In the marriage of DUNBAR, W.J. and DUNBAR, M.

(1987) FLC ¶91-846

Other publishers' citations: (1987) 11 FamLR 901

Full Court of the Family Court of Australia at Sydney. 

Judgment delivered 12 October 1987. 

Before: Evatt C.J., Ellis and Kay JJ.

Evatt C.J., Ellis and Kay JJ.: This is an appeal from orders made by her Honour Renaud J. on 20 March 1987 in contested applications for alteration of property interests. The parties whom I shall continue to call husband and wife, commenced to cohabit in 1967. The husband had been born on 27 December 1933 and the wife on 19 April 1937. They were married on 5 June 1970 and ceased to cohabit on 24 April 1981. Their marriage was dissolved by a decree which became absolute on 1 July 1982. The wife has a son who was born in about 1957. He was formally adopted by the husband during the course of the marriage. 

Both of the parties brought assets into the marriage, but it is unnecessary to detail those assets for the purposes of this judgment. On 30 June 1972 the husband and wife purchased three parcels of land at Nelligen in the State of New South Wales. They consisted of 2.5 hectares on the Clyde River, south of the Nelligen bridge (referred to as ``the resort land''), 48 hectares north of the Nelligen bridge (``the rural block'') and a small residential block close to the resort land (``the small block''). There were some difficulties with part of the title to the land which had been held by the vendor pursuant to a possessory title and the parties were unable to obtain, at the time of purchase, clear title to the land. The purchase price was $10,000 for all three lots. 

After the purchase the parties decided to develop the properties as a holiday resort, in particular the resort land. By December 1974 five motel units had been completed on the resort land and a resort was opened by them. In addition to the motel units the parties acquired small aluminium hire boats with outboard motors. 

From the commencement of the enterprise the parties traded as equal partners. On 30 June 1977 their son was included in the partnership returns. The son and his wife came to live at the resort in about September 1980. 

In late 1978 the parties purchased a river boat called ``Eucumbene II'' on which they conducted river cruises. They further developed the resort and eventually had on it eleven units together with other improvements such as a swimming pool and tennis court. They later constructed a second ferry known as the ``Clyde Princess''. They financed the resort and the acquisition of the various assets by borrowings mainly from banks. 

In February 1981 the wife went to Queensland and left the husband at the resort. Shortly thereafter the husband left the property and the wife returned to the property to manage it together with her son. Since that time until the time of the hearing before her Honour and indeed the time of the appeal before us, the wife and her son have operated the partnership business consisting of letting of the units and small hire boats and the operation of ferry cruises. It was common ground that as at the date of separation the husband and the wife had made equal contributions both financial and non-financial to the acquisition, conservation and improvement of their assets and to the welfare of the family. 

As at the date of separation the parties owned the three parcels of land, some cash savings, the ferry ``Eucumbene II'', the ferry ``Clyde Princess'' and the goodwill of the partnership business. Their debts totalled approximately $232,000 at that time. 

The partnership accounts disclose that as at 30 June 1980 the husband and the wife each had capital accounts in credit to the value of $36,792 whilst the son's capital account was in debit to the sum of $131. These sums appear to have reflected the initial capital introduction into the partnership by the husband and the wife together with adjustments made from time to time for management salaries paid to the husband and the wife. 

To reflect the position that the husband had taken with him upon separation some $15,000 of partnership savings, the 1981 trading performance and drawings, the partnership capital accounts were adjusted as at 30 June 1981 to show the husband then having a capital account in credit in the sum of $19,547 whilst the wife's capital account was in credit $34,387 and the son's capital account was in debit in the sum of $2,614. 

Following separation but in breach of some interlocutory orders of the Court, the wife and the son sold the ferry ``Eucumbene II'' in December 1981 for $45,000, but her Honour found that those moneys were applied towards reduction of the debts of the partnership and that no adjustment should be made in respect of the moneys received from that sale. 

The issues that confronted her Honour were firstly to ascertain the value of the parties' assets as at the date of hearing, to make such adjustments as were appropriate to the parties' capital accounts having regard to the various drawings of each of the partners in the years between 1981 and 1986, to decide which of the husband and the wife should be allowed to purchase the other's interest in the partnership and in determining what the appropriate purchase price for such an interest should be, to make such adjustments pursuant to the provisions of sec. 79 as her Honour deemed appropriate having regard to the contribution the parties had made to the conservation or improvement of the property since separation, and having regard to the matters generally set out in sec. 79(4)(e) of the Family Law Act incorporating the provisions of sec. 75 of the Act. Both the husband and the wife contended they should be entitled to purchase the other's interest in the various properties. 

