Box v Federal Commissioner of Taxation

[1952] HCA 61

86 CLR 387

Churchman v. Churchman (1) in another part of his judgment (2),

I think that she would be guilty of connivance; but in my opinion

' corrupt intention would mean in this case that the wife showed by her conduct that she willingly consented to the continuance of the adultery

The present is a case where a husband did choose to acquiesce in and encourage the continuance of an adulterous connection which his wife had formed; he did SO out of indifference coupled with considerations of advantage.

But the connivance of the appellant was directed to an existing situation. It could not, as connivance, be related back to the inception of the adultery SO as retroactively to connive at that adultery. In this view we agree with the Full Court of the Supreme Court. But clearly enough the whole conduct of the appellant amounted to condonation of all past adultery of his wife with Osmond. He did not know when the adulterous character of the relationship began. But he knew that it had been going on for some time. He indicated quite plainly, both by his acquiescence in its continuance and by his cohabitation with his wife while it continued, that he waived it as a matrimonial offence.

The situation was indeed an unusual one. The appellant, SO to speak, tacitly conferred upon his wife a licence of a general character to commit adultery with Osmond and at the same time maintained her in her full position as his wife. He condoned the past adultery, of which he had a sufficient knowledge although he may not have been completely aware of the duration of the adulterous relationship. He showed, however, that he was in- different altogether to the precise facts and was agreeable neverthe- less to continue to share his wife with Osmond. While in this way condoning her past adultery with him, the appellant connived at future adultery with Osmond.

In his dissenting judgment in Beard v. Beard (3) Vaisey J. appears to consider that the consequence of that decision must be that in English law absolute condonation cannot take place, no matter if both parties resolve that it shall be absolute and unconditional SO as to render the offence incapable of being revived.

If the reason why a condoned matrimonial offence may be revived by a subsequent offence is that condonation is subject to an implied condition, it ought to follow that the implication may be excluded by a sufficient communication of a positive intention to do SO.

(3) (1946) P. 8, at pp. 30, 31. (2) (1945) P., at p. 52.

86 CLR 38886 CLR 389

concerned only with the period up to the commencement of pro- ceedings, 29th August 1949.

The rule expressed as "once connivance always connivance ,,

if it ever did. The force of connivance may

Richmond v. Richmond 2; Monahan e appellant's connivance had not spent his wife parted. The course he took was by a

ire to rescue his wife from her guilty relations .ond a it was likely to do anything but that. It was du sunply t. the appellant's having formed a determination to take advantage of his wife's adultery in order to get rid of her and obtain a divorce.

It follows that the adultery committed by the appellant's wife during the period from the beginning of 1947 to the commencement of the proceedings was connived at and that the continuance of cohabitation with his wife and the connivance at her adultery with Osmond precluded him from reliance upon the acts of adultery prior to that period.

Ligertwood J. dealt with the suit, after it was remitted to him by the Full Court of the Supreme Court for further hearing, on the footing of unreasonable delay. A difficulty in SO dealing with the case lies in the fact that until the proceedings were commenced and the defendant and co-defendant admitted the commission of adultery in 1941 and onwards the appellant had never been in a position to prove adultery during the period before he began to connive at the relationship.

But in any case we think for the reasons we have given the dismissal of the suit was right.

The appeal must be dismissed.

Appeal dismissed with costs. Solicitor for the appellant, E. F. Skewes, Naracoorte, by Genders, Wilson &Bray.

Solicitors for the respondent Gale, Elliott, Elliott &Elliott.

2(1952) 1 All E.R. 838. 86 CLR 390

Breweries Ltd Ltd 7IPR 581

OF AUSTRALIA. [HIGH COURT OF AUSTRALIA.] BOX

THE COMMISSIONER OF TAXATION Income Tax (Cth.)-Assessable income-Premium on lease-Consideration "for

or in connexion with any goodwill attached to, or connected with, and "-Sale of business-Goodwill-Lease of business premises-Consideration for restrictive personal covenant entered into by vendor of business-Income Tax Assessment Act 1936-1946 (No. 27 of 1936-No. 6 of 1946), ss. 83 (1), 84 (1).

