordance with Article 14.1", Orica would transfer to Zeneca all intellectual property, commercial information and any other information which Zeneca may require to carry on the business, along with all permits required by Zeneca and all production assets used in the business. In addition, Orica was to provide certain indemnities relating to any contamination of the site, and use reasonable endeavours to transfer to Zeneca any rights granted to it to process and sell pharmaceutical products of third parties. 29 Article 14.3 provided, amongst other things, that Zeneca would purchase all stocks of finished products imported by Orica from Zeneca, and at Zeneca's option Orica would transfer to Zeneca some or all of the employees directly involved in the Business. Sale of ICI's majority share in Orica and Letter Agreement 30 In May 1997 ICI announced it would sell its majority shareholding in Orica. On 19 June 1997 Zeneca and Orica as parties to the Distribution Agreement entered into an agreement (the Letter Agreement) which stated, in effect, that a substantial change in ownership or control of the Business would occur if ICI ceased to hold more than 50% of Orica's shares. In that event Article 13 of the Distribution Agreement would be triggered and Article 14 enlivened. 31 The second paragraph of the Letter Agreement provided: In the event that Zeneca gives notice to terminate the Agreement pursuant to Article 13.3 upon such substantial change of ownership or control, Zeneca and [Orica] shall comply in good faith with all relevant provisions of the Agreement with a view to achieving the timely and efficient transfer of the Business to Zeneca as provided in the Agreement. 32 In the next paragraph the parties agreed: that it may be in their mutual interest to negotiate the sale and purchase of the Business from [Orica] to Zeneca without recourse to the time and cost of implementation of the valuation and other provisions as set out in Article 14.1 of the Agreement. Immediately following [the change of control in Orica] [Orica] and Zeneca shall enter into discussions in good faith with regard to the sale and purchase of the Business. 33 The remainder of this paragraph in the Letter Agreement sets out each party's obligations with respect to these good faith negotiations, namely, the provision of all relevant information, duties of confidentiality and the acknowledgement that such discussions would occur without prejudice to Zeneca's rights to give a notice of termination under Article 13.3 of the Distribution Agreement. Notice of termination of Distribution Agreement 34 On 8 December 1997, after months of negotiating an alternative to the procedure set out in Article 14 without success, Zeneca gave Orica a notice of termination in accordance with Article 13.3 of the Distribution Agreement that stated: Accordingly, pursuant to, and in accordance with, Article 13.3 of the Agreement and [the side letter sent on 19 June 1997] Zeneca hereby gives [Orica] notice that the Agreement shall terminate (subject to the provisions of Article 14.1.1(b) of the Agreement) on 6 February 1998. The notice also stated that: the Agreement shall remain in full force and effect during the period of notice referred to above and any extension thereof as the case may be. 35 Following this notice, each party appointed a valuer pursuant to Article 14. Orica appointed Price Waterhouse Corporate Finance Pty Ltd (PwC) and Zeneca appointed Arthur Anderson Corporate Finance (Arthur Anderson). In February 1998 the valuers produced their valuation reports. The difference between the valuations was substantial. The principal reason for this was attributable to the different meanings the valuers gave to the phrase "going concern" in Article 14.1.1(c). Given the significant difference in the valuations (more than 15% variation), Article 14.1 required a third valuer to be appointed. On 6 February 1998 Ernst & Young Corporate Finance Pty Ltd (E&Y) was appointed. 36 In early 1998 the parties began drafting an agreement for the sale of the Business to Zeneca. The drafts of this agreement were headed 'Umbrella Agreement'. One such draft, accompanying a letter from Orica Australia to Zeneca dated 13 February 1998, defined the vendors of the Business as Orica Australia and Orica New Zealand Ltd (Orica NZ) which operated a business in New Zealand that was similar to Orica Australia's in Australia. The recitals stated that the vendors owned the assets of the Business. 37 Clause 3.1 of the draft provided that Zeneca would pay Orica Australia the amount to be determined by the third valuer in accordance with Article 14 of the Distribution Agreement and that payment would discharge the obligations of Zeneca pursuant to Article 14.1.1(e). Article 14.1.1(e) is set out at [27]. 38 Clause 3.2 required Orica Australia to distribute the payment between itself and Orica NZ. 39 Another draft of the Umbrella Agreement, dated 13 August 1998, also had Orica Australia and Orica NZ as vendors. However, there were changes from the earlier draft. First, clause 3 now provided that payment be made to Orica, which was to distribute the amount between the vendors. The second change was the deletion of the words in clause 3.1 that payment would discharge Zeneca's obligations under Article 14.1.1(e) of the Distribution Agreement. The proceedings in London 40 On 24 February 1998, on application by Zeneca, Mr Justice Blackburne in the High Court of Justice in London granted an interlocutory injunction restraining the carrying out of the third valuation by E&Y. The 'Intended Defendant' named in the notice of motion and order was Orica Australia. 41 Two days later, on 27 February, his Lordship made further orders in relation to the trial of the action, in which Zeneca also sought declarations concerning the construction of Article 14 of the Distribution Agreement. The orders recited the parties' agreement that the Distribution Agreement would continue in force: beyond 8 March 1998 until completion of the third valuer's valuation and that such valuation (interrupted by the order of [24] February 1998) should be completed within 30 days of the court determining that such an order ought never to have been made or after the trial or compromise of the action, whichever is the earlier. 8 March 1998 was the date by which, under Article 14.1.1(b), the third valuer was required to complete its valuation. 42 The defendant named in this order was Orica, not Orica Australia. 43 On 22 July 1998 Mr Justice Park handed down his reasons for decision in respect of the factors to be included in the valuation procedure. The judgment fell largely in favour of Orica as it was held, amongst other things, that the value of future third party opportunities should be included in the valuation. 44 Whilst it is not necessary to consider Mr Justice Park's reasons in detail, it is helpful to record some of his Lordship's findings. With respect to the Distribution Agreement he said on page 5: its contents fell into two principal categories: the distributorship provisions and the termination provisions … the issues which the case is about all arise from the termination provisions. On page 11 his Lordship explained how the dispute before him arose: the big difference between the [two valuations] did not result from the two firms valuing the same items at different figures … the major explanation of the difference is that Price Waterhouse had taken into account and had included in the valuation several items which Arthur Anderson had omitted and which Zeneca contends were, on the correct construction of the agreement, not proper to be taken into account. On page 14, in dealing with Article 14, his Lordship said: I pause at this point to make a comment. Article 14 is far more than a conventional provision for the termination of a distributorship. Normally where there are a distributor and a supplier and the agreement between them is terminated, the distributor stays in business and looks for new suppliers; and the supplier might find a new distributor or decide to set up its own distribution arrangements. In this case article 14 goes beyond that; Zeneca is not just terminating [Orica's] rights to distribute Zeneca drugs; it is acquiring [Orica's] pharmaceutical business, including Villawood and other assets employed in the business. In regard to the distribution rights, he said on page 17: Distributing Zeneca drugs was by far the most important and profitable thing that [Orica] did in its pharmaceutical business in 1993 (when the agreement was negotiated and concluded). It was still the most important and profitable thing in December 1997, when notice of termination was given. Preservation Agreement 45 On 1 September 1998 Zeneca sent Orica a fax containing a proposal for the structure of the sale of the Business. In essence, the proposal was for: · Zeneca and Orica to rescind the termination of the Distribution Agreement which, as appears at [34], had been triggered by Zeneca's notice of termination on 8 December 1997; · Orica to sell the Business to nominated Zeneca affiliates. Specifically, the goodwill to be sold to Zeneca BV and the physical assets to other affiliates. Alternatively, Zeneca BV to purchase whole business and then on-sell the physical assets to the other affiliates; · Orica to novate the Distribution Agreement to Zeneca BV 'as part of the sale and purchase agreement'; · proceeds for the business acquisition to be allocated to physical assets at net book value and the balance to goodwill. Such allocations to be explicit in the sale and purchase contract; and · no proceeds to be allocated to the novation of the Distribution Agreement to Zeneca BV. Two days later, on 3 September 1998, Zeneca sent Orica a letter outlining what it called its 'final offer': Zeneca has decided to put its position regarding the issue of the pharmaceuticals distributorship to [Zeneca] or Zeneca b.v in writing. Our proposal was based on a view, backed by independent advice, that a cash sale and purchase by Zeneca b.v would be beneficial to Orica as well as Zeneca. You have intimated that this change is "neutral" to you and that you were willing to contemplate the change on commercial terms, to be agreed. We have considered our position on this matter. While there are some potential benefits to Zeneca in going the b.v rather than the Ltd. route, neither option is guaranteed to optimise our position and both have downsides. Given the above and the relatively short time frame available to us prior to completion, Zeneca is willing to make one last attempt to settle this matter before reverting to the original contractual arrangement of a transaction between [Orica] and [Zeneca]. In consideration of the changes we proposed, we are prepared to offer $1.5m in full and final payment towards all legal costs incurred by Orica. We would be willing to pay this money as part of the lump sum payment to you on completion of the sale as we believe that this would add further value for Orica. This offer is our final offer. If we are unable to agree to this between us by noon today, Zeneca will instruct its lawyers to revert to our original position on the umbrella agreement. Orica accepted this offer on the same day. 46 On 3 September Orica and Zeneca also entered into what Orica called a preservation agreement (the Preservation Agreement). It was in part as follows: [Orica] and [Zeneca] agree that, despite a notice of termination having been given by [Zeneca] on 8 December 1997 the Distribution Agreement continues in full force and effect but if completion of the sale of the pharmaceuticals business of [Orica Australia] and [Orica NZ] to [Zeneca] or one or more related bodies corporate of [Zeneca] (the Purchaser) including the assignment to the Purchaser of the benefit of the Distribution Agreement has not occurred by 5:00 pm Melbourne time on 8 September 1998 (or such other date as is agreed in writing by [Orica] and [Zeneca] prior to 5:00 pm on 8 September 1998), the Distribution Agreement will terminate effective 5:00 pm on 8 September 1998 and termination of the Distribution Agreement shall not affect any accrued rights or remedies under it including the obligations under Article 14 of the Distribution Agreement. 47 On 4 September 1998 E&Y provided its valuation report, which valued the Business at $327m. This prompted the parties to execute two separate, but related, agreements: an assignment and a sale of business. Assignment Deed 48 Also on 4 September 1998 Orica, Zeneca BV and Zeneca entered into an assignment deed (the Assignment Deed). Recitals A, B and C were as follows: A. [Zeneca] and Orica are parties to a [Distribution Agreement] dated 1 June 1993, pursuant to which [Orica Australia] and [Orica NZ] continued to conduct a pharmaceuticals business in Australia and New Zealand. B. Pursuant to a Sale of Business Agreement to be entered into on or about the date of this Agreement … [Orica Australia] and [Orica NZ] have agreed to sell that pharmaceuticals business to [Zeneca BV]. C. As part of the Sale of Business Agreement, Orica has agreed to assign the rights and obligations under the [Distribution Agreement] to [Zeneca BV] and [Zeneca BV] has agreed to assume Orica's obligations under the [Distribution Agreement]. Clause 2 is headed 'Assignment'. Clause 2.1, which is headed 'Assumption of benefits and obligations', provided: [Zeneca BV] shall be bound by and comply with the provisions of the [Distribution Agreement] binding on [Orica] and shall enjoy all the rights and benefits of [Orica] under the [Distribution Agreement]. By clause 2.2 Zeneca released Orica from: all its obligations and liabilities under the [Distribution Agreement] and all actions, claims or proceedings that it may have against Orica under or in respect of the [Distribution Agreement]. Sale of Business Agreement 49 On or around 4 September 1998 a Sale of Business Agreement (the Sale Agreement) was executed by the following parties: Orica Australia, Orica, Zeneca BV, Zeneca, Zeneca Pharmaceuticals Australia Pty Ltd, Orica NZ and Zeneca Pharmaceuticals New Zealand Ltd. The Sale Agreement was in a similar form to the draft Umbrella Agreements discussed at [36]‑[39] and gave effect to Zeneca's letter of 3 September set out at [45]. 50 The consideration for the sale was $328.5m, made up of E&Y's valuation of the Business and the additional $1.5m for legal fees. 51 The recitals to the Sale Agreement were as follows: A. For over 19 years [Orica Australia and Orica NZ] have conducted the Business in their respective countries. B. [Orica Australia and Orica NZ] have agreed to sell the Business as a going concern to Zeneca bv on the terms and conditions of this Agreement. C. Zeneca bv wishes certain of the assets and liabilities of the Business to be transferred by [Orica Australia and Orica NZ] directly to [Zeneca's nominee companies in Australia and New Zealand]. 52 Clause 2 stated that Orica Australia and Orica NZ, for their respective rights and interests, sell as legal and beneficial owners and Zeneca BV purchases the assets of the business, including goodwill. Goodwill was defined to include 'the benefit of the Distribution Agreement'. 53 Clause 3 required the purchase price to be paid to Orica "for and on behalf of" Orica Australia and Orica NZ, and Orica was obliged to distribute the payment between Orica Australia and Orica NZ according to their entitlements. Clause 5.2 required Orica Australia and Orica NZ at completion to deliver to Zeneca BV a counterpart of an assignment of the Distribution Agreement duly executed by Orica. LEGISLATION 54 The capital gain provisions of the former Part IIIA of the Income Tax Assessment Act 1936 (Cth) involve the identification of an asset, its disposal, the consideration in respect of the disposal and the cost base of the asset. If the consideration in respect of the disposal exceeds the indexed cost base in respect of the asset, a capital gain equal to the excess is deemed to have accrued to the taxpayer at the time of the disposal: s 160Z(1)(a). 55 It is common ground that Orica's rights under the Distribution Agreement were assets for the purposes of Part IIIA: s 160A, and that, if not otherwise disposed of, there was a disposal of Orica's rights under the Distribution Agreement by clause 2.1 of the Assignment Deed: s 160M. Section 160M(1) provided: Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change. Subsection (2) listed a number of ways in which a change in the ownership of an asset may occur. Subsection (3) provided that without limiting the generality of subs (2), a change shall be taken to have occurred in the ownership of an asset by: (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property – the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset. 56 Section 160ZD(1) provided that the consideration in respect of the disposal of an asset is: .1 if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal – that amount or the sum of those amounts; .2 if the taxpayer has received or is entitled to receive property other than money as a result or in respect of the disposal – the market value of that property at the time of the disposal; or .3 if the taxpayer has received or is entitled to receive both an amount or amounts of money and property other than money as a result of or in respect of the disposal – the sum of that amount or those amounts and the market value of that property at the time of the disposal. 