As a result of litigation between the parties and their son in the Supreme Court of New South Wales, it was agreed that the son owned one-third of the assets of the partnership, subject of course to any adjustments to be made in the partners' capital accounts. 

The orders that her Honour made that were the subject of the appeal and cross-appeal to the Full Court required: 

(1) The wife to pay to the husband by way of property settlement the sum of $92,960, such sum to be paid within three months of 20 March 1987 or such further time as the parties may agree upon in writing. 
(2) That in consideration of the aforementioned payment the husband shall simultaneously do all acts and sign all documents necessary to transfer to the wife the whole of his right, title and interest in the partnership of which the husband, the wife and the son are partners including all the assets of that partnership, except those referred to in Order (13) thereof. 
(3) That in the event that the wife shall fail to comply with Order (1) then the husband shall pay to the wife by way of property settlement the sum of $99,375 such sum to be paid within a further six weeks after the wife's said failure or such further time as the parties may agree upon in writing. 
(4) An order requiring the wife to transfer to the husband her interest in the partnership upon him buying her out. 
(5) If the husband could not raise the moneys then the wife was given a further four weeks to buy the husband out together with interest at the rate of 15 percent. 
(6) Consequential orders to sign the documents if the wife raised the money pursuant to para. (5). 
(7) An order empowering the Registrar to sign necessary documents if the parties defaulted in complying with their obligations under the orders. 
(8) Interim orders requiring the wife to indemnify the husband against the liabilities of the partnership and restraining her from dealing with or disposing of the assets of the partnership pending moneys being raised to buy out either the husband or the wife. 
(9) & (10) Indemnities being given by the partner acquiring the interests in the partnership to the outgoing partner. 
(11) A restraint on the husband from interfering with the operation of the partnership business pending the carrying out of the orders. 
(12) A restraint on the son from disposing of the assets of the partnership pending the carrying out of the orders. 
(13) The transfer of certain specified chattels from the wife to the husband. 

In arriving at the orders that her Honour made her Honour fixed values to the various items in dispute (which I shall refer to shortly), made adjustments to the parties' capital accounts and then determined that there should be a further adjustment in the wife's favour of $25,000 to reflect her contribution towards the conservation and improvement of the property from the date of separation. Finally she gave the wife first option to purchase the husband's interest in the property. 

The husband's appeal against the orders made can comfortably be categorised under three heads. Firstly he disputed the valuations arrived at by her Honour in respect of some of the assets. Secondly he disputed the allowance by her Honour of the sum of $25,000 by way of adjustment of the interest of the parties in the property and finally he disputed the finding by her Honour that the wife should be given first option to purchase the husband's interest in the property. 

Given that the wife had remained on the property for over five years after separation and had continued to manage the business together with her son and given that there was friction between the husband and his son, the choice of her Honour in selecting the wife to be given the first option to purchase the interests of her spouse in the partnership property was well within her Honour's discretion and in my view nothing has been shown by counsel for the husband which would lead this Court to properly interfere with that choice. 

The evidence as to valuation of the various assets came from two sources. On behalf of the husband a valuer of considerable experience was called and gave evidence. He valued the assets as follows: 

                                               $   
      The resort land, its                         
        improvements and the resort                
        business                            400,000
      The rural land                         80,000
      The small block                         9,000
      The "Clyde Princess" and its       
        associated cruise business          100,000
                                           --------
      Total:                               $589,000
                                           --------

On behalf of the wife another valuer of considerable experience was called. He valued the assets as: 

                                              $   
      Resort land and rural block at       150,000
      The "Clyde Princess" and          
        ferry cruise business at            75,000
      The small block at                     9,000
                                          --------
      Total:                              $234,000
                                          --------

Her Honour accepted the value of $9,000 for the small block and $100,000 for the value of the ``Clyde Princess'' and the associated ferry business and those findings were not challenged by counsel for the wife before us. 

The husband's valuer's evidence was that the rural block could be seen as an entirely separate entity from the resort land and that it had a value of $80,000. The wife's valuer took the view that the rural land and the resort block were intimately interwoven and could not be valued separately. Her Honour rejected the wife's valuer's evidence in respect of that matter and found that the rural block had a separate value of $80,000. Counsel for the wife did not challenge that finding before us. 