Section 83 (1) of the Income Tax Assessment Act 1936-1946 provides that premium means, inter alia, " any consideration nexion with any goodwill lease of which is granted assigned or surrendered ". Section 84 (1) provides, inter alia, that: " The assessable income of a taxpayer shall include, in addi- tion to rent, any premium received by him in the year of income."

A had carried on a bakery business, called the Elphin Bakery, in premises which he owned. Of the bread baked on the premises 6% was sold over the counter and 94% was sold on the delivery round. The premises were not situated in a good shopping area. A held an exclusive personal licence to sell bread in the zone in which the premises were situated. This licence was granted under the Bread Industry (Tasmania) Order made on 13th July 1942 under the provisions of the National Security (General) Regulations.

A sold his business and granted a lease of the premises to the purchaser for a term of ten years. At the same time in consideration of the sum of £1,750, A agreed with the purchaser that during the term of the lease (or if the purchaser should exercise an option to purchase contained in the lease, for a period of ten years from the expiration of the notice exercising such option) he would not carry on the business of a baker or sell bread within a stated area, nor would he permit his own name or the business style of Elphin Bakery" to be used for such purposes within the same

Held (1) by Dixon C.J., Williams, Fullagar and Kitto JJ. that the sum of £1,750 was consideration paid in connection with the goodwill of the business; (2) by the whole Court that the goodwill was not 'attached to or connected

86 CLR 391

with " the land the subject of the lease. Goodwill can only be said to be connected with land, however wide the meaning of the words " connected with " in S. 83, if the site forms a real element in the value of the business,

SO that the land has an added value because the purchaser of the business must purchase the land or obtain a lease and continue to carry on the business there, at least for a time, if he is to retain the real value of what he has bought.

APPEAL under the Income Tax and Social Services Contribution

Assessment Act 1936-1950. Albert Oliver Box carried on business as a baker for a number of years prior to 1946 in premises which he owned at 86 Elphin Road, Launceston, Tasmania. The bread was baked on the premises and about 6% of it was sold over the counter at the shop, the remaining 94% being sold on the delivery round. In February 1946 the said Albert Oliver Box entered into an agree- ment with John Henry Parkinson, which agreement was expressed as being subject to the consent of the Treasurer of the Common- wealth of Australia being obtained to a lease between the same parties of the premises at 86 Elphin Road, together with an adjoining block of land, for a period of ten years.

The agreement SO far as is relevant provided as follows that the vendor agrees to sell and the purchaser agrees to purchase the vendor's plant and utensils used by him in connection with the business of a baker pastrycook and confectioner carried on by the vendor at No. 86 Elphin Road, Launceston, aforesaid and known as the "Elphin Bakery including the goods and chattels men- tioned in the schedule hereto. The price for such plant and utensils shall be the sum of £1,250, whereof One hundred pounds shall be paid as a deposit and the balance on completion (2) that in consideration of the purchaser agreeing to purchase the said plant and utensils the vendor agrees that the purchaser shall be entitled to the goodwil of the said business together with pro- prietary recipes (if any) used in connection therewith and shall be entitled to the zone or area allotted to the vendor under the Bread Industry (Tasmania) Order made under the National Security (General) Regulations; (3) that in consideration of the further sum of £1,750 to be paid by the purchaser to the vendor on com- pletion the vendor agrees with the purchaser that during the term of the said lease or any extension thereof (and if the purchaser shall exercise the option of purchase contained in the said lease for a period of ten years from the expiration of the notice exercising such option) he the vendor his executors administrators or assigns will not directly or indirectly or in partnership with any person or persons whomsoever as a member of a public or proprietary

