Commissioner of Taxation of the Commonwealth of Australia v Murry, Judith Stella
[1996] FCA 622
•25 JULY 1996
CATCHWORDS
INCOME TAX - sale of taxi business - capital gain - whether disposal of "goodwill" for the purposes of s.160ZZR of the Income Tax Assessment Act 1936.
Income Tax Assessment Act 1936, s.160ZZR
Federal Commissioner of Taxation v Krakos Investments Pty Ltd
(1995) 133 ALR 545 - con.
Inland Revenue Commissioners v Muller & Co Margarine Ltd
[1901] AC 217 - con.
Hepples v Deputy Commissioner of Taxation (1992) 173 CLR 492 - con.
Bacchus Marsh Concentrated Milk Co Ltd (In Liq) v Joseph Nathan
& Co Ltd (1919) 26 CLR 410 - con.
Geraghty v Minter (1979) 142 CLR 177 - con.
Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110 - con.
Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561 - con.
Box v Federal Commissioner of Taxation (1952) 85 CLR 1 - con.
Rosehill Racecourse Co v The Commissioner of Stamp Duties (NSW)
(1906) 3 CLR 393 - con.
West London Syndicate Limited v Commissioner of Inland Revenue
[1898] 2 QB 507 - con.
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 - con.
JUDICIAL REVIEW - appeal to the Federal Court from Administrative Appeals Tribunal - whether question of law for the purposes of s.44(1) of the Administrative Appeals Tribunal Act.
Administrative Appeals Tribunal Act 1975, s.44(1)
Hope v the Council of the City of Bathurst (1980) 144 CLR 1 -
applied.
TNT Skypak International (Aust.) Pty. Ltd. v Federal Commissioner
of Taxation (1988) 82 ALR 175 - applied.
Collector of Customs v Davis (1989) 23 FCR 378 - applied.
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v JUDITH STELLA MURRY
No. QG 189 of 1995
BEAUMONT, DRUMMOND AND KIEFEL JJ.
BRISBANE
25 JULY 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
QUEENSLAND DISTRICT REGISTRY ) No. QG 189 of 1995
)
GENERAL DIVISION )
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Applicant
AND:JUDITH STELLA MURRY
Respondent
CORAM: BEAUMONT, DRUMMOND AND KIEFEL JJ.
PLACE: BRISBANE
DATE: 25 JULY 1996
MINUTES OF ORDER
THE COURT ORDERS:
Appeal dismissed
Appellant to pay seven-eights of the respondent's costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
QUEENSLAND DISTRICT REGISTRY ) No. QG 189 of 1995
)
GENERAL DIVISION )
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Applicant
AND:JUDITH STELLA MURRY
Respondent
CORAM: BEAUMONT, DRUMMOND AND KIEFEL JJ.
DATE: 25 JULY 1996
REASONS FOR JUDGMENT
BEAUMONT J.
INTRODUCTION
This is an appeal brought by the Commissioner of Taxation from a decision of the Administrative Appeals Tribunal ("the Tribunal"), constituted by Deputy President Gerber, that the Commissioner's decision, which had disallowed an objection by the respondent taxpayer against an assessment of income tax, be set aside and the objection be allowed. The context of the appeal is s.160ZZR of the Income Tax Assessment Act 1936 ("the Act") which reduces by one-half the amount of a capital gain in the event of the disposal of a business, or of an interest in a business, where that disposal includes goodwill, or an interest in goodwill. Specifically, the question is whether, in the circumstances (and the facts were not in dispute) there was, in the transaction in question, a disposition of "goodwill" for the
purposes of Part IIIA of the Act in its treatment of capital gains for income tax purposes.