57 Subsection (2) provided that: if a taxpayer has disposed of an asset and: (a) there is no consideration in respect of the disposal; (b) the whole or a part of the consideration received by the taxpayer in respect of the disposal cannot be valued; or (c) the amount that would, but for this paragraph, be taken to be the consideration received by the taxpayer in respect of the disposal is greater or less than the market value of the asset at the time of the disposal and, in the case where the asset was disposed of to another person, the taxpayer and that other person were not dealing with each other at arm's length in connection with the disposal; the taxpayer shall be deemed to have received as consideration in respect of the disposal an amount equal to the market value of the asset at the time of the disposal. 58 Subsection (2A) provided: For the purposes of the application of subsection (2) to the disposal of an asset otherwise than to another person, the market value of the asset at the time of the disposal is the amount that would have been the market value at that time if that disposal did not occur and was never proposed to occur. ORICA'S CASE ‑ OVERVIEW 59 Orica's case was in two parts. The first was that in 1979 it sold the Business, including the benefit of the Distribution Agreement, to Orica Australia. The 'disposals' relied on by the Commissioner (all by Orica) are of an asset (the Distribution Asset or the Article 14 right) that belonged to Orica Australia. Thus the Commissioner has assessed the wrong taxpayer. The second way Orica puts its case assumes that it fails to establish the first. It then contends that three of the various alternative disposals of either the Distribution Asset or the Article 14 right asserted by the Commissioner did not take place, and that the fourth disposal asserted by the Commissioner, with which Orica agrees, was for a nil consideration. I will deal first with the 'wrong taxpayer' contention. If that is successful, it will answer the Commissioner's 'disposal' case however it is put. The wrong taxpayer? 60 Orica's contention that the Commissioner has assessed the wrong taxpayer was developed on the basis of the matters recorded in this and the ensuing nine paragraphs. In 1979 Orica transferred its pharmaceuticals business to Orica Australia. Though no formal documents evidencing this are available, the annex to the board minute recorded at [12]‑[13] describes the group restructuring as the sale of the operating assets and transfer of operating liabilities from Orica to Orica Australia. The position after the restructure was that Orica would be the holding company, "not manufacturing or trading in its name". It would act as financier, borrowing and lending as appropriate. It would own existing land and buildings, most of which it would lease to Orica Australia. Orica Australia would be wholly owned by Orica. It would conduct in its name all the manufacturing and selling operations of the wholly owned businesses. 61 Orica's Annual Report for 1979 records that from 1 October 1979 its marketing and most of its manufacturing operations had been transferred to its wholly owned subsidiary Orica Australia. Orica Australia's financial statements for 1979 record the same event. The 1980 statements record that the company had purchased the operating assets and assumed certain liabilities and provisions of Orica and had taken over the marketing and manufacturing operations previously conducted by Orica. 62 From 1 October 1979 Orica Australia carried on the pharmaceuticals business, but there was no express assignment to it of any rights under the 1935 Deed. 63 The Operating Guidelines of 12 April 1984 referred to at [16] describe Orica Australia's primary role as acting as the Australian agency for all ICI Pharmaceuticals Division products for human use listed in an appendix, which is not in evidence. Under the heading 'Marketing' it is said that Orica Australia is regarded by ICI Pharmaceuticals Division as its vehicle for sale of the listed products in Australia. Orica says these Guidelines recognise that the benefit of the Business belongs to Orica Australia, and that the benefit of the distribution rights under the 1935 Deed belong to Orica Australia and not Orica. 64 Orica says that in 1993 it entered into the Distribution Agreement with Zeneca in substitution for the 1935 Deed. It describes the termination provisions as requiring Zeneca to purchase what it rendered as "the business of Orica Australia" for a price determined by a valuation process. 65 After Zeneca's notice of termination was served in December 1997, Zeneca and Orica implemented the valuation process. The completion of the process was halted as a result of the proceedings in the Chancery Division. At this time Zeneca and Orica negotiated as to whether Zeneca would buy the Business or proceed to termination of the Distribution Agreement. In the first of the two draft Umbrella Agreements in evidence (between Orica Australia, Orica NZ, Orica and Zeneca), Orica Australia and Orica NZ are described as the vendors. Recital A states that the vendors have conducted the Business in their respective countries since 1 October 1979. Recital B states that "In connection with the Business, the Vendors own the Assets". Clause 2 defines "Assets". Zeneca was to pay the purchase consideration to the vendors according to their respective entitlements. 66 Save for the addition of some Schedules, the second draft Umbrella Agreement is to the same effect as the first except that the purchase price was to be paid to Orica for and on behalf of the vendors. 67 Both draft Umbrella Agreements refer in various places to the Distribution Agreement as the Agreement dated 1 June 1993 between Orica and Zeneca. 68 The Preservation Agreement of 3 September 1998 identifies Orica Australia and Orica NZ as the vendors in the potential sale of business agreement. 69 By the Sale Agreement of 4 September 1998 Orica Australia and Orica NZ sell the Business to Zeneca BV. Orica is a party, but does not sell anything. The vendors sell "as legal and beneficial owners" various assets, including the "Goodwill", which is defined so as to include the Distribution Agreement "between [Orica] and [Zeneca]". 70 On the basis of the foregoing Orica submits that the Commissioner's case, which it says is essentially that part of the consideration of $328,500,000 was for the benefit of the Distribution Agreement (some $268 million), is at odds with the agreement between the parties and with the underlying business facts which had existed for 20 years. Orica contends that the 1935 Deed, essentially a distribution agreement, and later the Distribution Agreement that replaced it, belonged to Orica Australia, which built up the Business and in 1979 paid to acquire it. 71 Orica submits that nothing turns on the fact that one company is the wholly owned subsidiary of the other. The matter should be determined as though the parties were at arms length. 72 Orica relies on the principle recognised by Griffith CJ in O'Keefe v Williams (1910) 11 CLR 171 at 191 that: Every contract between subject and subject involves an obligation, implied if not expressed, that neither party shall do anything to destroy the efficiency of the bargain which he has made. The implied covenant or agreement for quiet enjoyment in the case of a demise of land is merely an instance of the application of this rule. 73 In reliance on this principle, Orica submits that Orica Australia having purchased the Business which depended for its existence on the distribution provisions of the 1935 Deed, the benefit of that Deed, either by reason of an implied contractual obligation "or some doctrine of promissory estoppel", was thereafter held for Orica Australia's benefit as the conductor of the Business. Thereafter, for almost 20 years, the vendor of the Business stood by and let the purchaser build up its value. This, Orica says, created an estoppel which would give rise to a trust. Then in 1993 when Orica negotiated with Zeneca about a replacement for the 1935 distribution arrangements, it was plainly doing so for the benefit of Orica Australia, to which it had sold the business and for which it held the existing distribution rights. 74 Although the 1979 documentation is meagre, I am satisfied that Orica sold the operating assets of its pharmaceuticals business to Orica Australia, which assumed some of Orica's liabilities in relation to the business. I infer from the words "sale" and "purchase" that Orica Australia gave consideration for the acquisition. I am satisfied that from 1 October 1979 Orica Australia carried on the business, and at least after 1984 on the basis described in the Guidelines. The Guidelines also suggest that it did this in reliance on the distribution rights conferred by the 1935 Deed. Having regard to the Orica Group structure as it then existed, there was no need for the 1935 Deed to be assigned to Orica Australia, because Orica was entitled to undertake the distribution business by itself or by its constituent affiliates, of which Orica Australia was one. It was not in dispute that the business was dependent for its profitability, indeed its existence, on the availability of the distribution rights granted by ICI under the 1935 Deed. 75 Although I accept that Orica sold the operating assets of the business to Orica Australia and that the latter assumed some of the former's operating liabilities, I am not prepared to infer that thereafter the benefit of the distribution rights belonged to Orica Australia. Orica accepts that there was no express assignment of those rights. If, as Orica asserts, the 1935 distribution rights were held by it on trust for Orica Australia, the trust must have come into existence at or about the time of the sale in 1979. In Walker v Corboy (1990) 19 NSWLR 382 at 386 Priestley JA, dealing with cases where the parties have not expressly stated their intention to create a trust, said: It seems to me to be prudent not to approach the question whether equitable doctrines are applicable in a commercial situation with the thought in mind that one should be disinclined to give a positive answer to that question. The question simply is, do the particular circumstances attract equitable rules. … In situations where there is no express agreement [requiring the application of equitable rules for their working out], then ultimately whether a court will apply equitable rules will depend upon the court's understanding of the expectation of the parties implicit in their dealings with one another in the commercial milieu in which the particular dispute has arisen. It is to these areas that the court's factual and evaluative attention should be directed and upon which decision should be based. At 390 Clarke JA spoke of: the caution which should be exercised when deciding whether an intention to impose trust obligations should be inferred from the complex set of circumstances which often attend the commercial relationship of parties who have traded together for a long period of time. If, however, the court, applying due caution, concludes that it is proper to infer, or impute, the requisite intention then it is the duty of the court to give expression to that conclusion. 76 At 395 Meagher JA said: except in the case of constructive trusts where a trust is thrust on the parties irrespective of their intentions and as a matter of policy, an intention to create a trust is an essential element of a trust … When, as here, the parties have no expressed intention, it then becomes necessary to see, in all the circumstances of the case, what intention the law should impute to them: see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 120-121 per Mason CJ and Wilson J (at 146‑147) per Deane J. … It is necessary to look at the nature of the transaction, the particular provisions of the agreement of the parties, and the whole of the circumstances attending the relationships between the parties. If one examines the whole of the relevant circumstances in the present case I am of the view that the law would not impute to the parties any intention to create a trust. 77 In Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1995) 130 ALR 415 at 423 Beaumont and Sackville JJ, with whom Jenkinson J agreed, approved the passages from Walker v Corboy 19 NSWLR 382 quoted at [75] above. 78 Adopting the above approach and looking at all the circumstances of the present case, no intention on Orica's part to create a trust is to be found. Nor is any such intention to be attributed to it. The fact that Orica Australia had access to the distribution rights under the 1935 Deed made it unnecessary for the parties to turn their minds to some other basis for access. 79 The position is the same if the matter is viewed as at mid‑1993 when the Distribution Agreement was being negotiated. Article 21, which is set out at [24], enabled Orica to assign the Agreement to a wholly owned affiliate without Zeneca's consent. Thus the benefit of the distribution arrangements could be passed to Orica Australia. In those circumstances, Orica evinced no intention to create a trust in Orica Australia's favour and no such intention should be attributed to it. The parties showed in clause 21 the way in which Orica Australia might derive the benefit of the distribution rights. It was not by way of a trust. Article 14 also points against any intention on Orica's part that it hold the benefit of the Agreement on trust for Orica Australia. Article 14.1 required Zeneca to make a payment to Orica equal to the value of Orica's business or the business of its affiliate assignee under Article 21. 80 The events that later happened show, to my mind, that the distribution rights remained with Orica. In 1993, after the negotiations about replacing the distribution rights under the 1935 Deed, Zeneca appointed Orica its distributor. If in 1979 Orica had been paid for the benefit of the 1935 Deed, it would not have made sense for Orica to have been appointed distributor in 1993. This confirms my view that the 1935 Deed was not part of the 1979 sale, and that Orica kept the distribution rights to itself until they were replaced by the 1993 Distribution Agreement. 81 In my view the Sale Agreement proceeds on a false basis. By clause 2 the vendors (Orica Australia and Orica NZ) sold the listed assets to Zeneca BV "as legal and beneficial owners". One asset was "the Goodwill", which included "the benefit of the Distribution Agreement, which was defined as the 1 June 1993 agreement between Orica and Zeneca. As I have indicated, Orica retained ownership of the Distribution Agreement. There was no trust in Orica Australia's favour. 82 The Commissioner sought to derive assistance from a 1995 agreement between Zeneca and Orica Australia, by which Zeneca appointed Orica Australia its subdistributor of various Ohmeda pharmaceutical products (the 1995 agreement). The Commissioner said this showed that when Zeneca intended to confer a benefit on Orica Australia, it did so expressly. I doubt that much assistance can be derived from the contrast between the Distribution Agreement and the 1995 agreement. Clause 3.1 of the 1995 agreement provided: Pursuant to [Orica Australia's] rights under Article 4.3 of the distribution agreement dated 1 June 1993 between Zeneca and [Orica Australia], Zeneca hereby appoints [Orica Australia] as its exclusive sub‑distributor of the Products in the Territory … Clause 4.3 of the Distribution Agreement provided that if during the term of the agreement Zeneca acquires the rights to sell the products of a third party in the Territory, such rights will be offered to Orica. The drafter of the 1995 agreement has confused Orica (called ICI Australia in the Distribution Agreement) with Orica Australia (called ICI Australia) in the 1995 Agreement. The Disposals 83 Without suggesting that the Commissioner bears any onus (cf s 14ZZO of the Taxation Administration Act 1953 (Cth)), it is convenient to deal with the second way in which Orica puts its case by reference to the various disposals for which the Commissioner contends. 84 The Commissioner identifies two relevant assets: first, the Distribution Asset constituted by the rights Orica acquired in 1993 under the Distribution Agreement, and second, the Article 14 right, consisting of the bundle of termination rights pursuant to Article 14 of the Distribution Agreement. One of those rights was to receive a payment on termination pursuant to Article 13.3. 