The High Court, by a 4:3 majority, has held that payments made under agreements for the purchase of soft drink concentrate, which formed part of a wider bottling and distribution arrangement, were not “consideration for” the use of intellectual property.
Therefore, they did not include any component that was a royalty for taxation purposes: FC of T v PepsiCo Inc & Anor 2025 ATC ¶20-969; [2025] HCA 30 (PepsiCo Inc). In doing so, the court yet again considered the proper meaning of the term “consideration” for revenue law purposes, albeit in this instance in the context of royalty withholding tax, not stamp duty.
The majority expressed a test for identifying when a payment obligation under a sale agreement that is part of a wide commercial arrangement is “consideration for” the transfer of the property bargained for under the agreement, or for something else. In Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) [1958] HCA 22 at [4] (Davis Investments) Dixon CJ referred to this task as “really one of characterisation”.
A question is whether the majority’s approach to the characterisation task is different in any material way to the tests articulated by the court in the stamp duty cases — Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28 (Archibald Howie), Davis Investments, Chief Commissioner of State Revenue (NSW) v Dick Smith Electronics Holdings Pty Ltd 2005 ATC 4052; [2005] HCA 3 (Dick Smith) and Commissioner of State Revenue (Vic) v Lend Lease Developments Pty Ltd 2014 ATC ¶20-478; [2014] HCA 51 (Lend Lease).
Table of contents
- Consideration in duties law
- The PepsiCo Inc case
- The majority decision
- The minority decision
- Implications for stamp duties law
Consideration in duties law
Transfer duty is typically assessed on the “consideration for” a dutiable transaction. This is because the consideration for dutiable property is generally accepted by revenue authorities as an indication of the unencumbered value of that property in an arm’s length transaction. The word “consideration” has been said to have “multiple meanings and shades of meaning” (PepsiCo Inc, at [160]), and different meanings in different contexts (Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68, per Gummow J at [103]). However, in the context of stamp duties legislation, "consideration" is the money or value passing which “moves” the conveyance or transfer of property, and not simply a quid pro quo between an offered promise and acceptance as it is under the modern law of contract (Archibald Howie). This wider meaning of “consideration”, rather than the narrower contractual concept of the term, was followed by the court in Davis Investments, Dick Smith and Lend Lease.
Commonly, there may not be a material difference between what moves a conveyance and consideration in the contractual sense. In St Helens Farm (ACT) Pty Ltd v FC of T 79 ATC 4161 at 4175, the Supreme Court of NSW (Sheppard J) said:
“It is no doubt right to say that ‘consideration’ is used in the legislation in the conveyancing sense and not the sense in which it is used in simple contract; cf. Archibald Howie Pty. Limited v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 at pp. 152-3 and 157-9. But in my opinion that means no more, when one is speaking of a conveyance, than that the consideration which moves the conveyance is the money which the conveyee has agreed to pay under the pre-existing contract.”
See also Davis Investments in which the consideration that the High Court majority held moved a transfer of shares was solely the purchase price that was stipulated in the contract for sale.
However, there are also transactions in which the identification of what constitutes the thing that “moves” a transfer of property is a more complex exercise. Take, for example, a transaction in which a purchaser of dutiable property promises to pay (or procure to be paid) to the vendor amounts or benefits that are in addition to a stated “purchase price”. In such cases, the question arises whether these additional payments or benefits passing to the vendor are “for” or attributable to the transfer of the dutiable property or to something else. Finding the correct answer is not always easy, particularly where a dutiable transaction is part of a broad commercial arrangement that includes other transactions to which separate payment or other obligations attach as a matter of contract.
The test for carrying out this characterisation exercise was said by the High Court majority in Dick Smith to involve looking to what was “received by the vendors” so as to move the transfer of the dutiable property to the purchaser as stipulated in the agreement. In this case, the vendors of shares had bargained for several promises on the part of the purchaser to bring about a stipulated payment in the vendors’ favour. The “consideration” which moved the share transfer was “the performance by the purchaser of the several promises recorded in the agreement” in consequence of which the vendors “received” the stipulated sum. This approach was followed by the High Court in Lend Lease.
Characterisation problems can also arise in a transaction for the sale of dutiable and non-dutiable property where the stated purchase price has not been clearly apportioned between the different classes of property being acquired, or where it is expressed to be payment for non-dutiable property only. In such cases, the question is whether the stated purchase price is in part consideration “for” the dutiable property, and in part “for” the non-dutiable property passing to the purchaser. These transactions require identification of what property has been “moved” by a payment or assumption of obligation — is that thing an item of dutiable property or is it non-dutiable property?