FACTUAL BACKGROUND
As has been said, the facts were not contentious. In 1987 the respondent, in partnership with her husband, acquired what she described in her evidence as a "taxi business", consisting of (1) a licence to hire issued by the Queensland Department of Transport and (2) shares in a taxi cab co-operative, Sunshine Coast Pty. Ltd. The co-operative company operated on the Queensland Sunshine Coast between Caloundra and Eumundi; membership of the co-operative was a pre-requisite to the operation of a taxi in the area. About 43 taxi operators were associated with Sunshine. The partnership purported to "lease" the taxi licence to Mr. L. Gower for a fixed monthly fee. Mr. Gower owned the licensed vehicle, but not the licence, and for our purposes, nothing turns on the arrangements with Mr. Gower.
In March 1992, the partnership agreed to sell the "business" to Mr. and Mrs. Wilkins; at the same time, Mr. Gower agreed to sell the taxi vehicle to the purchasers. In their application in writing to the Department of Transport for approval to transfer the licence dated 3 March 1992, the parties to the sale gave the following particulars of sale on the form provided by the Department (the details provided were in handwriting):
"2.DESCRIPTION OF VEHICLES AND PARTICULARS OF SALE
ALL VEHICLES Licence Number
Operated at:- 118090
Registration Number:- T29-243
Owned by:- L. Gower (Note licence
to hire leased to
L. Gower Expires Feb 92)
MakeFalcon
Type XF Sedan
Colour Yellow/White
Model XF
Company Suncoast Cabs
SALE PRICE VEHICLE $6000
Price and Description Spare Meter Schmidt G52 (4 yr old)
Parts and Other Property (SER No. 7944)
(Radio (Tair) Property of Suncoast Cars)
SHARES$25,000
GOODWILL (Licence Value) $189,000 [Emphasis added)
TOTAL SALE PRICE $220,000"
(It should be noted that the words "Goodwill (Licence Value)" were part of the printed form.)
The partnership thereby realised capital gains of (1) $6,130 on the Sunshine shares and (2) $72,071 in respect of the licence. The taxpayer's share of the latter gain was $36,036. The taxpayer claimed that this amount was for the sale of goodwill, so that she was entitled to a 50 per cent reduction of the capital gain, to $18,018, by virtue of the operation of the
provisions of s.160ZZR. But in his assessment, this claim was rejected by the Commissioner.
THE RELEVANT TAX LEGISLATION
The treatment of capital gains and losses is dealt with by s.160ZD(1) of the Act. It is there provided that where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income included that net capital gain. The amount of a capital gain is ascertained in accordance with s.160Z(1). For that purpose, it is necessary to determine whether there has been a "disposal" of an "asset", to identify the relevant "taxpayer" and to ascertain the relevant "consideration" and "indexed cost base" (cf. Hepples v FCT (1992) 173 CLR 492 per Brennan J. at 499). For our purposes, it is the "asset" that is significant.
For the purposes of Part IIIA of the Act, an "asset" was, at the relevant date (i.e. as at March 1992), defined so as to include "goodwill" in this way:
"160AIn this Part, unless the contrary intention appears, "asset" means any form of property and includes -
(a)An option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property; [Emphasis added]
..."
As has been said, s.160ZZR is central to this litigation.
Relevantly, it provides:
"160ZZR(1)Where -
(a)a taxpayer disposes of, or of an interest in, a business ... being a disposal that includes, or includes an interest in, the goodwill of the business;
(b)...
(c)...
(d)a capital gain is deemed for the purposes of this Part to have accrued to the taxpayer in respect of the disposal of, or of the taxpayer's interest in, the goodwill,
the amount of the capital gain shall be deemed to be reduced by half."
THE ASSESSMENT, THE TAXPAYER'S OBJECTION AND THE DEPUTY COMMISSIONER'S DECISION TO DISALLOW THE OBJECTION
The Commissioner assessed the taxpayer upon the footing that she was not entitled to the benefit of s.160ZZR. The taxpayer objected, but by letter dated 13 December 1994, the Deputy Commissioner disallowed the objection for, inter alia, these reasons:
"Halsbury's Laws of England 4th ed, vol 35, para.1106 to 1109, states that, `the goodwill of a business is the whole advantage of the reputation and connection formed with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to customers which the name and reputation possess'.