85 The Commissioner contends that Orica disposed of the Article 14 right in two alternative ways. The first was in consequence of Zeneca giving notice of termination of the Distribution Agreement pursuant to Article 13.3. The second was upon Orica agreeing on or about 3 September 1998 to enter into a new set of agreements, including the Sale Agreement, the Assignment Deed and the Preservation Agreement. 86 In further alternatives the Commissioner contends that Orica disposed of the Distribution Asset upon execution of the Sale Agreement or upon execution of the Assignment Deed. First Article 14 disposal 87 The contention is that on 8 December 1997 when Zeneca exercised its right under Article 13.3 to terminate the Distribution Agreement, Orica's bundle of rights under Article 14 was discharged, and in its place arose a right to payment of the amount to be ascertained by the valuation process. The Commissioner asserts that Orica's replacement right was debitum in praesenti solvendum in futuro: the amount to which Orica was entitled was capable of ascertainment and was payable in the future. The Commissioner contends that the Article 14 right was discharged because it consisted of rights that could no longer be enjoyed. There was therefore a deemed disposal of the Article 14 right within s 160M(3)(b). 88 The facts do not support the disposal for which the Commissioner contends. The notice of termination stated that the Distribution Agreement would terminate on 6 February 1998, but would remain in force during the period of the notice and any extension of the period. The parties then commenced the process contemplated by Article 14. 89 As at 6 February 1998 the parties were still working through the valuation process. Before that date each party's valuer had produced a report. On 6 February the third valuer, E&Y, was appointed. Before it had reported, Mr Justice Blackburne enjoined the carrying out of the third valuation. His Lordship's subsequent order of 27 February 1998 recited the parties' agreement that the Distribution Agreement "continues in force beyond 8th March 1998 until completion of the third valuer's valuation". The significance of 8 March 1998 is that that was the date by which the third valuer was to complete its valuation. Article 14.1.1(b) provided that if a third valuer was appointed, the date of termination of the Agreement as specified in Articles 13.1 and 13.3 was to be extended from 60 days to 90 days. That extension would have made the date of termination 8 March 1998. 90 By the Preservation Agreement of 3 September 1998 the parties agreed that the Distribution Agreement "continues in full force and effect". They also agreed that if completion of the sale of the Business, including the assignment to the purchaser of the benefit of the Distribution Agreement, had not occurred by 8 September 1998, the Distribution Agreement would terminate on that day. Such a termination was not to affect any accrued rights or remedies under the Agreement including the obligations under Article 14. The Preservation Agreement was preceded by the negotiations recorded at [45] by which the Business was to be sold to nominated Zeneca affiliates. 91 As appears from the foregoing, the parties did not terminate the Distribution Agreement. There was no "discharge" of the Article 14 rights. Rather the parties reverted to their original plan of sale by Orica Australia and Orica NZ to Zeneca. 92 In my view Orica did not on 8 December 1997 obtain the "replacement right" for its Article 14 rights being debitum in praesenti solvendum in futuro. Orica relied on Re Ahearn; Ex parte Palmer (1906) 6 SR (NSW) 576 (Re Ahearn) for the proposition that for there to be a debt there must be a liquidated amount or at least it must be possible by "mere calculation or arithmetic" to produce such an amount. Orica's submission was that the valuation process involved much more than mere calculation or arithmetic. The case does not establish Orica's proposition. There an unliquidated amount was reduced to a liquidated amount by the parties' agreement. Mr Justice Cohen said: For his failure to meet his contracts he was liable in damages, and, so long as it rested in damages, the liability was not a liquidated sum; before it could become so, it would have to be assessed either under the Stock Exchange rules, or by the ordinary tribunals, or by agreement between the parties, for the parties may meet and agree upon an amount which one shall be deemed to owe the other. There is no special virtue in having the amount assessed by a Court or a domestic tribunal, for an assessment between the parties is equally efficacious for the purpose of constituting the amount of a liquidated amount. His Honour did not use the expression "mere calculation or arithmetic". 93 Although Re Ahearn does not establish Orica's proposition, I do not disagree with its contention that there can be a liquidated amount even though its quantification may require a process of calculation or arithmetic. I do not accept the Commissioner's contention that on the giving of the termination notice there arose a debt, though payable in the future, because the amount payable was capable of ascertainment by the valuation process. Debitum in presenti requires the existence of a present debt. That involves a liquidated amount or something that is then capable of quantification. In the present case, there would have been a debt if the two valuers had agreed on a valuation, or had their valuations differed by 15% or less of the lower valuation so that the average of their valuations could be calculated, or had the third valuer made its valuation while the Article 14 process was still in being. The Commissioner's submission involves ascertainment (quantification) in the future. 94 Some assistance in this connection is provided by the Court of Appeal's decision in Webb v Stenton (1883) 11 QBD 518. A judgment debtor was entitled for his life to the income arising from a fund vested in trustees, payable half‑yearly in February and August. Upon application by the judgment creditor in November for a garnishee order attaching the debtor's share of the income in the hands of the trustees, it appeared that the last half‑yearly payment had been made, and that there was no money in the hands of the trustees. It was held that there was no debt "owing or accruing" at the time when the order was applied for which could be attached under Order 45 rule 2 of the Rules of Court. Sir Baliol Brett MR, with whom Lindley and Fry LJJ agreed, said at 524: The law has always recognised as a debt two kinds of debt, a debt payable at the time, and a debt payable in the future, and unless the legislature intended to invent a new kind of debt not known to the law, "accruing debt" can only be what the judges have so stated … Therefore it seems to me that the meaning of "accruing debt" … is debitum in presenti, solvendum in futuro, that it goes no further, and that it does not comprise anything which may be a debt however probable and however soon it may be a debt. 95 So in the present case, however likely it may have been on 8 December 1997 that a final value would be ascribed to the Business, that did not come about until the third valuer completed his valuation in September 1998, by which time the parties were no longer proceeding with the Article 14 process. 96 It was common ground that the valuation of the Business involved subjective judgments on the part of the valuers. They were not engaged in a mere process of calculation. In fact the first two valuers' opinions were far apart because their approaches to what they were valuing were different. This was what led to the proceedings in London. Mr Justice Park in effect gave the valuers guidance as to the basis on which the valuation was to be made. 97 Orica did not on 8 December 1997 own a present debt payable in the future. The Commissioner's first Article 14 disposal is not made out. Second article 14 disposal Commissioner's submissions 98 The Commissioner's alternative case is that if there was no disposal of the Article 14 right as a result of the giving of the notice of termination on 8 December 1997, that right was disposed of as a result of Orica entering into the Preservation Agreement (above at [46]), the Deed of Assignment (above at [48]) and the Sale Agreement (above at [49]‑[53]) (together the September agreements). 99 The Commissioner asserts that by the beginning of September 1998 Zeneca remained indebted to Orica in the amount to be ascertained by the agreed valuation process. He says that on 4 September the third valuer furnished its written valuation of $327 million. However, immediately before publication of the valuation, the arrangements between the parties were varied. The Commissioner's rendering of the events described at [45]‑[53] is as follows: (a) On 3 September Zeneca and Orica purported to agree that, notwithstanding the notice of termination, the Distribution Agreement was to remain in full force and effect until 5:00 pm on 8 September. (b) On 4 September Zeneca, Orica and related companies of each of them entered into the Sale Agreement. The purchaser was Zeneca BV. The purchase price was $328.5 million, made up of E&Y's $327 million and the further sum of $1.5 million Zeneca had agreed to pay towards Orica's legal costs. (c) As part of the Sale Agreement the parties agreed that there would be a novation of Orica's rights under the Distribution Agreement. Clause 5.2(d) required the vendors to deliver to Zeneca BV a counterpart of an assignment of the Distribution Agreement executed by Orica. (d) The novation of the Distribution Agreement constituted performance by Orica of "an implied obligation" under the Sale Agreement. At common law it was bound to do all things reasonably necessary to secure performance of the Sale Agreement. (e) The Assignment Deed of 4 September effected a novation of the Distribution Agreement, so that from the completion of the Sale Agreement on 4 September Zeneca BV became bound by the provisions of the Distribution Agreement that were binding on Orica, and Orica was released from its obligations. 100 The Commissioner asserts that the interrelated September agreements were entered into in exchange for Orica's right to receive payment following the termination of the Distribution Agreement under Article 13.3 thereof. He says that the September agreements substituted for Zeneca's existing obligation to pay $327 million to Orica (as owner of the Distribution Asset) a new arrangement whereby the businesses of Orica Australia and Orica NZ were sold to Zeneca BV and the Distribution Agreement was to be assigned to Zeneca BV. The Commissioner describes one of the issues in the case as whether the 3 September Preservation Agreement, which he calls a "contrivance", undid the capital gains tax consequences which had already arisen. 101 The Commissioner invites the Court to infer that on or about 3 September 1998 the parties entered into an agreement whereby the original contractual arrangement would be "cancelled or surrendered" and there would be substituted therefor a sale of the business assets to Zeneca BV for the same amount as would have been payable under the original arrangement plus an amount for legal costs. He contends that it was a term of the "Substitution Agreement" that on entry into the three September agreements, the parties would "surrender or cancel" their rights and release each other's obligations under the Distribution Agreement, "including the debt owed by Zeneca to Orica under Article 14". 102 The Commissioner submits that the above events constituted "a disposal of the debt owed by Zeneca to Orica, which had arisen on 8 December 1997 upon Zeneca giving notice of termination of the Distribution Agreement". Orica's submissions 103 Orica takes issue with the submission recorded at [99(d)] that novation of the Distribution Agreement constituted performance by it of one of its obligations under the Sale Agreement. It contends that the Sale Agreement imposed no such express obligation on Orica. It was the vendors, Orica Australia and Orica NZ who were subject to the obligation imposed by clause 5.2(d). 104 Orica also contests the claim that it was under the implied obligation recorded at [99(d)]. It submits that no such term should be implied having regard to the execution of the Assignment Deed on the same day as the Sale Agreement, and its acceptance of Zeneca's proposal that there were to be two agreements, one for the sale of the business and the other for the assignment of the Distribution Agreement. 105 Orica disputes the Commissioner's "contrivance" contention recorded at [100], first on the ground that the proposal to revert to a sale of business was made by Zeneca, and secondly on the ground that at the time of Zeneca's proposal there was no existing obligation on Zeneca's part to make a termination payment of $327 million to Orica. Cf [99] above. Conclusion on second disposal 106 The Commissioner's second disposal is put as an alternative to the first disposal. However an essential element of the second disposal is the existence of a debt owed by Zeneca to Orica which had arisen on 8 December 1997. Thus he contends that: (a) By the beginning of September 1998 Zeneca remained indebted to Orica in the amount to be ascertained by the agreed valuation process. (b) The September 1998 agreements substituted a new arrangement for an existing obligation that a termination payment of $327 million be made to Orica. (c) The letter agreement of 3 September 1998 purported to rescind the notice of termination that had already given rise to Orica's right to receive payment following termination. (d) The original contractual obligation that was replaced by the substituted arrangement was that Zeneca was bound to pay Orica $327 million. (e) It was a term of the substituted agreement that the debt owed by Zeneca to Orica under Article 14 would be released. (f) As a result of the September 1998 agreements there was a "disposal of the debt owed by Zeneca to Orica, which had arisen on 8 December 1997". 107 As appears from [92]‑[97] I have rejected the Commissioner's contentions that the notice of termination gave rise to a debt owed by Zeneca to Orica, and that Zeneca was then contractually bound to pay Orica $327 million. Upon receipt of the notice of termination Orica may well have acquired a chose in action, namely a right in the future to receive a sum of money ascertained in accordance with Article 14. But that chose was not a present debt. Nor was it a right to be paid $327 million. 108 Accordingly, the second disposal propounded by the Commissioner founders for the same reason that his first disposal is not made out. 109 The Commissioner contended that in order to achieve the "substitution" recorded at [101], Orica and Zeneca considered it necessary to enter into the 3 September 1998 Preservation Agreement, "which purported to rescind or undo the notice of termination that had already given rise to [Orica's] right to receive payment following termination". He describes this agreement as a "contrivance", a description with which Orica took issue. It is not clear to me that anything in fact turns on the propriety of the Commissioner's description. In case it does, I should record first, that no case of "sham" on Orica's part (or Zeneca's) is raised by the pleadings. Further, apart from the use of the word "contrivance" and a comparable statement that by the preservation agreement the parties "purported to agree" that the Distribution Agreement remained in effect notwithstanding the notice of termination, the Commissioner did not seek to run such a case. In those circumstances I treat the various September 1998 documents as having whatever effect their language gives them. 110 Secondly, although the Commissioner's animadversions appear to be directed at Zeneca as well as Orica, in my view Orica correctly points out that the proposal to revert to a sale of business came from Zeneca. By facsimile of 1 September 1998 from Mr Brimacombe of Zeneca to Mr Reynolds of Orica, the former set out the steps that would be involved in the sale of the Business to Zeneca BV. Ms Gibson's evidence was that those steps "were matters that Zeneca had proposed; they were not requirements of Orica". On 3 September 1998 Zeneca wrote to Orica about what it described as "our proposal". The context shows that that is Zeneca's proposal and not anything in the nature of a joint proposal or position. Thus the opening words of the letter state that Zeneca has decided to put "its position" on the matter in writing, and concludes by saying that if the parties are unable to agree on Zeneca's "final offer" by noon that day, it would revert to its original position on the umbrella agreement. Ms Gibson's evidence was that Dr Patterson of Zeneca told her the proposed changes were "for Zeneca's tax reasons". 111 Thirdly, when Zeneca made its proposal, there was no existing obligation on Zeneca's part to pay Orica $327 million. Thus the basis for the Commissioner's contrivance and "purported" agreement contention does not exist. 