The husband's valuer's method of valuing the resort land and the associated business was based on a capitalisation of the profitability of the business as he saw it to which he added $90,000 for the value of the residence occupied by the wife on the premises. In a report prepared in September 1982 the husband's valuer calculated gross rentals and returns from the resort land in the business at $75,000 from which he deducted a number of outgoings set out in his report to show a net profit of $30,000. It is perhaps important to note that no allowance was made in the outgoings for any management expenses relating to the said property, nor was any allowance made for the cost of financing the purchase. He did however make an allowance of $3,500 per annum for depreciation on furniture and a further allowance of $1,500 for general depreciation. 

The husband's valuer then capitalised the profit as he had calculated it at 12% giving a capital value to the business of $249,900 to which he added the value of the residence of $90,000 making a total of $339,900 as at September 1982. By a second report dated 2 October 1984 the husband's valuer reviewed his findings and concluded that upon issue of a qualified title to the resort land, the expected value of the holiday complex would be $400,000. In his viva voce evidence at the trial he stated: 

``It would be my opinion at the moment that the most conservative value that could be placed upon the subject properties would be the holiday complex at $400,000, the rural holding at $80,000, the home site at $9,000 and the ferry business at $100,000... well what I mean is a value that can be proved in Court due to comparable sales and from the evidence available. I believe that the properties could be put on the market place at slightly higher than these figures subject to obtaining certain information from Council and I believe, in essence, the market may pay more than those figures at present.'' 

As a method of cross checking his valuation arrived at by means of capitalisation of profits the husband's valuer also approached the matter on a summation basis concluding as follows: 

                       $                   
      Land                          100,000
      Power                          17,000
      Water                          30,000
      Road                           12,000
      Pool                           12,000
      Septic                         15,000
      Residences                     90,000
      Units                         180,000
      Laundry                        10,000
      Others                          5,000
      Tennis court/landscaping       10,000
                                   --------
      Total:                       $481,000
                                   --------

He also looked at the feasibility of strata-titling the property and concluded that it may produce $400,000 net profit in that manner. 

The husband's valuer's evidence was that the business by itself would not be a saleable commodity and that it had to be sold together with the land and improvements as a package. 

In arriving at a value of $150,000 for the resort land, the rural block and the resort business, the wife's valuer said: 

``I find this particular valuation appraisal task to be among the most difficult that I personally have encountered in more than thirty years for several reasons, none of which have anything to do with the people as such. It is merely that first and foremost there is a parcel of land for which is not, to my mind, secure title, that was improved over time and its particular use is directed towards a business operation that includes the use of the land, the use of the buildings, the use of plant and equipment, on-site and off-site for the purpose of earning income and in my opinion that use of that land, together with the improvements and ancillaries attached thereto, is strictly related to the conduct of a business operation. So that the question of value of it in terms of a value added to land, if you wish to put it that way, is what is the business worth, having in mind that the title to it has not been secured in the sense that, so far as I am aware, the only primary application that has been made in respect of that land, and this is only by advice that I have received as a result of enquiries, was made in 1979 or thereabouts and not pursued... 

Now the value of any business operation is the present value of future earnings, in other words — profit. Now the fact that this particular operation cannot expand beyond its current limit for reasons other than the lack of money, it cannot be expanded — it is therefore restricted to its ability to earn income from up, until very recently — ten units — now eleven units — because one of the family has moved in with the other so they now utilise that, so it earns income from that source and the only other source of income that it has is the amount of money that can be earned from ferry business itself, which is owned and operated on and from this site.'' 

The wife's valuer then gave evidence that in any event an appropriate capitalisation rate from profits of a business said to involve the risks that were involved in this business would be between 25% and 33⅓%, but as there were effectively no profits to be shown in this business it was inappropriate to approach the matter on a capitalisation basis. He concluded with the view that the whole of the land was over-capitalised and the business could not really be sold as a going concern. 

In the course of her reasons for judgment her Honour said of the husband's valuer's evidence: 

``The husband's valuer gave a figure of $30,000 as the `net realisation' which I take to be the profit on a somewhat mysterious figure of `$75,000 gross return'. This seems to have been derived from a combination of the figures obtained from the balance sheets together with occupancy rates calculated partly on the basis of figures obtained from the wife, and partly on `industry standards'. This gave a value to the business of $249,900. For a reason which was never explained $90,000, the value of the residence, was added to give a total of $339,900; this was presumably rounded to the $340,000 which was the total value he placed on the resort in his first report. The increase in the evaluation [sic] to $400,000 by the date of the hearing was not explained on the basis of any more up-to-date balance sheets to which he does not mention having had access. 