The PepsiCo Inc case
The latter type of scenario was considered in PepsiCo Inc. In this case, under a “composite” agreement between the parties called the Bottler, Seller and Distributor Agreement, PepsiCo Inc (one of the taxpayers) appointed Schweppes Australia Pty Ltd (SAPL) as its exclusive bottler and distributor in Australia of certain PepsiCo branded beverages. The suite of agreements included an Exclusive Bottling Agreement (EBA) between PepsiCo Inc and SAPL under which SAPL was granted a licence to use intellectual property of PepsiCo Inc to enable it to carry out its distribution and other obligations to PepsiCo Inc. No monetary consideration was expressed to be payable by SAPL for the grant of the licence. PepsiCo Inc agreed under the EBA to sell or to procure a related entity to sell to SAPL units of concentrate required for SAPL to manufacture the branded drinks at an agreed price per unit subject to indexation. PepsiCo Inc nominated a related entity, PepsiCo Beverage Singapore Pty Ltd (PBS), to be the seller of concentrate, and SAPL paid PBS the agreed price for the concentrate in accordance with invoices issued for each supply of concentrate. An issue, among others, was whether the payments under invoices for the supply of concentrate were in part consideration for the licensing of intellectual property, and thus a “royalty” as defined in s 6(1) of ITAA 1936.
On this issue, a majority of the Full Federal Court (PepsiCo Inc v FC of T 2024 ATC ¶20-918; [2024] FCAFC 86, per Perram and Jackman JJ), overturning the decision at first instance, held that it remained bound to apply the finding of the majority in Davis Investments – ie that the consideration for a transfer of property effected under an agreement for its sale is the price the parties have stipulated for that sale. The majority did not agree with the Commissioner’s submission that the Davis Investments principle was qualified by Dick Smith and Lend Lease, as they considered those latter cases to be distinguishable. This was because they concerned agreements where multiple promises for the payment of money or for the performance of other obligations constituted, in aggregate, the consideration for the transfer of shares (in Dick Smith) and parcels of land (in Lend Lease). In contrast, the majority construed the buyer’s promise under the contracts to pay for concentrate as a promise for the transfer of those goods, and for nothing else. Adopting orthodox principles of contractual interpretation, their Honours considered that the price paid for concentrate was not part of what moved the right to use the intellectual property, and thus not in part a royalty.
The majority decision
On appeal by the Commissioner to the High Court, the majority (Gordon, Edelman, Steward and Gleeson JJ) allowed the appeal, holding that the particular payments were solely for concentrate and not made in part as “consideration for” the rights of SAPL to use the PepsiCo Inc intellectual property. The payments therefore did not include a “royalty” as defined. In reaching that conclusion, the majority made statements to the following effect:
- Whether the payments for concentrate were in part “consideration for” the right to use intellectual property turned on the proper construction of the whole agreement between the parties, of which the PepsiCo EBA formed part, that is, “what the parties had agreed, ascertained objectively” (citing Mount Bruce Mining (2015) 256 CLR 104 at 116 [46]–[47]) (at [159]).
- Another meaning of consideration, which applied in circumstances broader than modern contracts, such as a conveyance or the making of a payment, was a “moving cause” or a “material cause” for the payment. In this broader, alternative sense, the consideration for a payment was the “purpose” of the payment or conveyance or, citing Redland City Council v Kozik [2024] HCA 7; (2024) 98 ALJR 544 at 579 [183]; 418 ALR 1 at 44 (Redland City Council), the “basis” or “condition” upon which the payment was made (at [160]).
- Following Archibald Howie, the phrase “consideration for” in the definition of “royalty” in s 6(1) of the ITAA 1936 was unlikely to be confined to whether there was a quid pro quo in the making of an offer and acceptance of that offer. The phrase extended to the “basis”, “purpose”, or “condition” for a transaction by which one party confers a benefit upon another (at [161]).
- Whether a payment was a basis, purpose or condition “for” the conferral of the use of intellectual property would always depend upon what the parties had agreed. In that respect, the word “for” connoted a “causal connection” between the making of a promise to pay or confer some other benefit, and the receipt of a right to use the intellectual property. That connection would be satisfied when the giving of the promise could be seen to be the basis for, or a condition of, that receipt (at [161]).
- The particular contracts between seller and buyer, at arm’s length, were for the sale and purchase of concentrate. The contractual price paid for the concentrate was the price paid for goods sold and delivered. The Commissioner had not disputed that it was an arm's length price, or a fair price, or that it was not disproportionately high. When the price paid for goods had those characteristics, it could not be said that a part of the price paid for those goods was payment of a royalty for the use of intellectual property applied to products partly made with those goods (at [162] and [174]).