Unless the taxi plate was the only licence issued in a particular region, which is not the situation, the plate itself would not have any of the above characteristics. Customers generally do not identify a taxi by the licence number or order a taxi by the licence number. Customers tend to accept whichever taxi is allocated to them or if a customer hires a taxi from a taxi rank they normally would take whichever is the next taxi in the line. Taxis are not utilised by a customer because they relate to and
favour a particular taxi licence number."
As has been noted, the taxpayer successfully applied to the Tribunal for review of this decision. Before going to the Tribunal's reasons, it will be convenient to mention the relevant provisions of the Queensland State Transport Act and Regulations.
THE QUEENSLAND STATE TRANSPORT LEGISLATION
The issue, renewal and transfer of licences to hire are dealt with by s.17(1) of the State Transport Act 1960-1981 as follows:
"17(1) ... The Commissioner may under, subject to and in accordance with this Part and the applicable regulations, issue, renew, suspend, cancel or transfer licences to hire."
By Part II of the State Transport Regulations 1987, provision is made for the making of an application for the issue, renewal or transfer of a licence. Amongst other provisions, reg.14 provides:
"14.The Commissioner may upon receiving an application for a license cause to be made an inquiry, test or examination which in his opinion is necessary or desirable to determine whether -
(a)the applicant is a fit and proper person to be issued with that license;
(b)any circumstances exist which would make it undesirable that that license be issued, (including in the case of an application to transfer a license, the consideration being paid by the proposed transferee)."
By reg.16(1), it is provided:
"16(1) The Commissioner shall refuse to grant an application for a license unless he is satisfied that the granting of the application will be conducive in every respect to attaining the objects and purposes of the Act and, without limiting the generality of the foregoing, he may at his discretion refuse the application if -
(a)the applicant is not eligible to apply for a license;
(b)the applicant has been convicted of a crime, misdemeanour or simple offence within the meaning of The Criminal Code or of an equivalent offence against a law of the Commonwealth, of another State or Territory of the Commonwealth or of another country;
(c)the general reputation of the applicant is not good, having regard to character, honesty and integrity; or
(d)the applicant, having held a driver's license, has had that licence suspended or cancelled."
By s.17 of the Transport Act, it is provided:
"(2)A license to hire shall not be issued, renewed or transferred in respect of a vehicle unless -
(a)if the vehicle is required to be registered under `The Main Roads Acts, 1920 to 1959,' a certificate of registration or of renewal of registration thereunder in respect of the vehicle is current;
(b)a certificate is produced to the Commissioner which satisfies him that such vehicle complies with the requirements of `The Inspection of Machinery Acts, 1951 to 1960'; and
(c)such vehicle is constructed and equipped as prescribed,
at the date of the issue, renewal or, as the case may be, transfer of such license.
(3)Subject to this Part and the applicable regulations, every license to hire and every renewal thereof shall, unless such license is sooner suspended, cancelled or surrendered under this Act or under any other Act or law, be in force
for such period, not being longer than twelve months, as is expressly stated in the license or in any endorsement thereon from and including the date of issue or renewal, as the case may be ... .
...
(6)A license to hire shall not be capable of being assigned, transferred, leased, encumbered or otherwise dealt with save with the prior approval in writing of the Commissioner, and any assignment, transfer, lease, encumbrance or other dealing with such a license otherwise than with such approval shall be absolutely void.
[Emphasis added]
Compliance by the licensee with the requirements of this subsection shall be an implied condition of every license to hire for breach whereof the Commissioner may cancel the license."
Invitation by the Commissioner for a new licence is relevantly dealt with in s.18 of the Transport Act as follows:
"18(1)When the Commissioner proposes to issue any new license to hire he may submit such license for sale -
(a)by public tender; or
(b)at a price fixed by him.
...