86 CLR 392

company as agent manager or employee of any person partnership or company carry on or assist in carrying on whether for remunera- tion or not the trade or business of a baker pastrycook or con- fectioner or sell bread smallgoods or confectionery on commission or as agent for any other person or persons or import bread small- goods or confectionery for sale within a radius of five miles from the Launceston Post Office nor will he permit the name of the vendor or the business style of Elphin Bakery' to be used for such pur- pose for or by any person carrying on or about to carry on or who might hereafter carry on such business within the same area and will not at any time during the said period knowingly do or cause to be done any act or thing whereby the purchaser may be injured or damaged in the conduct of his trade or business.

By an indenture made on 21st February 1946 Box leased the premises at No. 86 Elphin Road, together with the adjoining vacant allotment of land to Parkinson for a term of ten years from 10th March 1946 at a monthly rent of £21 13s. 4d. The indenture contained the following covenant by the lessee " (h) That during the operation of this lease or any extension thereof the Lessee will use and occupy the said premises as a shop for carrying on the trade or business of a baker and pastrycook and will at all times during this lease or any extension thereof keep the shop on the demised premises open for the sale of bread and smallgoods and will not permit or suffer the said premises or any part thereof to be closed or remain unused or permit or suffer the same to be used for any purpose other than as aforesaid without the consent in writing of the Owner ".

And the lessor covenanted inter alia as follows with the lessee (c) That if during the month of September One thousand nine hundred and fifty five the Lessee shall give to the Owner notice in writing that he desires to purchase the freehold of the demised premises (including the said allotment of land) for Two thousand four hundred pounds and shall pay the amount of the said purchase money and all arrears of rent and contribution towards rates up to the expiration of this lease then the Owner will at such expiration transfer or convey the freehold to the Lessee."

The Commissioner of Taxation regarded the sum of £1,750 referred to in cl. 3 of the agreement (supra) as being income and accordingly included it in Box's assessable income for the year ended 30th June 1946. The Commissioner of Taxation regarded the said sum as income on the basis that it was a premium within the meaning of S. 84 of the Income Tax Assessment Act 1936-1946.

86 CLR 393

On 5th April 1950 the taxpayer requested that the decision of the Commissioner of Taxation might be referred to a Board of Review, and it was SO referred. On 23rd July 1951 the Common- wealth Board of Review No. 2 by a majority confirmed the assessment 1. From this decision the appellant brought the present appeal to the High Court of Australia. On 24th July 1952 the matter came before Dixon C.J., who directed that the appeal be argued before a Full Court of the High Court of Australia pursuant to S. 18 of the Judiciary Act 1903-1950.

N. L. Campbell and R. L. Franklin, for the appellant. 1. Payment for the covenant in restraint of trade is not con- nected with the goodwill. Even without the covenant the pur- chaser could prevent the vendor from calling on his customers, as this would be soliciting. [He referred to Californian Oil Products Ltd. v. Federal Commissioner of Taxation 2 Trego v. Hunt 3 West London Syndicate Ltd. v. The Commissioners of Inland Revenue 4; Commissioners of Inland Revenue v. The Duke of Westminster 5.] 2. Alternatively, this is a "lease sold together with other assets (s. 83 (2) ). But sub-s. (2) cannot be applied, and SO the commissioner cannot apportion any sum to the goodwill. 3. Alternatively, the normal goodwill is superseded by the right given to the appellant under the Bread Industries (Tasmania) Order of 13th July 1942 made under the National Security (General) Regulations.