In his oral evidence the husband's valuer explained that he cross-checked his first figure by relying on the `summation method', attributing a value to the land and the individual improvements. His calculation by this method gave a total of $481,000. Why this figure could be said to have justified the first by cross-checking remains a mystery to me, particularly when the first figure was inflated by the addition of the value of the residence, which does not seem to belong to the first method at all. Moreover, it seems to me that the two methods are properly used to ascertain the values of different types of asset; they are not two ways of arriving at a valuation of the same thing. Despite his claim that he did not attribute any value to the goodwill or the business as distinct from the land and improvements, the capitalisation of profits is usually described as `valuing the goodwill'. To arrive at the total value of the business, therefore, he should have added these two amounts (but not double counting the residence), not claimed to be using one to check the other. This would have given a total value of $249,900 plus $481,000 — $730,900. Perhaps realising the unacceptability of this figure the husband's valuer concluded his report by saying: 

`From various methods of assessment, allowances are made by deduction or adjustment of capitalisation rate to determine market value.' 

Because market value was precisely what he set out to calculate by the `various methods', the confession that unspecified deductions or adjustments have to be made to determine it makes it look as if it had in fact been predetermined by a method he did not reveal. He did make reference to the possibility of strata titling the property but this was too speculative to be of assistance. He also referred to `comparable sales' of motels in the Batemans Bay area, this being the method characteristically used for the valuation of residential real estate; he admitted however that none of the sales was truly comparable, as the holiday complex by virtue of its location and the unit type (as opposed to motel type) accommodation is difficult to compare with other businesses offering accommodation.''

It seems that her Honour added the sum arrived at by the valuer as the value of the property by means of the capitalisation of the profits to the sum arrived at by valuation of the property by means of the summation method. 

The summation method of valuation is used merely as a cross-check to see that the capitalisation of profits method is not wildly out of kilter with the actual cost of creating the assets necessary to run the business. It is quite inappropriate to add the two together as her Honour did. 

Her Honour then discussed the wife's valuer's evidence and concluded that if one was to apply his capitalisation rate of between 25% and 33⅓% to the husband's valuer's profit figure of $30,000 the value of the ``goodwill'' would be between $120,000 and $90,000. Whilst her Honour's mathematics may be correct, applying those capitalisation rates to the husband's valuer's profit would have given a value for the ``business'' of between $120,000 and $90,000 and not the value of the ``goodwill''. 

It is purely speculative to determine what valuation the husband's valuer would have placed on the value of the resort land and the business had he concluded that the appropriate rates or profits were those suggested by the wife's valuer as there would have then been a significant chasm between the summation method used as a cross-check and the capitalisation method. 

Her Honour concluded, correctly in my view, that in determining the profitability of the business it was appropriate to leave out interest payments made on moneys borrowed to acquire the business (see Lenehan v. Lenehan (1987) FLC ¶91-814). She appears to have accepted the wife's valuer's observation that: 

``A purchaser may expect to pay wages to someone to run the business and the income, even without interest deducted, would not be sufficient to allow that.'' 

Her Honour then went on to say: 

``However, I do not think it follows from that, as the wife's valuer concluded that there is `no profit'. As he pointed out a family might choose to operate the business, as is presently the case, taking minimal drawings and sharing the small profit, larger if interest is not being paid on borrowed money. It is obviously true, however, that the number of buyers for such a business may not be great, and that its value would be less than the value of a business of which the profits were greater.'' 

To arrive at the value of the resort land and the business, given the conflicting evidence of the two valuers, her Honour said: 

``I am left therefore with the two figures of $150,000 and $400,000 for the resort. Since I have found that the two parcels should be valued as separate entities, I am left wondering how the wife's valuer would have valued that on its own. As he said that the figures the husband's valuer gave for individual improvements were not unreasonable, and as these included the land at $100,000 and the residence at $90,000, I propose to treat the wife's valuer's valuation of those assets at $190,000 retaining as much as I can of his approach in the light of the other findings I have made. 

Although the solution is somewhat arbitrary, I propose to take the mean of those two valuations, namely $295,000. In the particular area of the valuation of the resort and the motel business, I find the short-comings of each of the valuations to be such that I cannot fully accept either. I find the total value of the partnership business therefore to be: 

                                      $   
      The resort land and                 
        motel business             295,000
      Clyde Princess and ferry            
        business                   100,000
      Rural block                   80,000
      Small block                    9,000
                                  --------
      Total:                      $484,000
                                  --------

From this, the current liabilities must be deducted, and the partners' capital accounts taken into account.''