112 I am satisfied that the Commissioner's second propounded disposal did not take place. Third disposal Commissioner's submissions 113 The Commissioner contends that the Distribution Agreement was disposed of upon entry into the Sale Agreement. He says that the Assignment Deed effected a novation of the Distribution Agreement, and that the novation was in performance of an obligation that arose under the Sale Agreement. On the Commissioner's submission there was a novation because, despite clause 2 of the Assignment Deed being headed "Assignment", Zeneca BV agreed therein to assume Orica's obligations (as well as its rights) under the Distribution Agreement. He submits that the novation cancelled or released the rights and obligations of Orica and Zeneca under the Distribution Agreement, and created a new set of rights and obligations between Zeneca BV and Zeneca. 114 It was a term of the Sale Agreement that at completion the vendors would deliver to Zeneca BV a counterpart of the Assignment Deed duly executed by Orica: clause 5.2(d). The Commissioner repeats his earlier submission that Orica was subject to an implied obligation under the Sale Agreement to execute the Assignment Deed so as to facilitate performance and completion of the Sale Agreement. He draws attention to the statement in recital C that "As part of the Sale of Business Agreement", Orica has agreed to assign its rights and obligations under the Distribution Agreement. The Commissioner also relies on recital B of the Sale Agreement whereby the vendors sell the business "as a going concern", and contends that Zeneca BV could not have carried on the Business without the benefit of the Distribution Agreement. 115 For those reasons the Commissioner urges that the novation of the Distribution Agreement was partial performance by Orica of its obligations under the Sale Agreement. That agreement was the source of the obligation to novate the Distribution Agreement which Orica discharged by entering into the Assignment Deed. Accordingly, he says, the Sale Agreement effected a disposal of the Distribution Asset as well as the other assets of the Business, the consideration for all of which was the agreement to pay Orica $328.5 million. He relies on s 160M(3)(b), in particular the words "cancellation [or] release … of the asset". Orica's submissions 116 Orica disputes the Commissioner's contention that there was a novation of the Distribution Agreement on three grounds. First, that under clause 2.2 Orica did not receive a full release of its obligations under the Distribution Agreement. Second, that the parties did not intend to effect a novation. They bargained for an assignment of rights and a partial release of potential liabilities. Third, the Distribution Agreement did not come to an end. It had to survive to enable Zeneca to enforce any rights "accrued or arising before the Effective Date": cl 2.2. 117 Orica contends that the Sale Agreement was not the source of the obligation to "assign" the Distribution Agreement. It says that Zeneca BV could have carried on the Business without the benefit of the Distribution Agreement because, as a wholly owned subsidiary of Zeneca, it could have obtained a fresh grant of distribution rights at any time. All it needed from Orica were the essential elements of its pharmaceutical business, including its plant, product registrations, staff, confidential information and customer lists and its trading stock Orica contends that the source of the obligation to "assign" the Distribution Agreement was the express terms of the Assignment Deed. Because of those express terms, there is no need to imply an obligation under the Sale Agreement. Conclusion on third disposal Novation 118 The burden of a contract cannot be assigned without the consent of the other party to the contract, in which event the consent will give rise to a novation. Similarly, it is impossible to assign "the contract" as a whole, because it consists of both burdens and benefits. As Lord Browne‑Wilkinson said in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 at 103, although lawyers often purport to assign a contract, thereby intending to assign the benefit of the contract, "since every lawyer knows that the burden of a contract cannot be assigned", the assignment will be construed as intending to pass the benefit only. To the same effect is Century 21 (South Pacific) Pty Ltd v Century 21 Real Estate Corporations (1996) 136 ALR 687 at 698. 119 Rights and obligations can be effectively transferred by a novation: a transaction by which all parties to a contract agree that a new contract is substituted for an existing contract. It involves the extinguishment of one obligation and the creation of a substituted obligation in its place: Olsson v Dyson (1969) 120 CLR 365 at 388. A novation can be express or implied from the circumstances. Whether there is an implied novation ultimately depends on the intention of the parties: Vickery v Woods (1952) 85 CLR 336 at 345. 120 The terms of the Assignment Deed are set out at [48]. It is important to repeat that the parties were Orica, Zeneca and Zeneca BV. Recital C records Orica's agreement to "assign the rights and obligations" under the Distribution Agreement to Zeneca BV, and the latter's agreement to assume Orica's obligations thereunder. Although clause 2 is headed "Assignment", its verbiage goes further. In addition to becoming entitled to enjoy all the rights and benefits of Orica under the Distribution Agreement, Zeneca BV agrees to be bound by and comply with the provisions of the Distribution Agreement binding on Orica. In view of this lack of symmetry, clause 1.1 of the Deed is to be noted. It provides that headings are for convenience only and do not affect interpretation. In any event, the significance of the "Assignment" heading is reduced by the immediately following subheading – "Assumption of benefits and obligations". What is important is that recital C and clause 2.1 (including its subheading) reflect an intention that the benefits and burdens of the Distribution Agreement should pass to Zeneca BV. 121 The circumstances leading to the making of the September 1998 agreements disclose that the parties intended there to be a novation of the Distribution Agreement. The overture for a change from the umbrella agreement to a sale of the Business to Zeneca BV came from Zeneca. Mr Brimacombe's facsimile of 1 September proposed the rescission of the termination notice subject to Orica selling and Zeneca purchasing the Business, "including novation of the 1993 Distribution Agreement". Dr Patterson's facsimile of 3 September repeated the proposal, and added the sweetener of the $1.5 million towards Orica's legal costs. Ms Gibson wrote "Accepted 3.9.98" on the document. 122 I do not accept Orica's submissions, recorded at [116], that the Assignment Deed did not effect a novation of the Distribution Agreement to Zeneca BV. The first is that Orica did not receive a complete release from all its obligations. Clause 2.2 covered prospective liabilities only, because it was made without prejudice to any rights of Zeneca accrued or arising before the Effective Date. That, says Orica, means that there was not a complete discharge of the Distribution Agreement between Orica and Zeneca. It relied on the following passage from the judgment of Windeyer J in Olsson v Dyson 120 CLR at 388‑389: Novation is the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person he, the third person, must be a party to the novated contract. … In Scarf v. Jardine (1882) 7 App Cas 345 at 351 Lord Selborne said novation "means this ‑ the term being derived from the civil law ‑ that there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be) or between different parties; the consideration mutually being the discharge of the old contract". In that sense "novation" means simply a new contract standing in the place of the old. 123 The question is what is meant by "the extinguishment of the obligations of the old contract" and "the discharge of the old contract". The two core elements of novation are the rescission by agreement of an existing contract or part thereof and the entering into of a new contract by way of substitution. In a helpful article Bayley J, "Novation" (1999) 14 Journal of Contract Law 189 at 191‑194 the author considers a contract between A and B which is rescinded by agreement and replaced by a new contract between A and C. After noting that A must now look to C for performance of contractual obligations under the new contract and cannot look to B for fulfilment of the contractual obligations which were extinguished by the novation, the author considers whether the fact that A can no longer look to B for performance of B's primary obligations under the original contract, means that A cannot hold B liable for past breaches of contract, because the contract no longer exists. He concludes that whether the novation lets B off the hook depends on what the parties intended to do in rescinding the original contract. If they intended only to rescind the original contract without affecting existing causes of action, A will be able to pursue B for past breaches. But if it was intended that the original contract and all accrued causes of action arising out of the contract were to be discharged by the novation, that will be the effect of the novation. Mr Bayley concludes: The reason this occurs is that the incidents and consequences of a consensual rescission are essentially plastic to the intention of the parties. This flexibility has been summarised by one jurist as follows: In the sphere of rescission by the acts of the parties themselves and express consensus, the only limits that can be placed to the possible incidents of rescission of a contract are the limits to the power of making one. The jurist referred to is Morison, The Principles of Rescission of Contracts (Stevens & Haynes 1916) p 4. 124 In the present case the parties agreed that future events were to be governed by a contract between Zeneca and Zeneca BV in the same terms, mutatis mutandis, as those in the former contract between Orica and Zeneca. Orica falls out of the picture so far as they are concerned. But as to the past, the parties agreed that Orica would remain liable to Zeneca in respect of events that occurred before the rescission. What the parties have done is to adopt the scheme of rescission for breach. The contract is not rescinded as from the beginning. The original parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. Cf McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476‑477. 125 I adopt the analysis outlined at [120]‑[124] because it accords with contractual principle. It is also supported by authority. In Weldwood‑Westply Ltd v Cundy (1965) 50 DLR (2d) 744 a company was indebted to the appellant for an amount exceeding $20,000. The appellant and the respondent, with the acquiescence of the company, agreed that the respondent would assume liability to pay $20,000 of the debt owing by the company to the appellant, and that the company would be discharged from having to pay the $20,000. The Supreme Court of Canada held that there was a novation. Spence J dealt specifically with whether a novation could take place if the original contract was rescinded only in part. Dealing with a defence relied on by the respondent that there was no novation because the old debt was not extinguished, his Lordship said at 749: Certainly, the old debt was extinguished as to $20,000 thereof and therefore the defence must be that there could not be a novation of only part of the old debt. I have been unable to find any authority for that proposition … I have found that Williston in vol 6 of the revised edition of his authoritative work on Contracts, at p 5241 states: Novation necessarily involves the immediate discharge of an old debt or duty, or part of it, and the creation of a new one. Thereby implying that the novation may be of part only of the original debt. In my view, Hodgson v Anderson (1825) 3 B&C 842, 107 ER 945 and Fairlie v Denton and Barker (1828) 8 B&C 395, 108 ER 1089, are authorities for that proposition. See also Jenkins S, Corbin on Contracts (Revised ed, 2003) vol 13 §§71.3(1). 126 Orica referred me to no authority that a provision such as clause 2.2 of the Assignment Deed is inconsistent with a novation. Such a contention does not accord with Orica's own documentation. The Sale Agreement contained a pro forma Assignment Deed (Sch 8) and a pro forma Novation Deed (Sch 9). These Deeds were to be used in relation to contracts between Orica and third parties. The parties to the Novation Deed are Orica Australia, Zeneca Pharmaceuticals Australia Pty Ltd, which is called "Zeneca", and the third party. Recital C provides that the parties: have agreed that the Main Agreement will be novated on the terms of this Deed, so that: (a) Zeneca becomes a party to the Main Agreement in place of Orica; and (b) Orica is released from its obligations under the Main Agreement. Clause 3 is headed "Novation": With effect from the Effective Date: (a) Zeneca shall be substituted for Orica as a party to the Main Agreement; and (b) the Main Agreement shall take effect as an agreement on the same terms as previously except that references to Orica shall be read and construed as if they were references to Zeneca. Clause 3.2 is in the same terms as clause 2.1 of the Assignment Deed. Clause 3.3 is in the same terms as clause 2.2 of the Assignment Deed. That is to say, the release of Orica is without prejudice to the accrued rights of the other party to the original contract. 127 The second ground upon which Orica contends there was no novation is that the Distribution Agreement itself had not in fact come to an end. It was not "terminated", but survived. It had to survive to enable Zeneca to enforce any "rights of Zeneca accrued or arising before the Effective Date". What I have said about the first ground disposes of this one. 128 The third ground is that the parties to the Assignment Deed had not intended there to be a novation. They bargained for an assignment of rights and a partial release of potential liabilities. What I have said at [120] to [121] deals with this ground. Sale agreement 129 It is central to the Commissioner's case that the Sale Agreement obliged Orica to novate the Distribution Agreement to Zeneca. Thus he contends that the novation of the Agreement by Orica constituted performance by it of "one of its obligations under the Sale Agreement". However clause 5.2(d) of the Sale Agreement provides that upon completion "the Vendors shall deliver to Zeneca BV a counterpart of an assignment of the Distribution Agreement duly executed by Orica Limited". The word "Vendors" is defined in clause 1.1, "unless the context requires otherwise", as Orica Australia and Orica NZ. The context does not otherwise require. Clause 5.2(d) refers to both "the Vendors" and "Orica Limited". It imposed no obligation on Orica. 130 I accept Orica's submission that it is not necessary in order to give business efficacy to the Sale Agreement to imply in the Sale Agreement a term to the effect that Orica will novate the Distribution Agreement in Zeneca BV's favour. The Sale Agreement and the Deed of Assignment were executed on the same day. Recital B of the latter refers to the Sale Agreement as a contemporaneous document. Recital C records Orica's agreement to assign its rights and obligations under the Distribution Agreement to Zeneca, and Zeneca's agreement to assume Orica's obligations thereunder. Clause 2 provides for Zeneca's assumption of and Orica's release from obligations and liabilities thereunder. In those circumstances, there is no need to imply the term for which the Commissioner contends in order to give business efficacy to the Sale Agreement. The parties have expressly dealt with the topic in a contemporaneous agreement. 131 However I did not understand the Commissioner to have sought the implication of a term on business efficacy grounds. In his closing submissions the Commissioner made clear that the implied term he asserted was not a "special implied term" that had to satisfy the tests in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, but an implied obligation to do whatever was necessary to secure performance of the Sale Agreement, to which it was a party. This obligation was said to be part of the implied term of good faith that is present in every contract. In this connection, reliance was placed on the observations of McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450: Many of the terms now said to be implied by law in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. Hence, the reference in the decisions to "necessity". 