R. L. Franklin. The goodwill was not "attached to or con- nected with the land". The English decisions on "local" or "personal" goodwill are not directly relevant to this question: Federal Commissioner of Taxation v. Williamson 6. Goodwill is what induces people to deal with a particular business. Com- missioners of Inland Revenue v. Muller &Co.'s Margarine, Ltd. 7; Churton v. Douglas 8; Trego v. Hunt 9. "Attached to or connected with is a compound expression which must be read as a whole. It requires a certain logical nexus to be established between the goodwill and the land. "Connected with is reduced in scope by its association with 'attached to [He referred to Strong &Co., of Romsey Ltd. v. Woodifield (Surveyor of Taxes) 10; Holy Law South Broughton Burial Board v. Failsworth Urban

1(1950) 2 T.B.R.D. 30. 2(1934) 52 C.L.R. 28. 3(1896) A.C. 7, at p. 17. 4(1898) 2 Q.B. 507, at p. 524. 5(1936) A.C. 1, at pp. 19-21. 6(1943) 67 C.L.R. 561, at p. 564. 7(1901) A.C. 217. 8(1859) Johns 174 [70 E.R. 385]. 9(1896) A.C. 7. 10(1906) A.C. 448. 86 CLR 394

District Council 1. In re Hedley; Ex parte Board of Trade 2 Whiteman Smith Motor Co. Ltd. v. Chaptin 3.] The meaning of this expression and the proper test is Do people deal with this business because it is situated where it it, or for some other reason ? This is consistent with the four cases decided previously on this section, viz.: Federal Commissioner of Taxation v. Williamson 4; Phillips v. Federal Commissioner of Taxation 5; Commissioner of Taxation v. Watson 6; Commissioner of Taxation v. Smith 7.

[WILLIAMS J. Phillip's Case (5) and Watson's Case (6) seem to be irreconcilable.]

As to the test of resorting to the premises ": (a) If there is no such resort, the goodwill cannot be attached to the land. (b) If there is such resort the goodwill is prima facie attached, but not if it can be shown that it attaches to: (i) personal skill or reputa- tion; (ii) personal property-e.g., a trade mark or patent (iii) a legal or de-facto monopoly, in the area: Rosehill Racecourse Co. V. Commissioner of Stamp Duties (New South Wales) 8. In the present case customers did not deal with the business because it was situated where it was. There was no true resort to the premises. The Board of Review wrongly applied the test of resort to the premises.

J. B. Tait Q.C. (with him B. J. Dunn), for the respondent. Goodwill may be site goodwill, business goodwill, or personal goodwill. The former is attached to the premises in the narrowest sense. It is an added value which the land has because of its site. Business goodwill is that which would remain if the business were moved to any other place in a reasonably convenient locality. Personal goodwill depends on the particular character of the proprietor of the business. Site goodwill would be taxable without special provision, as it is reflected in an increase in the rental value of the land In Re Income Tax Acts 9. Section 83 extends to cover all business goodwill, and only personal goodwill is excluded Commissioner of Taxation v. Smith (7) is wrongly decided.

[DIXON C.J. referred to Booth v. Curtis 10.] The goodwill of a business may be of all three types. [DIXON C.J.: Must you not decide to what type it substantially belongs ?

1(1928) 1 K.B. 231. 2(1895) 1 Q.B. 923. 3(1934) 2 K.B. 35. 4(1943) 67 C.L.R. 561. 5(1947) 75 C.L.R. 332. 6(1952) A.L.R. 427. 7(1952) A.L.R. 1052. 8(1905) 3 C.L.R. 393, at p. 400. 9(1932) V.L.R. 102. 10(1869) 20 L.T. 152. 86 CLR 395

FULLAGAR J. Apart from the goodwill of an advertised product, must there not always be an element of site goodwill ?

Yes. If any element of the goodwill is within the section the whole is taxable.

[DIXON C.J. Does this mean that every sale of goodwill is taxable if made in connection with a lease ?

Yes. Boards of Review have increasingly tended to take this attitude. The onus is on the taxpayer to show that none of the goodwill is taxable. The sum of £1,750 paid in this case was in connection with the goodwill. [He referred to Trego v. Hunt 1; Townsend v. Jarman 2.]