Her Honour then found that the total debts were $260,882.26 (a figure which was not challenged by counsel for either party) and she concluded that the net value of the partnership business before considering the capital accounts was in round figures $223,118. She went on to say: 

``Each partner is entitled to one-third, or $74,372.67. There remains the issue of the capital accounts, to which I will return.'' 

On the question of ascertaining the value of an asset the Full Court in Lenehan and Lenehan (1987) FLC ¶91-814 at p. 76,142: 

``A trial Judge, as part of his ultimate responsibility under sec. 79 or otherwise, is normally required to determine a number of issues. Some of those issues may properly attract the evidence of expert witnesses. In appropriate circumstances their opinions are admissible to assist in the determination of such an issue. It is the responsibility of the trial Judge to take into account the opinions of such witnesses; however the ultimate duty of the Judge is to determine the issue on the whole of the material before him including such opinions. The expert evidence is called to enable the Judge to form his own independent judgment on the matter by the application of the appropriate principles. 

In a case such as this that responsibility is not performed by simply selecting a mean or average between the rival opinions of the experts. Expert evidence on an issue of the value of real estate is but a particular example of this problem, rendered in many cases more acute because of the circumstance that the witnesses, as part of their expertise, give evidence upon that very issue, namely the value to be ascribed to the particular item of property; but the duty of the trial Judge remains the same. 

It appears to us that the views of Dixon C.J. and Kitto J. in Commonwealth v. Milledge (1953) 90 C.L.R. 157 at p. 160 et seq. are apposite. In that case, which was a compulsory acquisition case, six valuers gave evidence as to the value of the relevant land, each valuation being different. 

The trial Judge's approach to that and the criticisms of it by the members of the High Court are summarised in the following passage at pp. 160-161: 

`The learned judge formed a confident opinion that all six of these valuers were men of experience and integrity, and he drew no distinction amongst them in regard to soundness of judgment or otherwise. Since they differed so widely, not only in result but in approach and in choice of material, the task presented to a judge to whom they all seemed equally reliable was one which could not be satisfactorily performed in any other way than by making a critical selection of the most helpful facts from the mass of information provided by the evidence, and applying correct principles in the light of the selected material. Unfortunately it does not appear from the judgment which his Honour delivered that he dealt with the matter in this way. He did not make any choice amongst the proved sales of other lands for the purpose of finding a basis for any reasoning of his own. Indeed he expressed the view, although he does not seem to have acted upon it, that the true basis for computation is not that to be found in one comparable sale, but in the average of a number, the larger the number the more acceptable the result. `Such a statistical average,' he added, `will tend to eliminate the effect of the individual peculiarities (if any) of those in the transaction.' We do not find it possible to give countenance to this view. Perhaps it would be safer to work from an average of several prices than from one price if the sales were substantially contemporaneous sales of parcels of land which were identical in all material respects, but it must be rarely, if ever, that a process of averaging sale prices can be anything but fallacious. 
What his Honour appears to have done is to put aside the evidence of sales — he said he could not pick a sale or sales that satisfied him as closely comparable — and to take, as a figure from which to work, the average of the valuations of the six expert witnesses.' 

Their Honours then proceeded to reject this approach saying: 

`We think that a valuation made on this basis ought not to be sustained. Even if all the witnesses had used the same material as one another, and had approached the problem in the same way, the average of the values they respectively reached would most likely be a figure which each of them would consider to be wrong. But what is worse is that it would be a figure not arrived at by the application by the court of the established principles of valuation' (p. 161). 

Their Honours went on to reiterate the correct approach which must be applied in relation to a valuation issue, namely: 

`by a commonsense endeavour, after consideration of all the material before the court, to fix a sum satisfactory to the mind of the court as representing the value contained in the land'... (p. 162). 

Their Honours went on to say: 

`The problem was not to eliminate the idiosyncrasies of the individual opinions; it was to form an estimate which really satisfied his Honour's mind as being the value of the property to the plaintiff on the material date' (p. 162). 

See also as an example of this approach Brewarrana Pty. Ltd. v. Commissioner of Highways (No. 2) (1973) 6 S.A.S.R. 541 and the cases referred to in each of the above cases.''