132 Those observations were made in the context of distinguishing between terms that are implied from the particular circumstances of the case and to give effect to some apparent underlying intention of the parties about providing business efficacy, and terms that are implied independent of intention. After referring to earlier cases in which the latter class of terms had been described as rules of law, their Honours continued at 449: However, the more modern and better view is that these rules of construction are not rules of law so much as terms implied, in the sense of attributed to the contractual intent of the parties, unless the contrary appears on a proper construction of their bargain. There is force in the suggestion that what now would be classified as terms implied by law in particular classes of case had their origin as implications based on the intention of the parties, but thereafter became so much a part of the common understanding as to be imported into all transactions of the particular description. … This understanding of the matter is consistent with the proposition that terms of this kind, although treated as implied by law, may be excluded by express provision made by the parties and also as a result of inconsistency with terms of the contract. The result is that, even if treated as rules of law, they only apply in the absence of an expression of contrary intent. 133 In my view it was not an implied term of the Sale Agreement that Orica would novate (or assign) the Distribution Agreement to Zeneca BV. In Byrne 185 CLR at 450, after the passage set out at [131], McHugh and Gummow JJ said that "the notion of 'necessity' has been crucial in the modern cases in which the courts have implied for the first time a new term as a matter of law". Having regard to the provisions of the Assignment Deed, there was no necessity to imply into the Sale Agreement a term that Orica would execute an assignment of, or novate, the Distribution Agreement in favour of Zeneca BV. In the circumstances of the present case, the absence of the implied term sought by the Commissioner could not render nugatory, worthless or seriously undermine the rights conferred by the Sale Agreement. Accordingly, the necessity to which McHugh and Gummow JJ referred was not present. Even if, as some courts have done, one were to depart from a strict test of necessity in favour of reasonableness or fairness (see for example Liverpool City Council v Irwin [1977] AC 239 at 258), that would not affect the outcome in this case. 134 In my view the Commissioner attaches too much significance to recital C of the Assignment Deed. It does not state that by the Sale Agreement Orica has agreed to assign the rights and obligations under the Distribution Agreement. It simply records that, in connection with the Sale Agreement, Orica has agreed to make the assignment. The contrast between recitals B and C is clear: "pursuant to" the Sale Agreement in the former and "As part of" the Sale Agreement in the latter. An ambiguous recital in one agreement cannot control the words of the operative part of a related agreement. Cf Lewison, The Interpretation of Contracts (4th ed, 2007) par 10.2. 135 It follows from the above that the Commissioner's third disposal is not made out. Fourth disposal 136 The Commissioner's final contention is that the Assignment Deed itself effected the disposal of the Distribution Asset. I agree with that contention. So does Orica. The Assignment Deed effected a novation, and there was accordingly a deemed disposal under s 160M(3)(b) – a cancellation or discharge. CONSIDERATION IN RESPECT OF DISPOSAL Valuation evidence Orica's witness 137 John Selak, a partner of E&Y with extensive experience in corporate finance and valuations, prepared two reports for Orica. The first, dated 20 August 2009, though prepared in 2006, dealt with the market value as at 4 September 1998 of Orica's rights under the Distribution Agreement. His opinion was that the value of the rights was nil, and he formed this opinion "because the short life of the asset at the date of valuation (being some four days) would be insufficient time for a hypothetical buyer to generate any economic return". 138 Mr Selak stated four fundamental criteria that must be present in order that intellectual property may be classified as an asset and be allocated a fair value. It must be: · separately identifiable; · protected legally or capable of protection through a de facto right; · transferable or capable of being exchanged for value; and · enduring in nature. In order to satisfy the first of these criteria, the future economic benefits from the use of the intangible asset must be capable of reasonable estimation and separable from other assets in the business. Under the last criterion, the asset must be capable of producing continuing economic benefits over the life of the asset. 139 Mr Selak identified the two rights he said were derived by Orica under the Distribution Agreement . The first was to produce and distribute Zeneca products in the distribution territory. The second was the opportunity to facilitate the transfer or sale of the pharmaceuticals business. Having noted that at the valuation date the Distribution Agreement had only four days to run, Mr Selak expressed the opinion that it was not commercially realistic to consider that a third party could or would establish a business to produce and distribute Zeneca products for a period of four days. At pars 101 and 102 he said: Even if Orica was able to find a third party that was: (a) acceptable to Zeneca; (b) prepared to purchase the existing pharmaceutical business; and (c) prepared to take assignment of the 1993 Distribution Agreement, they would only be able to operate the business for four days before the 1993 Distribution Agreement ended, and, by the operation of Articles 13.3 and 14, the purchaser would be required to sell the business to Zeneca. Whilst theoretically possible, clearly it is not commercially realistic. Based on my analysis of the circumstances that existed as at the valuation date, it is my opinion that the right to produce and distribute Zeneca products for a four day period would have no market value. 140 The second right conferred by the Distribution Agreement was also, in Mr Selak's opinion, of no market value at the valuation date. This was because it was self evident that the ability to transfer or assign the Distribution Agreement to another affiliate of Orica or Zeneca would have no market value as at 4 September 1998. Article 21 (no assignment without consent) would generally have an adverse impact on market value. As at the valuation date, Orica and Zeneca had entered into, or were about to enter into, a sale agreement "further restricting Orica's ability to sell or transfer the business to a third party". Based on the above, Mr Selak's opinion was that no market value could be attributed to the opportunity to facilitate the transfer or sale of the pharmaceuticals business as at 4 September 1998. 141 Mr Selak's second report dated 25 March 2009 dealt, amongst other things, with the market value of the Distribution Asset as at 4 September 1998 on various different bases. In par 3 of the report he identified certain key events, namely the rights conferred on Orica by the Distribution Agreement, the effect of the termination provisions of the Agreement, the notice of termination, the Sale Agreement, the Deed of Assignment, and the terms of that Deed. The first valuation basis (called Valuation one) stipulates two modifications to the key events: (a) the rights under the 1993 Distribution Agreement were not transferred to Zeneca BV pursuant to the Deed of Assignment, and (b) instead, the disposal of those rights did not occur and was never proposed to occur. 142 Mr Selak's opinion was that the fair market value of the Distribution Asset on the above basis was nil. He said that the price Zeneca BV paid for the Business was derived from the projected future revenue streams, discounted at an appropriate rate of return (effectively a discounted cash flow methodology). He said that implicit in this methodology is that the buyer receives all the assets and liabilities necessary to generate those revenue streams, including the right to distribute the products (the implicit assumption). Notwithstanding this, the rights derived from the Agreement would only have value for Orica if it was able to derive a benefit or generate a revenue stream from the rights. The Business and all the assets associated with it having just been sold, Mr Selak was unable to identify a significant benefit to Orica from retaining the rights. He said it would take years and a significant financial investment to establish a pharmaceuticals business based on Zeneca's products even with Zeneca's co‑operation. In those circumstances, he did not consider the establishment of a new pharmaceuticals business based on Zeneca's products to be commercially viable. 143 The second valuation (Valuation one (a)) involved the additional assumption that Orica would be unable to exercise any of its rights under the Distribution Agreement following the sale by Orica Australia of its pharmaceuticals business to Zeneca BV. This additional assumption made no difference to Mr Selak's opinion on Valuation one. 144 Valuation two involved two further additions or modifications: (a) the distribution rights under the Distribution Agreement were transferred by reason of the Sale Agreement, and (b) no part of the consideration expressed to be payable under the Sale Agreement was for, or in respect of, those rights. 145 Mr Selak said that because of the implicit assumption recorded at [142], he was unable to isolate the revenue associated with the distribution rights from the revenues associated with the other assets and liabilities of the Business as a whole. He said that in allocating value to the assets of a business which is acquired, value is attributed to the assets in the following order: · tangible assets such as plant and machinery, stock, property etc; · identifiable intangible assets which can be reliably measured; and · what is left goes into a 'bucket' called goodwill. Where tangible assets are not capable of separate recognition, they are deemed to be subsumed by goodwill. Given that the Distribution Agreement was not a separately identifiable intangible asset, Mr Selak was unable to attribute value to it on the present assumptions. The value of the asset was contained within the goodwill bucket. Accordingly, he attributed no value to the Distribution Asset. 146 Mr Selak was cross‑examined. In relation to his first report (2006) he agreed that: (a) he assumed that the Sale Agreement had been executed and that the Distribution Agreement had only four days to run, so that he was effectively valuing those four days, and nothing else; (b) because the opportunity to produce income existed only for a four day period, the opportunity to in any way deal with that asset was nil; (c) he had not been asked to consider, and had not considered, the value of any right Orica had to receive a payment of $327 million upon termination of the Distribution Agreement on 8 September 2009; (d) he had not been asked to assume that the right to receive the termination payment had been assigned to Zeneca BV; (e) he had not been asked to assume that the termination payment had any bearing on the valuation he was performing. 147 In relation to his second report (2009) Mr Selak agreed that: (a) in arriving at a nil value (Valuation one) he was valuing the Distribution Agreement absent the business; the business having been sold, the Distribution Agreement had no value because "there is nothing to receive a termination payment in respect of"; (b) he did not value the right to receive the termination payment in the hands of Zeneca BV; (c) though he did not think the Distribution Asset had no value, he was unable reliably to measure and assign a fair value to it. 148 Mr Selak was of the opinion that Mr Samuel's report was "significantly flawed" and he did not accept that it expressed a reasoned judgment. The Commissioner's witness 149 The Commissioner's valuation evidence was given by Tony Samuel, a forensic accountant. Mr Samuel was asked: (a) to provide his opinion of the market value of Orica's rights under the Distribution Agreement on 4 September 1998, and (b) whether he agreed with Mr Selak's Valuation two. 150 Mr Samuel dealt with the second question first. He did not agree with Mr Selak's Valuation two. In his summary on this issue he expressed the following opinions: (a) the Distribution Asset is an intangible asset that satisfies the identifiability criteria in the accounting standards; (b) the need to make estimates in order to value an intangible asset does not preclude either the recognition or valuation of the asset; (c) the revenues attributable to the Distribution Asset are the revenues derived from the distribution of Zeneca products; (d) techniques exist which enable the Distribution Asset to be valued. 151 In support of par (b) of his summary Mr Samuel pointed to par 35 of Australian Accounting Standards Board (AASB) 138 – Intangible Assets: The fair value of intangible assets acquired in business combinations can normally be measured with sufficient reliability to be recognised separately from goodwill. When, for the estimates used to measure an intangible asset's fair value, there is a range of possible outcomes with different probabilities, that uncertainty enters into the measurement of the assets fair value, rather than demonstrates an inability to measure fair value reliably. 152 After quoting par 38 of AASB 138, which states that the only circumstances in which it might not be possible to measure reliably the fair value of an intangible asset acquired in a business combination are where the intangible asset arises from legal or other contractual rights and is not separable, Mr Samuel expressed the opinion that the Distribution Asset arose from a legal contract and was also separable "as it was possible for the Distribution Asset to be transferred to a third party without transferring the workforce and/or other assets of the Business". He went on to say that the fair value of the Distribution Asset could be estimated using measurable variables to which he referred in his answer to the first question. 153 Mr Samuel disagreed with Mr Selak's reason for being unable to attribute a value to the Distribution Asset, namely that the revenue associated with the distribution rights cannot be isolated from the revenue associated with the other assets and liabilities of the business as a whole. Mr Samuel's opinion was that the revenue associated with the Distribution Asset was the revenue derived from the sale of Zeneca products. In this connection he added: (a) The fact that the relevant revenue was derived in part from the use of other assets and liabilities did not preclude a valuation of the Distribution Asset, although it did make it more difficult and more subjective. He gave examples. (b) Accounting standards recognise that estimates may be necessary, and do not permit the need for estimates to be used as a basis for not measuring the value of the intangible asset. (c) Accounting standards identify some techniques that can be used to estimate the value of intangible assets, such as those mentioned in AASB 138 par 41. 154 Mr Samuel then turned to the first question he was asked, namely the value of Orica's rights under the Distribution Agreement on 4 September 1998. He first restated the three objections raised by Mr Selak to applying any of the valuation methodologies he described in Appendix A to the second report: (a) he was unable to identify any material future economic benefit that would flow to a purchaser of the rights; (b) the Business had already been sold; and (c) there were only four days left in which to utilise the Distribution Agreement. 155 Mr Samuel disagreed with objection (a), saying that the Distribution Agreement provided Orica with: (a) the right to produce and distribute Zeneca's products in the territory; (b) the opportunity to facilitate the transfer or sale of the business; and (c) the right to receive the value of the Business in the event that a termination notice was given. He opined that all these rights entitled Orica to future economic benefits. Right (a) entitled Orica to the future cash flows arising therefrom. If the Distribution Asset was sold, this right would go to the purchaser. Opportunity (b) entitled Orica to the value of the Business if it was sold. Mr Samuel described this value as in effect a capitalised amount, being the present value of the future cash flows. These potential cash flows would pass to the acquirer of the Distribution Asset. Right (c), in Mr Samuel's view, "underwrites the value of the Business to the holder of the Distribution Asset: So long as the Distribution Asset was in force, the holder of those rights was guaranteed either the future cash flows arising from the distribution of Zeneca products in the Territory or a capital sum equivalent to the future cash flows arising from the distribution of Zeneca products in the Territory. Specifically, as at 4 September 1998 … (a) in the event that the Business was not sold to Zeneca, Orica had 4 days in which to exercise its rights to produce and sell Zeneca products, following which paragraph (c) below would apply; (b) Orica had the opportunity to sell or to cause its subsidiary to sell the Business to Zeneca BV for $328.5 million on 4 September 1998; or (c) Orica was entitled to receive $327 million on termination of the Business on 8 September 1998. 