(4)In the case of a sale at a price fixed by the Commissioner, subject to being satisfied that the applicant in question to purchase is competent and qualified to hold the proposed license to hire, the Commissioner may grant the application which appears to him in all the circumstances to be the most advantageous in the public interest.
If the Commissioner is satisfied that two or more applications to purchase are equally so advantageous, and that the applicants are respectively competent and qualified to hold the proposed license to hire, the Commissioner shall decide the application to be granted by ballot."
Section 20 of the Transport Act prohibits the activity with which we are now concerned, except with a licence, as follows:
"20.(1)A person shall not keep or let, or cause or permit to be kept or let, for hire at any time a vehicle unless at that time such vehicle is being kept or let for hire under and in accordance with a license to hire.
(2)A person shall not use, or cause or permit to be used, on a road at any time a vehicle for the carriage of passengers or goods, or both passengers and goods, for hire unless at that time such vehicle is being used for the carriage of such passengers or goods, or both passengers and goods, as the case may be, under and in accordance with a license to hire.
(3)A person shall not cause or permit to stand or ply for hire for the carriage of passengers or goods, or both passengers and goods, at any time a vehicle unless at that time such vehicle is so standing or plying for hire under and in accordance with a license to hire."
With respect to the scope of licenses, reg.21 of the Regulations
relevantly provides:
"21. ... Unless the contrary is indicated by a condition attached by the Commissioner, a license to hire ... shall be deemed to be subject to the conditions that -
(a)in the case of a license to hire in respect of a cab -
(i)the authority given by that license shall extend only to the licensed area: Provided that the licensee may carry passengers or goods from a place within the licensed area to a place outside the licensed area that is not more than forty (40) kilometres from the principal post office in the licensed area;
(ii)the driver for the time being of the cab shall at any time when the cab is on a taxi rank or is kept, let, used, plied or stood for hire at any place other than a taxi rank accept a hiring to carry passengers or goods
from any place within the licensed area to some other place -
(A)where the licensed area endorsed on the license is the metropolitan taxi district, within the licensed area;
(B)in other cases, within the licensed area or within forty (40) kilometres of the principal post office in the licensed area ..."
THE TRIBUNAL'S REASONS
The learned Deputy President found that, there being no certainty that any additional licences would be "released", private sales of licences were "subject to market forces". The Tribunal further found that the gross operating profit of a taxi was "largely dependent" on how much the owner was prepared to commit him or herself to the business, and the extent the vehicle is on the road plying for hire; and that to drive a cab profitably required "a good deal of know-how (experienced operators will know which [cab] ranks work best at which times)."
The Tribunal, however, went on to say that the major part of taxi work came from kerbside pick-ups and radio bookings; and that even if a minor component may conceivably be derived from personal contact (where a customer insists on a particular driver) no such "personal goodwill" existed here.
Referring to the statement in the Departmental form of application for approval of transfer of a licence "Goodwill (Licence Value)", the Tribunal said that whether or not any part of the consideration constitutes "goodwill" is "to be determined
by law, not the label put on it in the instrument of transfer".
Turning then to the legal concept of "goodwill" discussed in the authorities, the learned Deputy President found assistance in the reasoning in The Rosehill Racecourse Company v The Commissioner of Stamp Duties (NSW) (1905) 3 CLR 393 because it was there concluded that goodwill may, in some circumstances, be severed from the premises. In the Rosehill case, it was held that the right, or privilege, of the club to conduct races was not vested in a particular racecourse, but was accorded to a particular club and did not go with the land conveyed; the land (like the cab here) was sold for a relatively small amount and it was the right to hold fixtures which attracted the major consideration.
The Tribunal cited the observations of Rich J. in F.C.T. v Williamson (1943) 67 CLR 561 (at 564) that to determine the nature of goodwill in a given case, it is necessary to consider the type of business and the type of customer which such business is inherently likely to attract, as well as the surrounding circumstances. The Deputy President then said:
"In other words, `goodwill' must be judged in each case against the background and the nature of the business in which it is claimed to arise. Above all, goodwill is a noun, not an adjective describing some elusive phosphorescent substance glowing in the dark or turning litmus paper blue given the right mystical incantations. It can be measured, weighed, valued, quantified - and sold."