Just as the Full Court in Lenehan's case concluded that the trial Judge erred in selecting the mean of the two valuations which were before him, it is our view that her Honour erred in selecting the valuation which the husband's valuer had placed on the resort land and the value which her Honour concluded the wife's valuer might have placed on the resort land had he approached his task differently from the manner in which he did. Whilst it was clearly open to her Honour to reject portions of the evidence of both of the valuers and ascribe her own conclusions as to the appropriate valuation of the resort land and business, it was in our view inappropriate for her to do it by what she described as the ``somewhat arbitrary'' method of taking the mean between the two valuations. 

In Brewarrana Pty. Ltd. v. Commissioner of Highways (No. 2) (1973) 6 S.A.S.R. 541, at pp. 544-545 Wells J. said: 

``What is the true function and duty of a Land and Valuation Court when it is confronted with irreconcilable differences between the opinions of expert valuers — not only in result, but in reasoning and precept, too — for the resolution of which the evidence as a whole provides little or no assistance? 

The question just formulated rests on the assumption that it is to the evidence that, at all events in the first instance, the Court ought, and is entitled, to have recourse, in order to resolve the differences of opinion. I have always taken the view, and shall continue to do so unless directed by a superior Court to do otherwise, that the creation of a special Division in a Court to deal with a particular class of case is not intended to turn the presiding judge into an independent expert in the very field in which testimony will be tendered to him that he will be called on to evaluate. It would never occur to a trial judge who, for example, had heard many cases in which expert medical evidence had been tendered, to choose between the conflicting testimony of two medical witnesses by applying to it his own medical knowledge. That knowledge would, no doubt, have been of inestimable value in understanding the testimony; in suggesting questions; in comparing one set of opinions with another. But it would be quite contrary to principle, I apprehend, for the judge to bring a third set of opinions into the arena, and to supplement or condemn testimony properly adduced before him in reliance on his own theoretical grasp of principles and precepts of medicine. The judge may have proper and rational grounds for preferring one expert to another; such grounds are well-known and accepted. He may, by a consideration of the whole of the evidence, expert and non-expert, be able to conclude that one opinion is more likely to be sound than another or others, even though both or all opinions are given by men of integrity, learning and skill, and are supported, within self-ordained limits, by impeccable reasoning. 

He may, because he has been persuaded by the evidence of one expert, find that there is a fatal flaw in the reasoning of another. It may appear that, having regard to the whole of the evidence, certain factual assumptions, and hence the opinions based on those assumptions, are not well founded. But the judge cannot arrogate to himself the role of an expert who is, in any respect, primus inter pares. In the Land and Valuation Court I seek to be informed and, as best I can, to evaluate; I do not sit to use such acquired knowledge of valuation principles as I have acquired in order to confirm or to condemn. I must act on the evidence, and if any of it is, in any wise, defective, incomplete or irreconcilable then I must make such use as I can of whatever other evidentiary material is available to correct, complete or reconcile.'' 

Counsel for the husband has urged us to accept the evidence in the valuation put forward by the husband's valuer. He has pointed out that her Honour has accepted the evidence of the husband's valuer in preference to the evidence of the wife's valuer on almost all aspects of the valuation evidence, and in the circumstances we should accept the husband's valuer's evidence. 