156 Consequent upon the notice of termination and Mr Justice Park's decision, E&Y valued the Business as at 5 December 1998 at $327 million. Orica was therefore entitled to that amount, and would not logically have entered into any agreement on a commercial basis to give up that right and dispose of the Business for any lower sum. In Mr Samuel's opinion, "this is logical as the default position for Orica was to let the agreement terminate and collect the $327 million on 8 September 1998". 157 After noting that Mr Selak did not treat right (c) as amongst the rights provided to Orica by the Distribution Agreement, Mr Samuel observed that Article 14.1 provided Orica with the right to receive a payment equal to the market value of the Business on a going concern basis in the event that a termination notice was given. This, he said, was an important right because it precluded Zeneca from withdrawing Orica's other two rights without compensation. 158 Mr Samuel also disagreed with Mr Selak's objection (b) to applying any valuation methodologies, namely that the Business had already been sold. He said that if by this Mr Selak meant that the Business "was obligated to be sold" because of the giving of the notice of termination, then the value of the Business was $327 million, being the amount payable by the willing buyer, Zeneca, with another willing buyer, Zeneca BV, being prepared to pay $328.5 million to acquire the Business. If on the other hand Mr Selak meant that the Business had been sold on 4 September 1998, then he was valuing the Distribution Asset in the hands of Zeneca BV and not Orica. That was not the purpose of the valuation exercise. 159 Mr Samuel also disagreed with Mr Selak's third objection to applying valuation methodologies, namely that the Distribution Asset had no value because it only had four days to run. He said that as at 4 September 1998, prior to the sale of the Business, either the business would be sold to Zeneca BV for $328.5 million, or if not so sold, the termination payment of $327 million would become payable by Zeneca, and certain assets of the Business would be transferred on 8 September 1998. On the basis of this understanding of the transaction Mr Samuel expressed the following opinion: the impending sale to Zeneca BV provides the value of the Business which includes the value of the rights under the Distribution Asset, regardless of whether the sale specified a figure for those rights. This is because the minimum value for the Business was determined by the price set under Article 14.1. In other words, had Zeneca BV not acquired the Business on 4 September 1998, Orica would have received $327 million from Zeneca as a result of the termination of the Distribution Asset on 8 September 1998. In my opinion, Mr Selak's conclusion that the Distribution Asset had no value as it only had 4 days to run ignores the value of the Distribution Asset because it had only 4 days to run, being the right to receive $327 million on termination. 160 Mr Samuel then described his preferred methodology. This was an earnings based approach which values an asset by reference to its future economic benefits. Of the various ways of doing this, which he identified, he adopted two. First, estimating the value of the intangible asset by quantifying the difference between the value of the Business with the asset and without it. Second, estimating the value of the intangible asset as a residual from the value of the overall value of the relevant business. 161 On the first alternative, he assumed a value of the Business of $327 million. He quantified its value without the Distribution Asset at $15.8 million (net tangible assets). The value of the Distribution Asset was thus $311.2 million. 162 On the second alternative the outcome appears in Mr Samuel's table 3 showing the value attributable to the tangible assets and the goodwill using net profit levels of 1.53%, 4.60% and 7.67%, and adopting the proportions of profit attributable to assets other than the Distribution Asset appearing in his Table 2 – residual value attributable to the Distribution Asset. Mr Samuel later discarded the 1.53% and 7.67% net profit levels for the reasons he explained. Accordingly I will reproduce only that part of Table 3 that uses the 4.60% net profit level. Assuming net profit for goodwill of: A 4.60% Proportion attributable to goodwill: B 19.49% $'M Market Value of the Business C 327.0 Less: Tangible Assets D (15.8) Residual Value E = C – D 311.2 Goodwill F = E x B (60.7) Distribution Asset G = E – F 250.5 =============================== Revenue in 1996/97 H 99.6 Profit attributable to goodwill I = H x A 4.6 Expenses incurred in 1996/97 J 22.4 Profit return on costs K = I/J 20.5% Goodwill as a % of the Business L = F/C 18.6% Accordingly Mr Samuel's valuation of the market value of the Distribution Asset at 4 September 1998 was $250.5 million. 163 Mr Samuel was cross‑examined. He agreed that in his report he set out to determine the value of Orica's rights under the Distribution Agreement, based upon an allocation of an amount determined by E&Y upon its valuation under Article 14 of the Distribution Agreement. He also agreed that nothing in his report constituted an attempt to value the release given by Zeneca in favour of Orica. He said his valuation was based on the assumption that "the rights were transferred under the sale agreement". 164 Mr Samuel was asked to explain the process of reasoning he undertook to isolate a value for the Distribution Agreement. His lucid response was as follows: my approach was to firstly take as a starting point the value for the business as a whole, as determined by Ernst & Young, which is as at the date that I was asked to consider the value of the distribution asset. I then considered the extent to which you could isolate the cash flows arising from this asset. But as the asset relates to the distribution of, as I understood it, all the products of the business, it meant that the starting point was that we were dealing with all the cash flows of the business. So I looked at this from two perspectives. The first was to say what is the value of the business with the asset and what would be the value of the business without it? In that first instance it seems to me, at least, that the value of the business without the asset is no value at all, because there's no product to sell. However, I recognised that other assets of value existed within the business and, therefore, it would not be appropriate to allocate the entire value of the business to the asset, so I looked for ways and means of … separating the distribution asset from the other assets of the business. Now, in order to do that what I sought to do was to identify the profits being made by other business in the pharmaceutical sector, being businesses which would have … similar assets to and operations to the business of Orica. Now, in doing that I recognised there's no direct comparable, you're never going to find the same business sitting somewhere else, but I identified a handful of companies and looked at the profits that they were making in that area of manufacturing, distribution and processing of pharmaceutical products. What I identified there was a range of net profit percentages …, strictly speaking operating profit before interest [and] tax. It was in the range of about one and a half to … seven and a half, which is a reasonably narrow range. On that basis I concluded that a reasonable return in this sector was around four and a half per cent, which was the midpoint of that range. I compared that to the return being made by Orica which was more like 23 per cent and attributed the balance, the difference between those figures to the distribution asset. I then applied that proportion to the value of the business of 327 million after deducting the value of the tangible assets which was approximately 16 million and so I allocated the value of 311 million between … all the other intangible assets on that proportion of four and a half per cent to 23 per cent and the balance to the distribution asset. 165 Mr Samuel was challenged as to his selection of the pharmaceutical companies from which he derived a range of profit margins in or around 1998 of between 1.53% and 7.67% which he employed in his valuation of the Distribution Asset. It was put to him that he had not chosen companies comparable to Orica, because three of those chosen had large scale retail activities that Orica did not have. It was also put to him that the choice was inappropriate because the same three were customers of Orica Australia. Mr Samuel did not dispute the facts that were put to him, but rejected the assertion that his selection was inappropriate. He said that when doing comparables analysis evaluation, a valuer has to deal with the best information obtainable. He chose the companies in question because they were the most comparable he could find to Orica. He said there will always be differences between a company being valued and the "comparables". "It's almost inevitable." 166 Mr Samuel also rejected counsel's claim that he wrongly discarded CSL, which was put to him as the closest in nature to Orica. He said CSL had a significantly larger investment in plant and machinery ($188 million) than Orica, which had only about $3 million so invested. For that reason he did not consider it the closest comparable. 167 Mr Samuel was taken to his Table 1 – Orica's segment results for the year ended 30 September 1998, which showed, amongst other things, the net profit margin for each of its six divisions. One of these was the Advanced Sciences division, within which the pharmaceuticals business was located. This division had a margin of 11.7%. Mr Samuel had excluded that division in calculating the average net profit margin across the divisions. This produced a mean of 3.2%. He was challenged as to why he had excluded the 11.7% in calculating the mean. It was put to him that 11.7% was a quite different margin from either 3.2% or the overall range of 1.5% to 7.7%. He replied: The purpose of the [Table 1] analysis was to identify the net profit margin for Orica after you exclude the business we're seeking to compare it with, which is the pharmaceutical business of Orica. So what I had to do is to extract from the results of the group as a whole, the results of the business we're seeking to compare it to. In other words, the results for the Orica pharmaceutical business dealing in Zeneca products is significantly better than the results in all the other businesses that Orica was engaged in. 168 Pressed again as to why he had excluded the 11.7%, Mr Samuel said: Well, because otherwise the results of Orica would be tainted by the results that I'm seeking to compare it with… If I'm trying to compare one business with … other businesses, I have to exclude the business I'm seeking to compare, my starting business, if you like. I have to exclude that from the collection of other businesses. Otherwise I'm comparing it partly with itself. 169 He was then asked why he hadn't used the 11.7% profit margin of the Advanced Sciences business in his calculation of the value of the Distribution Agreement. His reply was that the 11.7% comprised more than just the pharmaceuticals business he was seeking to apply value to. 170 Mr Samuel was taken to par 106 of his report which states: Table 1 shows that Orica's net profit margin by division (after excluding Advanced Sciences, within which the Business resided) varied between -2.4% (Plastics) and 6.6% (Agriculture Chemicals) and averaged 3.2%. By contrast, the net profit margin for the Business in 1996/97 was 23.6%. He was asked why he had not used Orica Australia's 1996/97 profit figure of 23.6% as the figure for the Advanced Science's business. He replied: I don't think we're comparing like with like. The Advanced Sciences business contained businesses, as I understand it, in addition to the pharmaceuticals business. The 23.6 per cent is a reference to the last, or most recent actual operating results for Orica Australia that I could find, and by way of reference, the Orica results had a turnover of approximately 100 million, and if you look at the Advanced Science results here, it's closer to 300 million. 171 Counsel returned to this issue later, and accused Mr Samuel of "cheating" in "the last step of analysis" by using the 1997 figure rather than the 1998 figures previously calculated. He replied: Your Honour, I want to be very clear about this. The results I've used for the Orica business were the most recent actual results for that business that I could locate and that was the sole reason that I chose those results. It was the only and the most recent results that I could find. Now, there's no cheating going on and the 11.7 per cent is misleading, because it will include within it the results of the pharmaceutical business, which in most years was around 20 to 23 per cent, as well as other businesses. So the 11.7 per cent is deflated by those other businesses, as a matter of logic. It's not the right figure to use. Submissions on consideration Orica's initial written submissions 172 Orica contends that s 160ZD(1)(b) is applicable to the disposal effected by the Assignment Deed. It says it received valuable consideration for the disposal in the form of a chose in action, being the release it obtained from Zeneca. Orica asserts that the Commissioner does not and could not contend that the value of the release equals the gain assessed in the sum of $264,700,000. It says that inferentially the release will have a value that is much less than the amount of the assessment. Orica agrees that if it is successful, the Commissioner is entitled to assess on the value of the release, less any applicable cost base. 173 Orica claims that none of the modified rules in s 160ZD(2) applies. Paragraph (a) does not apply, because there was consideration in respect of the disposal, namely the release. 174 Paragraph (c) does not apply, because Orica and Zeneca were dealing with each other at arm's length in connection with the disposal. It says there is abundant evidence of the strained relationship between it and Zeneca. In this connection it refers to the litigation in London. It contends that it did not submit its will to the dictation of Zeneca. Its insistence on the payment of the additional $1.5 million is said to be proof of that. 175 Orica made no distinct submission as to why s 160ZD(2)(b) does not apply. 176 Even if s 160ZD(2) does apply, Orica contends that the market value of the rights under the Distribution Agreement was nil at the time they were assigned on 4 September 1998. This contention is particularised as follows: (a) whatever rights Orica may have previously had to payment under Article 14, those rights had ceased to exist by 4 September 1998. Orica had no right to be paid anything pursuant to the Distribution Agreement. (b) Only the vendors of the Business, Orica Australia and Orica NZ, were entitled to payment. (c) As at 4 September 1998 the Distribution Agreement had, if not assigned, only four days to run. (d) Orica could not assign its rights under the Distribution Agreement to a third party without Zeneca's consent. Even if Zeneca were to have consented, it would not be commercially realistic for a third party to have established a business to distribute Zeneca products for a period of four days. (e) Orica Australia was already committed to selling its business to Zeneca, including all relevant assets, intellectual property and goodwill to exploit the rights conveyed by the Distribution Agreement. (f) Zeneca itself did not need the rights conveyed by the Distribution Agreement in order to carry on the Business in Australia and New Zealand. 177 Orica relies on the nil valuation of Orica's rights under the Distribution Agreement as at 4 September 1998 in Mr Selak's first report. The basis for this opinion was that "the short life of the asset at the date of valuation (being some four days) would be insufficient time for a hypothetical buyer to generate any economic return". Orica says Mr Selak's report is the only expert evidence before the Court concerning the market value of the rights under the Distribution Agreement as assigned by the Assignment Deed. 178 Orica attacks Mr Samuel's valuation report on the ground that he does not value the release, but rather seeks to determine the market value of Orica's rights under the Distribution Agreement based on an allocation of the amount received by Orica Australia on the sale of its business. Orica claims that the valuation is based on a scenario that did not happen, namely that part of the $328.5 million paid for the Business owned by Orica Australia and Orica NZ was paid for Orica's rights under the Distribution Agreement. Commissioner's initial written submissions 179 The Commissioner agrees that if the Assignment Deed alone effected the disposal of the Distribution Agreement, and the consideration for the disposal was the release given by Zeneca, s 160ZD(1)(b) applies, and the consideration for the disposal is the market value of the release. It says Orica has failed to discharge the onus of showing the assessment is excessive because there is no evidence of the market value of the release. 