The Tribunal proceeded to identify these three elements of goodwill involved in the present case: (i) the right to ply for hire; (ii) the right, subject to Departmental approval, to substitute another licensee for valuable consideration; and (iii) the "monopoly right" to operate a taxi in the specified area.
The Deputy President said:
"On that view, it seems to me that the taxi service operated by the taxpayer contains goodwill and what Mr Slater [for the Commissioner] refers to as a `monopoly right' is, in reality, an attempt by Government to limit the number of licences in order to regulate and stabilise the market. It follows that the holder of a taxi licence not only obtains the right to exploit the licence by plying his or her cab for hire, but the advantage conferred by virtue of the monopoly, or, in the words of Warrington J. in Hill v Fearis [[1905] 1 Ch. 466] `the advantage, whatever it may be, which the [purchaser] gets by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which has been carried on for some time previously'. It is this `composite' that the vendors enjoyed and which - the business carried on by them not coming to an end when they sold the shares, cab and licence - they intended the purchasers to possess and enjoy. If a taxi business cannot be operated without a licence - and that is made clear in the Transport Act - it seems to me to follow that the licence is so intimately connected with the business as to constitute part of the goodwill of the business.
In economic terms, what was sold in the instant case consisted of the shares (whose value is fixed by the cooperative), the Falcon sedan (whose value is governed by the second-hand cab market) and the residue - being the difference between the total amount received for the shares and Falcon and what the vendor was able to negotiate `all up' on the open market - is - in my view, more appropriately described as `goodwill' than - with all due respect to Mr Slater - as a `premium' to enter the taxi business."
The Tribunal went on to say:
"It is ... overly simplistic to regard the consideration paid by the transferee to the transferor merely as consideration for the grant of a licence to operate a cab. ... [T]he test whether an amount in question is a premium is to be determined by considering for what was that amount given. Applied to this case, was the amount given for the mere right to operate the cab, or was it for the benefit obtained by continuing the business which the transferor, as part of the cooperative, had carried on before him, ie joining the elite `club' of plying his cab for hire in the specified area? Once the issue is put in those terms, the `premium' analysis falls to the ground."
THE COMMISSIONER'S GROUNDS OF APPEAL
In his notice of appeal, the Commissioner contends that the Tribunal erred in law in its interpretation of the concept of "goodwill" in s.160ZZR; and in holding that there existed an entitlement to the partial exemption provided by that provision. The Commissioner contends that the sum of $189,000 received by the taxpayer's partnership in March 1992 was, as a matter of law, properly to be regarded as consideration for the assignment of the licence, rather than for goodwill.
CONCLUSIONS ON THE APPEAL
If the present matter were free from authority, there would, in my view, be much to be said for the Commissioner's contentions. That is to say, there is much to be said for making the following assumptions: (1) That a statutory licence of the present kind is property (see, e.g. Banks v Transport Regulation Board (Vic.) (1968) 119 CLR 222 per Barwick C.J. at 232; Duncan v Ridd (1976) 2 NSWLR 105 at 112; 2 Day FM Australia Pty Ltd v Commissioner of Stamp Duties (1989) 89 ATC 4840) and assignable, subject to departmental approval, as a chose in action, and thus an "asset" within s.160A. (2) That in s.160ZZR(1), the noun "goodwill" was intended to have its ordinary, dictionary meaning, as for instance, defined in the Macquarie, 2nd ed.:
"3. Comm. an intangible, saleable asset arising from the reputation of a business and its relations with its customers, distinct from the value of its stock etc."
(cf. Case 11/96, 96 ATC 199.)