In Spencer v. the Commonwealth (1907) 5 C.L.R. 418 at pp. 442-443 Isaacs J. quoted with approval the following passage from the Advice of the Privy Council in Secretary of State for Foreign Affairs v. Charlesworth Pilling & Co. (1901) A.C. 373 at p. 391: 

```It is quite true that in all valuations, judicial or other, there must be room for inferences and inclinations of opinion which, being more or less conjectual, are difficult to reduce to exact reasoning or to explain to others. Everyone who has gone through the process is aware of this lack of demonstrative proof in his own mind, and knows that every expert witness called before him has had his own set of conjectures, of more or less weight according to his experience and personal sagacity. In such an inquiry as the present, relating to subjects abounding with uncertainties and on which there is little experience, there is more than ordinary room for such guesswork; and it would be very unfair to require an exact exposition of reasons for the conclusions arrived at.''' 

This passage has been repeatedly relied upon since then: see, for example, Minister of State for Home Affairs v. Rostron & Ors (1914) 18 C.L.R. 634 at pp. 637-638; Fisher v. Deputy Federal Commissioner of Land Tax (N.S.W.) (1915) 20 C.L.R. 242 at p. 251; The Minister v. N.S.W. Aerated Water and Confectionery Co. Ltd. (1916) 22 C.L.R. 56 at p. 68; F.C. of T. v. Westgarth (1950) 81 C.L.R. 396 at p. 411. 

My difficulty in adopting that approach is that the husband's valuer has not simply sought to rely on his general expertise as a valuer in looking at the assets and giving an opinion as to their valuation, but has sought to justify his opinion by a particular method based on capitalisation of projected profits. Her Honour found that the profits for the resort business for the year ending 30 June 1986 exclusive of interest and exclusive of management costs amounted to approximately $11,500. The 1985 profit and loss account showed income for the holiday units at $74,754 and expenses exclusive of interest paid at $70,245 showing a profit of approximately $4,500. 

Similarly for the year ending 30 June 1984 the income from the holiday units was shown at $79,583 and the expenses at $78,499 showing a profit of approximately $1,100. 

It is difficult to see how on those figures one could accept the husband's valuer's evidence of projected profits of $30,000 per annum and in particular accept those profits bearing in mind that no allowance had been made by the husband's valuer for the retention of a manager on the premises. 

M.S. Adamson in his book The Valuation of Company Shares and Businesses (7th ed.) at p. 45 cites H.E. Seed on Goodwill as a Business Asset (1937) p. 99,155 as follows: 

``Since, then, the purchaser of goodwill must perforce be the purchaser of a business, it is the price he is to pay for the business as a whole which primarily concerns him, rather than the price he is to pay for the goodwill as such. The matter in which the purchaser is particularly interested is the rate of the return, which the profits which he expects the business to earn (after providing for his own remuneration if he is to work in the business) will yield on the price he is paying.'' 

Again at p. 89 Adamson says: 

``Where the subject of valuation is a business owned by a private individual or firm... it may be that the remuneration charged for proprietors' services had been more or less than is reasonably adequate.... In either of these events, the valuer should excise the amounts charged and substitute what he considers to be a reasonable recompense for the services rendered. True profit can only be determined after deduction of the cost of all management and labour on a commercial basis rather than an expedient basis adopted to suit particular individuals.'' 

Whilst it would appear that this business had demonstrated few profits after making allowances for appropriate managerial costs, that does not mean that it has no value beyond the real estate which it owns. We think her Honour was quite correct when she observed as follows: 

``However, I do not think that it follows from that, as the wife's valuer concluded, that there is `no profit'. As he pointed out a family might choose to operate the business, as is presently the case, taking minimal drawings and sharing the small profit, larger if interest is not being paid on borrowed money. It is obviously true, however, that the number of buyers for such a business may not be great, and that its value would be less than the value of a business of which the profits were greater.'' 

As Mason J. observed in Mallet v. Mallet (1984) FLC ¶91-507 at p. 79,121: 

``There is always the risk that in examining methods of valuation attention is diverted from the object of the exercise, namely the ascertainment of the real value of the shares, to the means by which the object is to be achieved.'' 

The object of any valuation exercise is to establish what a willing but not anxious purchaser would be prepared to pay and a willing but not anxious seller would be prepared to accept (see Spencer v. The Commonwealth of Australia (1907) 5 C.L.R. 418). 

We find unfortunately that we are unable to accept the submissions of counsel for the appellant husband that the evidence of the husband's valuer should be accepted in its totality. As the husband's valuer placed his valuation of the resort, land and business entirely on his capitalisation of profits and as we find that we are unable to accept his conclusions as to the future profitability of the business, we have reluctantly come to the conclusion that this matter must be returned for a re-trial, and that we are unable on a careful reading of all of the evidence to make any conclusions which we could safely rely upon to place a valuation on the resort land and the business as at the present time. 

There are further aspects of her Honour's conclusions that it is necessary to examine. 

Depreciation

Counsel for the husband submitted that in order to ascertain the true profitability of the partnership all reference to depreciation of the fixed assets of the partnerships should be ignored. In our view that is an inappropriate approach. Whilst it is true that the rates of depreciation are chosen in the books of accounts by reference to a formula approved for income tax purposes, it may be an inappropriate gauge having regard to the actual change in value of the fixed assets. The wear and tear on the assets and other loss of value cannot be entirely ignored in a business such as this one. Appropriate allowance has to be made for wear and tear and replacement of the various items such as bed linen, and other assorted furniture as well as the hire boats and the like. 