180 The Commissioner says that even if it could be inferred (as Orica says it can) that the value of the release was less than the amount of the assessment, s 160ZD(2)(c) applied to deem the market value to be the consideration. He says that par (c) will apply if the consideration (the market value of the release) was less than the market value of the Distribution Asset. 181 On the assumption that the Assignment Deed effected a novation, the Commissioner says that par (c) applies, without it being necessary to determine whether the parties were dealing at arms length, because the asset (the Distribution Agreement) was not "disposed of to another person". Accordingly the consideration in respect of the disposal would be deemed to be the market value of the asset (Mr Samuel's $250.5 million). The Commissioner says that for the purposes of s 160ZD(2A), in determining this value the disposal did not occur and was never proposed to occur. 182 The Commissioner contests Orica's claim that the Distribution Agreement had no value. His contentions were: (a) The Distribution Agreement was a valuable asset after the notice of termination had been given (8 December 1997) and after the Letter Agreement had been signed (19 June 1997). If the sale of business did not proceed on 4 September 1998, the Distribution Agreement would have entitled Orica to payment of $327 million (and only required it to perform the Article 14.2 obligation). Even if the sale did proceed, Orica would still be entitled to $327 million. In this connection the Commissioner relies on Mr Samuel's report at par [68]. (b) The reason Orica was entitled to the $327 million under the Sale Agreement was that the vendors were not entitled to the whole $327 million because they did not own the Distribution Asset. (c) The fact that the Distribution Agreement, if not assigned to Zeneca BV, had only four days to run, did not mean that its market value was nil. He relies on Mr Samuel's evidence that Orica's assertion ignores the value of the Distribution Agreement because it had only four days to run, being the right to receive $327 million on termination: Mr Samuel's Report at par [75]. (d) The Commissioner contends that the market value of the Distribution Agreement should not be discounted because of the restriction on transferability imposed by Article 21 of the Distribution Agreement, for three reasons. · In a case such as the present, where there is already a willing buyer (Zeneca), one should ask what a prudent person might be willing to give for the asset rather than fail to obtain it. · Zeneca did in fact consent to the transfer of the Distribution Agreement to Zeneca BV. · Because Article 14 conferred on Orica the right to sell the business assets other than the Distribution Agreement to Zeneca for $327 million, Orica would not have caused the Business (including the Distribution Agreement) to be sold for less than that. The Commissioner says that the restriction on transfer is simply not relevant because Orica already had a willing buyer in Zeneca, and Zeneca had already committed to pay $327 million. There were in fact two willing buyers on the relevant valuation date. The Commissioner relies on Mr Samuel's report in this connection at pars 58 and 59. (e) The Commissioner accepts that Orica Australia was already committed to the Article 14.2 obligation because of the notice of termination. However the evidence is that another willing buyer, Zeneca BV, was prepared to pay $328.5 for the Business, and Zeneca was willing to allow it to be sold to Zeneca BV. Again the Commissioner relies on Mr Samuel's report at par 72. (f) The Commissioner contends that Zeneca BV did need the rights conferred by the Distribution Agreement to carry on the Business. In order for Zeneca BV to carry it on, Zeneca had to terminate the Distribution Agreement and pay Orica an amount reflecting the value of the agreement, or had to cause someone else (Zeneca BV) to "purchase" the agreement. 183 The Commissioner contests Mr Selak's opinion that the Distribution Agreement is an asset that cannot be valued (s 160ZD(2)(b)) because it is not possible to identify it as a separately identifiable intangible asset. He relies on Mr Samuel's report (pars [30]‑[50]) for these propositions: · The Distribution Asset meets the criteria in AASB 138 for the recognition of an intangible asset. It is a "separate" asset (Samuel par 45). · It is irrelevant that the parties to the Sale Agreement did not allocate any of the consideration to the Distribution Asset (if that be the case) (Samuel par 48). · The revenue associated with the Distribution Asset can be isolated. It is the revenue derived from the sale of the Zeneca products. The value of the asset can be estimated by applying techniques provided for in AASB 138 (Samuel par 49). · The Distribution Asset was by far the most valuable right the Orica group had in relation to the Business. Without it the Business did not exist. 184 The Commissioner accepts that there should be some amount as the cost base, but says he is not in a position to address this issue because Orica has not adduced any evidence to support a positive cost base. Orica's written submissions in reply 185 Orica rejects the Commissioner's submission that it "deliberately" failed to adduce evidence of the market value of the release. It says the Commissioner's case has always been that the market value of Orica's rights under the Distribution Agreement constitute the capital proceeds for the disposition of those rights. Orica's case has always been that the capital proceeds are not to be determined by reference to the value of those rights. By showing that it in fact received valuable consideration for those rights, namely a release, it has demonstrated the error in the Commissioner's case and thus the excessiveness of the assessment. The value of the release should be remitted to the Commissioner for determination. 186 Orica disputes the Commissioner's reliance on s 160ZD(2) (market substitution rule). (a) Assuming the Assignment Deed was a novation, the market value of the Distribution Rights on 4 September 1998 was nil. Orica relies on Mr Selak's first report: at par 102. The Commissioner provided no valuation of those rights as they were assigned on 4 September 1998. Mr Samuel's report is based on assumptions of fact that never occurred. The assumptions are included in the letter of instructions from the Australian Government Solicitor dated 15 May 2009. (b) Again assuming a novation, and that s 160ZD(2A) is engaged, that provision does not affect Mr Selak's conclusion. In his second report he was asked to value the Distribution Rights on the assumption required by subs (2A), namely that the rights were not disposed of and were never proposed to be disposed of. He concluded that the market value of the distribution rights as at 4 September 1998 on these assumptions was nil. The Commissioner has produced no valuation evidence to contradict this. (c) As to the Commissioner's attack on Mr Selak's valuation, Mr Selak agreed that the Distribution Agreement was a separately identifiable asset, but said that its value cannot be separately measured reliably: second report at par 80. His opinion was that at best those rights were a source of Orica Australia's goodwill. 187 As to the cost base of the Distribution Agreement, Orica submits that by entering into the Distribution Agreement in 1993 it abandoned any rights it had under the 1935 Deed. The loss of these valuable rights in exchange for the rights under the Distribution Agreement formed part of its cost for determining the ongoing cost base under s 160ZH of its rights under the Distribution Agreement. It relies on a report by Mr Churchill filed by the Commissioner valuing Orica's business as at 1 June 1993 at $115.4 million. It says that, inferentially, this evidence was filed for the purpose of ascertaining Orica's cost base. Commissioner's closing submissions 188 The Commissioner submits that in order to demonstrate that the assessment is excessive Orica must prove that the value of the release is less than the gain assessed. It has not done so. He rejects Orica's claim that he does not contend that the release had a value equal to the amount of the capital gain assessed. The Commissioner's position is that he makes no submission about the value of the release "because he does not know what it is". Nor does the Court, because there is no evidence to establish that value. There is only an unsupported assertion in par 7(c) of Orica's Statement of Facts Issues and Contentions that its value is $700,000, and the reply submission that the value of the release is a "nominal sum": par 8 of Reply. 189 Mr Selak's first report valued the distribution rights on the assumption that Orica was capable of employing them for only four days. He did not attribute any value to Orica's right to receive a termination payment. 190 As to Mr Selak's second report: (a) Valuation one is based on assumptions which again led him to exclude any value attributable to the right to receive the termination payment. (b) In Valuation two Mr Selak declined to attribute a value to the distribution rights because he was unable to isolate revenue associated with the rights from the revenues associated with other assets and liabilities. He regarded himself as obliged by AASB 138 to come to this conclusion. However AASB 138 is a reporting standard, and does not prevent a valuer forming a judgment as to what an asset might be worth for purposes other than reporting. (c) Mr Samuel's report shows that a valuer can form an opinion as to what might be the value of the Distribution Asset. 191 There is no evidence as to the amount of the cost base asserted by Orica. Mr Churchill's report, upon which Orica relies, was not in evidence and cannot be relied on. 192 Even if there were evidence showing that the market value of the release was $700,000, s 160ZD(2)(c) would apply. Mr Samuel's evidence was that the market value of the asset disposed of was $250 million. Orica's closing submissions 193 Counsel was critical of Mr Samuel's evidence: he had no particular expertise in valuation; he didn't have a particularly good grasp of the accounting standards dealing with goodwill; his choice of comparable companies was not bona fide, and he rejected the 11.7% profit margin for Advanced Sciences "and instead chose a figure which was almost twice that and so it necessarily, as a matter of mathematics, doubled the amount that would be attributable to the distribution agreement". Conclusion on consideration Expert evidence 194 I do not accept the evidence of Mr Selak that as at 4 September 1998 the market value of the Distribution Asset was nil. In both his reports he identified only two rights conferred on Orica by the Distribution Agreement – the right to produce and distribute Zeneca products in the territory and the opportunity to facilitate the transfer or sale of the pharmaceutical business. I agree with Mr Samuel that Mr Selak has failed to attribute any value to Orica's right to receive a termination payment under the Distribution Agreement. Under Article 14.1 Orica had the right to receive a payment equal to the market value of the Business on a going concern basis in the event that a termination notice was given. Mr Samuel was correct in describing this as an important right, because it precluded Zeneca from withdrawing Orica's other two rights under the Distribution Agreement without compensation. 195 Nor do I agree with Mr Selak's conclusion in his second report that "it is not possible to separately identify the Distribution Asset as a separately identifiable intangible asset", with the result that he is unable to attribute value to the asset under the assumptions in Valuation two. This conclusion is attributed in part to his understanding of AASB 138. In par 43 he sets out the Standard's criteria for an asset to be classified as an intangible asset and be allocated a fair value. In par 44 he paraphrases par 12 of AASB 138 by saying an asset meets the identifiability criterion if it (a) is capable of being separated or divided from the entity and sold, transferred etc, or (b) arises from contractual or other legal rights. In par 45 he says that "where there is uncertainty as to whether an asset constitutes an identifiable intangible asset, no separate value should be attributed to that asset". 196 Mr Samuel's report contains a more thorough review of the relevant provisions of AASB 138. He first points out that the Standard is not strictly applicable to the valuation of the Distribution Agreement because it is not carried out for the purpose of recognising an asset in financial reports in accordance with Part 2M.3 of the Corporations Act 1974 (Cth). See par Aus 1.1(a)‑(c) of AASB 138. However, Mr Samuel agrees that the Standard provides authoritative guidance as to issues relevant to the identification and valuation of intangibles, and would typically be referred to by accountants performing valuations. Mr Samuel draws attention to AASB 138 par 38, quoted at [151], that uncertainty in the valuation of intangibles acquired in business combinations enters into the measurement of the asset's fair value, rather than demonstrates an inability to measure fair value reliably. 197 Mr Samuel's valuation methodology is unexceptionable. In his second report Mr Selak described a range of valuation methodologies that can be used to assess the market value of intangible assets. He said that broadly speaking the value of an intangible is determined by the expected future earnings or cash flow (that is future economic benefits) that can be obtained from the use or sale of the asset. On the Economic Value or Income Approach, the value of the intangible is the present value of the expected economic income to be earned from it. This approach has two components: · identification, separation and quantification of the earnings or cash flows attributable to the asset, and · capitalisation of those earnings or discounting the cash flows. Mr Selak said that many different methodologies based on the income approach may be used to provide an indication of value for an intangible. They include "methods that estimate the value of the intangible asset as a residual from the value of the overall business enterprise value". 198 Thus, in Mr Selak's opinion, the approach adopted by Mr Samuel was a common valuation methodology – estimating the value of the intangible asset as a residual from the value of the overall value of the relevant business: par 77(c)(ii) of Mr Samuel's report and par 40 (page 11) of Mr Selak's first report. 199 In cross‑examination, it was put to Mr Selak that Mr Samuel's report contained a "reasoned judgment" as to his opinion of the value of the Distribution Asset. His response was that "Mr Samuel's judgment is significantly flawed and I don't accept that it's reasoned". Mr Selak had the opportunity to explain why Mr Samuel's judgment based on a common valuation methodology recognised by Mr Selak was significantly flawed, but did not explain why or otherwise particularise his opinion. 200 I have found the first part of Mr Samuel's report persuasive. It is a methodical, well‑reasoned refutation of Mr Selak's contention that Orica's rights under the Distribution Agreement had no real value as at 4 September 1998. In particular I accept his treatment of Mr Selak's three reasons for not applying valuation methodologies to the Distribution Asset. I refer to the discussion at [154] to [159] above. 