But, as the transfer form here itself indicates, there is a settled line of authority which, I think, compels the conclusion that the licence value is itself a form of goodwill, expressed as a monopoly or quasi-monopoly (or oligopoly) goodwill; and that it should be accepted that those drafting s.160ZZR(1) must have been aware that, technically, "goodwill" could extend to pick up the licence value itself, even if no commercial reputation (in the dictionary sense) were involved.
The line of authority may conveniently first be located in the off-quoted reference to the "agreed absence from competition", as an element of goodwill, by Lord Lindley in I.R.C. v Muller & Co's Margarine Ltd. [1901] AC 217 (at 235). These observations were cited, with apparent approval, by Dixon C.J., Williams, Fullagar and Kitto JJ. in Box v Commissioner of Taxation (1952) 86 CLR 387 (at 396-7). Their Honours went on to say (at 397):
"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 ... ."
Their Honours then cited Phillips v Federal Commissioner of Taxation (1947) 75 CLR 332, where Williams J. said (at 336):
"The shop could therefore be situated at any convenient place in the area. The newspapers and other publications, particularly the newspapers, are sold chiefly by delivering them at the houses of the residents in the area. The area contains a number of persons who would naturally purchase such publications locally, and the absence of competition ensures that they will purchase from the sole local agent. Accordingly the real value of the goodwill of such a business lies in the appointment of the proprietor as the exclusive agent of the newspaper companies to purchase their newspapers and other publications wholesale and to sell them retail in the prescribed area, or in other words in the agent being the sole source of supply in that area. It is a case in which, in the words of Lord Eldon in Kennedy v Lee ...`the good-will of a trade follows from, and is connected with, the fact of sole ownership'."
In Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492, Dawson J., after citing Lord Lindley's observations in Muller, said (at 519-20):
"The covenants in question in this case all went to protect Hunter Douglas's business against competition by the appellant and the entry by the appellant into those covenants was an act or transaction which took place in relation to Hunter Douglas's goodwill. It was an act or transaction which enhanced Hunter Douglas's goodwill and it was, therefore, also an event affecting Hunter Douglas's goodwill. The trade secrets and the special processes may also have constituted knowledge with a value apart from goodwill and therefore might be regarded as assets separate from Hunter Douglas's goodwill, but the covenants not to divulge or use them undoubtedly protected Hunter
Douglas against competition and in so doing assisted in generating goodwill. I do not think that it can be doubted that a covenant in restraint of trade may enhance the value of the goodwill of a business ... .
Even if a covenant in restraint of trade is regarded merely as protecting, that is preserving rather than increasing the value of, goodwill, e.g. as in Herbert Morris Ltd. v Saxelby ... the absence of competition which it ensures is nevertheless part of the goodwill itself and it is that which enhances its value. It is, therefore, of no moment whether that which enhances the value of the goodwill is seen as the covenant itself or what the covenant does."
Toohey J. said (at 523):
"The inseparability of the goodwill of a business from the business itself was reiterated by this Court in Geraghty v Minter... . An important component of goodwill is the likelihood of competition... ."
McHugh J., also citing Lord Lindley and Box, said (at 542-3):
"It will be seen from the statements in Inland Revenue Commissioners v Muller that goodwill is the collective name for various intangible sources of the earnings of a business which are not able to be individually quantified and recorded in the accounts as assets of the business. The goodwill may be constituted by sources internally generated by the business entity or `from the combination or inter-relationship of entities or groups of assets (synergistic benefits)' or both... . Goodwill, therefore, is `inherently inseverable from the business to which it relates'... . It does not survive the cessation of the business and cannot be dealt with independently of that business... . Although goodwill is commonly valued by capitalizing the expected future net profits or by estimating the worth of purchasing several years of the past profits of a business, it may exist even though the business has not made any profits and is unlikely to do so for some time. In the case of a new business, money expended on research, advertising and distribution networks, for example, may have created sources of goodwill which will ultimately generate future profits even though the business has not yet made any profit."
See also Duncan v Ridd, above, at 116-122.