Adamson at p. 94 says: 

``The question of depreciation was considered in [McCathie v. The Federal Commissioner of Taxation (1944) 69 C.L.R. 1]... Williams J. approved the adjustment of amounts deducted in excess of those claimed in the income tax returns by treating the excess as additional profits. He pointed out that such excess depreciation was a reserve which could be brought into revenue again and made available for dividends... It is submitted that it is not inconsistent to state a general rule that adjustments... should be determined according to whether the book figures are unduly excessive or inadequate... There will be many instances... where the rates of depreciation accepted by the Commissioner of Taxation for the purposes of income tax assessment will be found to be a convenient measure of adequacy.'' 

Treatment of partners' capital accounts

Her Honour approached the task of determining the proper present adjustments to be made to the partners' capital accounts, but by offsetting against the accounts of the wife and the son, various partnership expenditures which had been claimed as outgoings of the partnership but which on a careful analysis were really outgoings of a private nature from which the wife and the son had benefited and from which the husband had gained no benefit. 

Having gone through the exercise of making adjustment to the capital accounts to take into account drawings made by the remaining working partners, personal expenditure attributed to partnership outgoings, and undeclared income, her Honour concluded: 

``As at the date of the trial, the capital accounts were as follows: 

      Wife owed the partnership          $10,255  
      The son owed the partnership       $47,388  
      Husband was owed by                         
        partnership                      $43,586''

Her Honour's method of treating the capital accounts was to divide the net assets of the partnership as she had found them ($223,118) by 3, and then to add to the husband's ⅓ share of $74,372.67 his capital account of $43,586. 

In our view her Honour's treatment of the capital accounts and the division of the partnership assets was inappropriate. P.E. Joske in his Law of Partnership in Australia and New Zealand (2nd ed.) at p. 134 stated: 

``In the ordinary course of accounting between partners on dissolution of partnership, each partner receives his contributed capital before any distribution of surplus is made.'' 

In order to make a proper division of the $223,118 as between the three partners, her Honour should have notionally treated the partners' debit accounts as being debts due to the partnership, and then distributed from the notional assets of the partnership so calculated the husband's capital account which stood in credit and then divided the balance by 3 to determine the partners' entitlements. In this case there would need to be: 

      notionally added to the          $223,118
      the amount owed by the wife       $10,255
      the amount owed by the son        $47,388
                                      ---------
                                       $280,761
                                      ---------

From that sum there should have been allowed to the husband his capital account of $43,586, leaving a balance of $237,175 to be distributed between the three partners, the husband's ⅓ share thereof being $79,058.33. Thus the husband's ⅓ entitlement to the partnership assets together with his capital account was $122,644 compared with her Honour's method of calculation which gave the husband $74,372.67, plus his capital account $43,586 — being a total of $117,958.67. 

      The wife's interest in the net assets of the                       
      partnership should have been calculated by her                     
      Honour at:                                               $79,058.33
        less her capital account of                            $10,255.00
                                                              -----------
                                                               $68,803.33
                                                              -----------

        The son's entitlement to the assets of the                       
      partnership would thus be:                               $79,058.34
        less capital account                                   $47,388.00
                                                              -----------
                                                               $31,670.34
                                                              -----------

Thus the net assets which her Honour found to be $223,118 should have on her Honour's figures, been shared between the three partners: 

      Husband                                                 $122,644.33
      Wife                                                     $68,803.33
      Son                                                      $31,670.34
                                                             ------------
                                                              $223,118.00
                                                             ------------

It is not our intention that the trial Judge at the remitted hearing of this action should be bound in any way by her Honour's adjustments of the capital accounts. We have set out the above figures merely to demonstrate the appropriate manner in which capital accounts should be treated in determining the partners' entitlements to the net assets on a pure accounting basis without regard to sec. 79 factors. 

It will be necessary at the retrial of the action for a cross-accounting in regard to the parties' loan accounts to be calculated in order to determine the balance which is left to divide between the parties; as the matter is being remitted it is unnecessary to go into detail working out on these accounts. 

The orders of the Court will be: 

1. That the orders made on 20 March 1987 be set aside and the matter remitted for rehearing by a single Judge. 
2. Pursuant to sec. 6 of the Federal Proceedings (Costs) Act the respondent be granted a Certificate stating that in the opinion of the Court it would be appropriate for the Attorney-General to authorise a payment under the Act to the respondent in respect of the costs incurred by the respondent in relation to the appeal. 
3. Pursuant to sec. 9 of the Federal Proceedings (Costs) Act the appellant be granted a Certificate stating that in the opinion of the Court it would be appropriate for the Attorney-General to authorise a payment under the Act to the appellant in respect of the costs incurred by the appellant in relation to the appeal.