[TAYLOR J. Is not this only connected to that part of the goodwill which is not connected with the land ? ]

It was not paid in connection with the right under the National Security Regulations. Therefore Phillips v. Federal Com- missioner of Taxation 3 has no application. Here there is no evidence why people deal with the business. [He referred to Commissioners of Inland Revenue v. Muller &Co.'s Margarine Limited 4 Federal Commissioner of Taxation v. Williamson 5; Charrington and Co. Ltd. v. Simpson 6 Daniell v. Federal Commissioner of Taxation 7; Commissioner of Taxation V. Smith 8.] Accordingly there is no basis on which the Court could apportion the goodwill, even if this were permissible.

R. L. Franklin, in reply. The following written judgments were delivered :-

DIXON C.J., WILLIAMS, FULLAGAR AND KITTO JJ. This is an appeal under S. 196 of the Income Tax and Social Services Contribution Assessment Act 1936-1950 (referred to the Full Court by the Chief Justice pursuant to S. 18 of the Judiciary Act 1903-1950) from a decision of the Commonwealth Board of Review No. 2, which by a majority upheld the contention of the respondent commissioner that the sum of £1,750 paid to the appellant by one John Henry Parkinson in February 1946 formed part of the assessable income of the appellant for the year ended 30th June, 1946. The material facts can be shortly stated. Prior to February, 1946, the appellant had been carrying on the business of a manufacturer and retailer of bread at 86 Elphin Road, Launceston. There is a cottage on the

1(1896) A.C. 7, at pp. 7, 27. 2(1900) 2 Ch. 698. 3(1947) 75 C.L.R. 332. 4(1901) A.C., at pp. 223, 226, 230. 5(1943) 67 C.L.R. 561. 6(1935) A.C. 325, at pp. 335, 341. 7(1928) 42 C.L.R. 296. 8(1952) A.L.R. 1052. 86 CLR 396

land, in which the appellant lived, one room of which, twelve feet square, was fitted up as a shop where bread was sold over the counter. The bakehouse was situated in the yard at the rear of the cottage. The trade over the counter was SO small that it did not justify the employment of a whole time assistant and the customers were served by the housekeeper who looked after the home. A few orders for bread were received at the shop by telephone and a few customers preferred to pay their accounts at the shop rather than to pay the carters. The bread sold over the counter was approximately six per cent of the total sales. The rest of the bread was sold by delivering it in bread carts to the customers in their own homes pursuant to orders given to the carters on their rounds.

In February 1946 the appellant entered into a contract in writing with Parkinson whereby, subject to the consent of the Treasurer of the Commonwealth, he agreed to grant a lease containing an option of purchase of 86 Elphin Road to the purchaser for a period of ten years. He agreed to sell to Parkinson the plant and utensils used in the business for the sum of £1,250 and also agreed that for this consideration the purchaser should be entitled to the goodwill of the business, together with the proprietary recipes, if any, used in connection therewith and that the purchaser should be entitled to the zone or area allotted to the vendor under the Bread Industry (Tasmania) Order made under the National Security (General) Regulations. By cl. 3 of the contract, it was provided that in consideration of the further sum of £1,750 (this being the sum claimed by the respondent to be assessable income) to be paid by the purchaser to the vendor on completion, the vendor agreed with the purchaser that during the term of the lease, or any exten- sion thereof (and if the purchaser should exercise the option of purchase contained in the lease for a period of ten years from the expiration of the notice exercising such option), the vendor would not directly or indirectly carry on the trade or business of a baker or sell bread within a radius of five miles from the Launceston Post Office, nor would he permit the name of the vendor or the business style of " Elphin Bakery to be used for such purposes within the same area. By an indenture made on 21st February 1946, the appellant, subject to the consent of the Treasurer of the Commonwealth, leased No. 86 Elphin Road to Parkinson for a term of ten years from 10th March 1946 at a monthly rent of £21 13s. 4d. The indenture contained an option for the lessee to purchase the premises during the month of September 1955

86 CLR 39786 CLR 398

such a covenant plainly increases the value of the business in the hands of an assignee.