- The decisions of the High Court in Dick Smith and Lend Lease required no contrary conclusion to the above. Both cases were “State Duties Act cases” in which a purchaser had made a number of contractually distinct promises to pay its vendor, and the issue for determination was the correct identification of the consideration for those sales. In each case, it was held that the consideration which moved the transfer of property by the vendor to the purchaser was the performance, by the purchaser, of all the promises it had given to pay the vendor. Both cases turned upon “an application of a State Duties Act to their particular facts. And neither case involved looking outside the terms of the arrangements and the transactions involved”, as the Commissioner had contended (at [170]–[172]).
- The consideration given by SAPL for the licence to use the PepsiCo intellectual property was not the payments it made to PBS for the supply of concentrate. The “basis” or “condition” for those payments was only the receipt of the concentrate. But the basis or condition that moved the licence to use the PepsiCo intellectual property was the performance of the various monetary and non-monetary promises by SAPL under the “composite” Bottler, Seller and Distributor Agreement. Contrary to the approach taken in Dick Smith and Lend Lease, it was the Commissioner who had sought to isolate the performance of one of the promises given by SAPL, and had wrongly sought to allocate the performance of that promise as the consideration for all that SAPL obtained. Dick Smith and Lend Lease “did not support such a narrow approach” (at [173]).
The minority decision
The minority (Gageler CJ, Jagot and Beech-Jones JJ) agreed with the dissenting judgment of Colvin J in the Full Federal Court. They stated (at [35]) that the Full Court majority’s correct acceptance that the intellectual property licences were a “necessary element” of the agreements to distribute the beverages meant that SAPL’s promise to pay for what was said in the EBA to be the concentrate, must have been, in part, what moved the grant of the intellectual property licence to SAPL that was “equally necessary for SAPL to make and sell the branded drinks”. It followed that the payments for concentrate were in part a royalty. Adopting the principles enunciated by the court in Lend Lease, the minority considered that the components comprising “the complete view” of the EBA were “interlocking and indivisible”, and that to characterise the price payable for concentrate as consideration only for the sale of concentrate “purportedly subdivides the indivisible”. This process of characterisation of a payment involved identifying if the transaction was “single, integrated and indivisible or not, having regard to its text, structure and purpose” (at [59]). If it was, it could not thereafter be divided into its component parts for the purpose of identifying any royalty component.
Implications for stamp duties law
A view may be taken that the High Court majority in PepsiCo Inc has laid down a test for characterising “consideration” quite different to that enunciated by the court in the stamp duty cases. This test is one taken from the law of unjust enrichment that looks to the “basis, purpose, or condition” for a transaction by which one party confers a benefit upon another, and a “causal connection” between a promise and a receipt. It is not one that looks at what is “received by the vendor” so as to “move” a transfer or conveyance (Dick Smith) under a “single, integrated and indivisible” agreement (Lend Lease). Interestingly, the majority made no reference at all to Davis Investments, a case which the majority in the Full Federal Court felt compelled to follow. Their Honours appeared to downplay the relevance of Dick Smith and Lend Lease, by noting that both cases turned upon “an application of a State Duties Act to their particular facts” (at [172]).
On the other hand, the majority did cite the dictum of Dixon J in Archibald Howie with approval, and appeared to equate the “moving” notion with the “basis, purpose or condition” concept from Redland City Council when it said (at [160]):
“But another meaning of consideration which applied in circumstances broader than modern contracts, such as a conveyance or the making of a payment, was a ‘moving cause’ or a ‘material cause’ for the payment (Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (1987) at 424–426, 485). In this broader, alternative sense, the "consideration" for a payment was the "purpose" of the payment or conveyance, or the "basis" or ‘condition’ upon which it is made (Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 556-557 [102]-[103], quoting Martin v Andrews (1856) 7 El and Bl 1 at 4 [119 ER 1148 at 1149]).”
[emphasis added]
If indeed the High Court majority in PepsiCo Inc has laid down a new characterisation test for consideration, it may be one that is confined to the statutory context at issue and not intended to apply to “State Duties Act cases”. However, it may be observed, in the final analysis, the apparently dissimilar approaches of the court in PepsiCo Inc and the duty cases to the meaning of consideration, although expressed in distinct terms and dealing with different factual scenarios and statutory contexts, may well produce the same result. Each requires, upon an objective construction of the entire transfer agreement, the finding of a clear nexus (or “causal connection”) between the giving (or performance) of promises (typically being the receipt by the vendor of agreed amounts), and the receipt by the purchaser of the property bargained for in that agreement. If such a nexus is found, the amount or amounts so received by the vendor will be the amount that has “moved” (or is a “basis, purpose or condition” for) the transfer of the property and, thus, the consideration for that property.