201 Mr Samuel's discussion of and disagreement with Mr Selak's attribution of a nil value to Orica's rights under the Distribution Agreement was directed to the latter's "Valuation two", which involved the assumption that those rights were transferred by the Sale Agreement. On the view I have taken, the rights were transferred under the Assignment Deed. I do not think this makes any difference to Mr Samuel's opinion as to whether the rights were able to be valued and were valuable. That is shown by his general disagreement with both of Mr Selak's reports: the first assuming Orica's rights were disposed of under the Assignment Deed and the second assuming they were disposed of under the Sale Agreement. In both cases Mr Selak's reasons were the same, and Mr Samuel's reasons for disagreeing with the nil valuations were the same. 202 Counsel for Orica claimed that Mr Samuel "didn't have any particular expertise in valuation". However, there was no formal objection to the admissibility of his report on the ground that he lacked specialised knowledge based on his training, study or experience (s 79 of the Evidence Act 1995 (Cth)). Nor was there an application that the report should be excluded under s 135. In any event I am satisfied that he has the required degree of expertise. His report discloses his experience as including: (a) over 20 years as a Chartered Accountant including the analysis of financial statements and accounting records for the purposes of audit, due diligence, valuation or disputes; (b) the valuation of numerous businesses and intellectual property assets conducted since 1991; (c) joint responsibility for launching PwC's Intellectual Asset Management Group in 1998. This group provided services and thought leadership in the identification, management and extraction of value from intellectual assets, including intangible assets. He was a member of the group between 1998 and 2004; (d) assessment of damages arising from lost profits or loss of value in numerous engagements since 1991, including intellectual property disputes. 203 Mr Samuel made no attempt to inflate his valuation expertise. In cross‑examination he said that although he had carried out valuations every year for the last 16 or 17 years, "I don't go to market as a valuer, per se". 204 My confidence in Mr Samuel's valuation expertise was confirmed by his report, which as I have said was methodical and well‑reasoned. It was further confirmed by his response to cross‑examination which was at times robust. Despite being called a cheat, he retained his composure and, as appears from [166]‑[173] above, repelled the attacks upon his work. 205 Once Mr Selak's opinion that Orica's rights are not capable of valuation or are of no value is put aside, I am left with Mr Samuel's opinion, which I accept, that the rights are capable of valuation and are not worthless. In the second part of his report he attributes to them a value of $250.5 million as at 4 September 1998. 206 I accept the propriety of Mr Samuel's choice of "comparable" companies. There was no suggestion that Amrad was not comparable. Its principal activities were the development and commercialisation of pharmaceutical programs and projects, the supply of pharmaceutical products, and the manufacture and supply of diagnostic products and biotechnology reagents. It was not suggested that it had a retail division. 207 Faulding's principal activities were the manufacture and distribution of health and personal care products. Until 1997 it was a wholesaler. In that year it launched a retail business. That business did not contribute to profit in the 1997/1998 financial year. It was in my view comparable to Orica. 208 Despite its retail division, Sigma's 1998/1999 Annual Report describes its principal activities as the manufacture and wholesale distribution of pharmaceutical and allied products and the provision of financial and other services to retail pharmacists. 209 Despite API's retail activities, its 1998 Annual Report describes its principal activities as the wholesale distribution of pharmaceutical and allied products and the provision of finance and other services to retail pharmacists. 210 I accept Mr Samuel's evidence that he chose the companies in question because they were the most comparable to Orica that he could find, and that those with retail divisions and that were customers of Orica Australia did not cease to be comparable for those reasons. As he said, there will always be differences between the company being valued and the "comparables". With the exception of CSL, which he initially considered and discarded, it was not put to Mr Samuel that there were companies he could have chosen that were more comparable to Orica than the ones he selected. 211 I accept Mr Samuel's reason for putting CSL aside, namely that it had a significantly larger investment in plant and machinery ($188 million) than Orica ($3 million). 212 I accept Mr Samuel's evidence as to the need to exclude from his calculation of Orica's net profit margin the Advanced Sciences net profit margin of 11.7% on the ground that to include it would be comparing Orica partly with itself. I also accept his reason for not using the 11.7% in calculating the value of the Distribution Agreement, namely that that percentage comprised more than just the pharmaceuticals business he was seeking to value. 213 I also accept Mr Samuel's evidence that he used the most recent actual results that were available to him. I entirely acquit him of "cheating" by not using Orica's 1996/97 net profit margin (23.6%). He disclosed the 23.6% in his report (see [171] above) and in his evidence explained why he did not use it. 214 The result of the foregoing is that I accept Mr Samuel's valuation of Orica's rights under the Distribution Agreement. Conclusion 215 I have found that the Assignment Deed itself effected the disposal of the Distribution Asset, that the Assignment Deed constituted a novation, and that there was accordingly a deemed disposal under s 160M(3)(b) – a cancellation or discharge. Orica contends that s 160ZD(1)(b) is applicable to the disposal, and that it received valuable consideration for the disposal, namely the release it obtained from Zeneca. The Commissioner agrees that if the Assignment Deed alone effected the disposal, and the consideration for the disposal was the release, s 160ZD(1)(b) applies, and the consideration for the disposal is the market value of the release. In my view the consideration for the disposal was the release given by Zeneca. Although the Commissioner did not concede that this was the case, he did not point to any other matter that could constitute consideration moving from Zeneca. 216 Orica adduced no evidence of the market value of the release at the time of the disposal of the Distribution Asset. On that basis the Commissioner contended that Orica had failed to discharge the onus of showing the assessment is excessive. 217 By clause 2.2 of the Assignment Deed Zeneca released Orica from all its obligations and liabilities under the Distribution Agreement and all actions, claims or proceedings that it may have against Orica under or in respect of that agreement. The release did not include any rights of Zeneca accrued or arising before the date of completion under the Sale Agreement. Having regard to the amount of the assessment, I accept Orica's submissions that even though there is no direct evidence of the market value of the release, I should infer that it is considerably less than $264,700,000. 218 The Commissioner submits that even if it is to be inferred that the market value of the release was less than the amount of the assessment, s 160ZD(2)(c) applied to deem the market value of the Distribution Asset to be the consideration. It was not I think in dispute that a consideration derived under s 160ZD(1)(b) could be displaced by operation of subs (2)(c). Subsection (1) is expressed to be "Subject to this Part", and the terms of subs (2)(c) – "but for this paragraph", appear to refer back to a consideration ascertained under subs (1). Because the Assignment Deed effected a novation, the arm's length component of par (c) is not applicable, and the provision can be rendered in simplified form as applying to a taxpayer who has disposed of an asset and: the amount that would, but for this paragraph, be taken to be the consideration received by the taxpayer in respect of the disposal is greater or less than the market value of the asset at the time of the disposal … In those circumstances: the taxpayer shall be deemed to have received as consideration in respect of the disposal an amount equal to the market value of the asset at the time of the disposal. 219 Paragraph (c) will apply if the consideration received by Orica (the market value of the release) was less than the market value of the Distribution Asset. The market value of the Distribution Asset is $250.5 million. I have inferred that the market value of the release is much less than $264.7 million. I also infer that it is less than $250.5 million. Accordingly, the consideration in respect of the disposal is deemed to be $250.5 million. 220 Orica's only answer to par (c) (on the assumption that the Assignment Deed effected a novation), was that as at 4 September 1998 the market value of the Distribution Asset was nil. I have rejected that contention. CONCLUSION ON FOURTH DISPOSAL 221 Section 14ZZO of the Taxation Administration Act imposed on Orica the burden of proving that the assessment is excessive. The task for the taxpayer on an appeal is to show that the amount of money for which tax is levied by a notice of assessment exceeds the actual substantive liability of the taxpayer: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 and Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 467 at 479. The parties are agreed that the issue is whether the net capital gain amount of $264,540,764, or some lesser amount, was properly included in Orica's assessable income pursuant to s 160ZO of the Act. A lesser capital gain amount of $250.5 million should have been included in the assessable income, namely a net capital gain of $250,340,764, being $250.5 million minus the cost base used by the Commissioner of $159,236. Orica has shown, by reference to Mr Samuel's report, that the amended assessment of 11 October 2004 is excessive. As I have said at [192], Orica adduced no evidence of the cost base of the Distribution Asset. PENALTY 222 The Commissioner has imposed additional tax pursuant to s 226K of the 1936 Act on the basis that it was not reasonably arguable that Orica was not required to include in the calculation of its assessable income a capital gain of $264,540,764. Section 226K provided: Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in relation to a matter or identical matters in a particular way; and (c) the shortfall or part, as the case may be, so caused exceeded whichever is the higher of: (i) $10,000; or (ii) 1% of the taxpayer's return tax for that year; and (d) when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct; the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part. 223 Section 222C(a) provided: the correctness of the treatment of the application of a law … is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied … it would be concluded that what is argued for is about as likely as not correct. The word "authority" is defined to include the relevant tax Act, court, tribunal or board of review decisions or public rulings. 224 In Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at [108] (Walstern)Hill J, in a series of propositions approved by later Full Courts (Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at [108] and Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468 at [67]), explained the operation of s 226K. It is sufficient to set out proposition 7: … the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved. 225 Section 226K(d) requires the "not reasonably arguable" question to be answered "when the statement was made". In this case that was when the income tax return was lodged on 30 July 1999. There is no direct evidence of "the way in which the application of the law was treated" at that time. The earliest expression of Orica's understanding of its position that is in evidence is its letter to Mr Selak of 19 August 2004 asking him for his opinion of the market value of Orica's rights under the Distribution Agreement on 4 September 1998. The first six pages recite the background facts and exhibit the basic documents, including the Distribution Agreement, notice of termination, side letter of 3 September 1998, Sale Agreement and Deed of Assignment. The letter then noted some matters "that may be relevant" to the opinion sought: (a) Orica could not assign its rights without the consent of Zeneca except to a wholly‑owned affiliate. (b) Although the Distribution Agreement had been extended so that it was operative on 4 September 1998, the effect of the side letter of 3 September 1998 was that if the sale of the Business to Zeneca including the assignment of the Distribution Agreement had not been completed by 5:00 pm on 8 September 1998, the Distribution Agreement would terminate then, without prejudice to any accrued rights under it, including those under clause 14. (c) The fact that the Distribution Agreement was not assignable without Zeneca's consent, save to a wholly owned affiliate had a number of effects: (i) as a matter of practical reality, the Distribution Agreement was not assignable to any third party, but only to a third party to which Zeneca had consented; (ii) even if it is assumed that Zeneca would have consented, any acquiring party, including Zeneca BV, would still hold an asset with restrictions on its assignability; (iii) even if Orica had assigned the Distribution Agreement to an affiliate, the affiliate would hold an asset with restrictions on its assignability. (d) If there had been no agreed extension of the Distribution Agreement, Orica through its affiliate, Orica Australia, in accordance with Article 14, would have transferred the Business to Zeneca for an amount, the calculation of which had been contractually pre‑determined (but yet to be confirmed by the English High Court). In that instance, no amount could have been attributable to the Distribution Agreement because that agreement would not have been in existence and therefore could not have been assigned. (e) Because the sale proceeded, the Distribution Agreement was not terminated before it was assigned. No rights to payment for the business ever accrued to Orica under Article 14 and so such right was or could be assigned by Orica to Zeneca. (f) Zeneca BV did not pay any amount for the assignment of the Distribution Agreement. The rights under the Distribution Agreement which were sold by Orica were rights which Orica would not have been able to exploit in the future. As at 4 September 1998, absent a sale of the Business to a Zeneca associate, the Distribution Agreement had 4 days to run. Orica could not derive any benefit from the rights of distribution for 4 days because Orica had not carry on the Business. 226 Mr Selak provided a draft valuation on 5 October 2004. In some respects it differed from his first report (2006). However, the essential reasoning is the same as that described at [137] to [140] above, and its conclusions are the same. 227 In its initial Statement of Facts Issues and Contentions (31 October 2005) Orica contended: (a) by reason of the Assignment Deed its rights under the Distribution Agreement (the Distribution Asset) were disposed of; (b) it received no consideration for the disposal of the Distribution Asset; (c) by reason of s 160ZD(2) it is deemed to have received as consideration in respect of the disposal an amount equal to the market value of that asset at the time of the disposal; (d) by reason of the service of the notice of termination, the agreement reached between Orica and Zeneca on 3 September 1998, the entry into the Sale Agreement and the terms of the Distribution Agreement, the market value of the Distribution Asset on 4 September 1998 was nil, or a nominal amount, or alternatively some amount less than $264,540,764. 228 It can be seen from the above that Orica's case as outlined in its letter to Mr Selak of 19 August 2004, as reflected in his draft report and as cast in terms of Part IIIA in the Statement of Facts Issues and Contentions, was essentially that presented at trial in reliance on Mr Selak's reports. That is that Orica's rights under the Distribution Agreement as at 4 September 1998 were valueless. 229 Attributing to Orica as at 30 July 1999 the understanding of its case described above as "the way in which the application of the law was treated" for the purposes of s 226K(d), the question in Walstern terms is whether Orica's contention that the Distribution Asset was valueless on 4 September 1998 based on Mr Selak's reasoning, though ultimately held to be wrong, is nevertheless "about" as likely to be correct as the view that ultimately prevailed in the sense that reasonable minds could differ as which view was correct. A question of judgment is involved, and in my view the view that has ultimately prevailed is so clearly superior to Orica's that it cannot be said that its view is "about" as likely to be correct as the one that prevailed. 230 The imposition of the penalty was based on a tax shortfall of $95,234,675. On the view I have taken it was somewhat less than that. The parties are agreed that the penalty issue is whether additional tax by way of penalty of $23,808,668.78, or some lesser amount, was properly payable by Orica pursuant to s 226K. The lesser amount of $22,545,000 is properly payable on that account. I certify that the preceding two hundred and thirty (230) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 10 March 2010