The contention of the respondent is that the sum of £1,750 was a premium as defined by S. 83 (1) of the Income Tax Assessment Act 1936-1946 and therefore assessable income of the appellant under S. 84 (1) of the Act. Section 83 (1) provides that premium means any consideration in the nature of a premium, fine or foregift payable to any person for or in connection with the grant or assignment by him of a lease or any consideration for or in connec- tion with the surrender of a lease, or for or in connection with any goodwill or license attached to or connected with land, a lease of which is granted, assigned or surrendered. Section 84 (1) provides that the assessable income of a taxpayer shall include, in addition to rent, any premium received by him in the year of income, and any consideration SO received for or in connection with his assent to any grant or assignment of a lease. The definition of premium in S. 83 has three limbs. The first applies where the transaction consists of the grant or assignment of a lease. The second applies where the transaction consists of the surrender of a lease. The third applies to the more complicated case where a lease is granted, assigned or surrendered as part of a transaction which includes a sum paid as consideration for the purchase of the goodwill of the business. In cases falling within the first and second limbs, no difficulty in ascertaining whether the sum is a premium would usually be encountered. The payment is made for the purpose of the lessee or assignee obtaining the benefit of the lease or of the reversioner obtaining possession of premises which have more value to him as premises in possession than as premises in reversion.

Neither the contract nor the indenture of lease of 21st February 1946 provided for the payment of any consideration for the lease in the nature of a premium: consequently the respondent cannot rely on the first limb. No lease was surrendered as part of the transaction that took place between the appellant and Parkinson

SO that the respondent cannot rely on the second limb. He must rely on the third limb. The £1,750 was consideration paid in connection with the purchase of the goodwill of the business, SO that the crucial question is whether this goodwill was attached to or connected with 86 Elphin Road. The majority of the board found that it was, but in our opinion this finding was not in law reasonably open on the evidence. The attributes of goodwill as a legal conception have been explored in many cases, including cases of the highest authority. At first the tendency was to place upon goodwill the limited meaning of nothing more than the probability

86 CLR 39986 CLR 400

property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. in some cases and to some extent goodwill can and must be considered as having a distinct locality, is obvious, and was not in fact disputed. The goodwill of a public-house or of a retail shop is an instance. The goodwill of a business usually adds value to the land or house in which it is carried on if sold with the business and SO far as the goodwill adds value to land or buildings, the goodwill can only be regarded as situate where they are. In such a case the goodwill is said to be annexed to them."

In the present case the £1,750 was paid as consideration for the vendor entering into a covenant not to compete with the purchaser in the business which he had previously been carrying on. It was paid to protect and enhance the value of that business SO that the purchaser would be able to carry it on in the future in the same profitable manner as the vendor had previously carried it on without the risk of the vendor commencing or becoming engaged in a competing business. Goodwill includes whatever adds value to a business, and different businesses derive their value from different considerations. The goodwill of some businesses is derived almost entirely from the place where they are carried on, some goodwills are purely personal, and some goodwills derive their value partly from the locality where the business is carried on and partly from the reputation built up around the name of the individual or firm or company under which it has previously been carried on. It is, for instance, said in Lindley on Partnership, 11th ed. (1950), at pp. 539, 540, that the goodwill of a business is frequently of no value at all, except in connection with the place of business. This, however, is by no means always the case. The value of the goodwill of a newspaper, for example, attaches to its name, and is scarcely, if at all, dependent on the place of publication". In the case of a monopoly such as letters patent, or an exclusive licence to sell a commodity only obtainable from the licensor, such as a newspaper, in a particular area, the real value of the goodwill would lie in the fact of sole ownership and, SO far as it has a locality, would be situated in the area over which the monopoly extended: Phillips v. Federal Commissioner of Taxation 1.

1(1947) 75 C.L.R. 332. 86 CLR 401