More recently, in Federal Commissioner of Taxation v Krakos (1995) 133 ALR 545, Hill J. (with the agreement of von Doussa and O'Loughlin JJ) said (at 551-2):
"The different aspects of goodwill that have been recognised in the cases include site goodwill, personal goodwill and name goodwill. There may also be other kinds of goodwill such as monopoly goodwill to which reference is made later in these reasons."
After describing "site", "personal" and "name" goodwill, Hill J. said (at 553):
"In addition, common experience suggests that there is at least one other kind of goodwill. It has received some mention in the cases. I shall adopt here the name `monopoly goodwill' to refer to it. Where a monopoly has been conferred upon a trader, that trader may develop a custom which is tied to that monopoly. One example is a patent. A process may be so unique that the mere ownership of a patent brings with it custom. In such a case the attractive force of the custom attaches to the patent. Similarly, where a statutory licence or monopoly has been conferred, that licence may come to have attached to it a type of goodwill, in the sense that it is the holding of the licence which attracts custom. For example, a crown monopoly to sell a commodity such as salt may come to have a special value to its holder over and above the cost of obtaining the monopoly. Customers will revert to that trader not because of the name of that trader, the place from which he or she trades or some personal characteristic of the trader, but because of the statutory monopoly which the trader has."
It follows that, as a legal concept, it is established that an element of a particular form of "goodwill" is the degree of competition permissible, specifically, that allowed under a licensing system. It must further follow, in my opinion, that the description in the transfer application form ("GOODWILL (Licence Value)" should, in the light of the settled course of authority, be treated as appropriate in the present case to describe an element of goodwill, at least in the technical or notional sense discussed, for the purposes of s.160ZZR. That is to say, even if it be assumed that the partnership had no name goodwill (presumably this was Sunshine's) or personal or site or product goodwill, the partial absence of competition arising from the limited form of monopoly granted under the licensing system meant that the partnership should be regarded as possessing, and then disposing of, a form of goodwill. That being so, the Commissioner's contention in his grounds of appeal that the sum of $189,000 received by the taxpayer's partnership in March 1992 was, as a matter of law, properly to be regarded as consideration for the assignment of the licence, rather than for goodwill, cannot be sustained.
No question appears to arise on the facts of this case as to the proper amount to be attributed to the technical or notional goodwill involved here. Being an arms' length transaction, presumably negotiated in good faith, there appears to be no reason to question the apportionment of the consideration made by the parties (cf John Roberts, Malcolm Druery Goodwill: The nature and valuation of goodwill for stamp duty purposes: A New South Wales Office of State Revenue perspective (1994), at 3, 86).
I propose that the appeal be dismissed.
COMPETENCY OF THE APPEAL
Although the taxpayer filed no formal objection to competency, in the written submissions filed on her behalf it was contended that the appeal was "ill founded", as it purported to be an appeal from a finding of fact made by the Tribunal, and there was here no question of law, as required by s.44(1) of the Administrative Appeals Tribunal Act 1975. It was submitted that the relevant finding of fact was the Tribunal's conclusion that the subject sale was a sale of goodwill. It was then said, on behalf of the taxpayer, that "goodwill" was a term in ordinary English usage and that the meaning of such terms are questions of fact.
In my opinion, the submission must be rejected.
It is true, as has been said, that the noun "goodwill" has an ordinary dictionary meaning. But the present question is the meaning of the term for the purposes of s.160ZZR, and as I have already held, the meaning of that term in the present statutory context is wide enough to pick up a technical definition of "goodwill".
In N.S.W. Associated Blue-Metal Quarries Ltd. v Federal Commissioner of Taxation (1956) 94 CLR 509, Kitto J. observed that the question whether certain operations answered the description "mining operations upon a mining property" within the meaning of s.122 of the Act was a mixed question of law and fact
(at 511-512). His Honour said (at 512):
"The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words as so determined; and that is a question of law."
The present question is, in principle, a similar one (see also, e.g. Hope v The Council of the City of Bathurst (1980) 144 CLR 1 at 7-8 per Mason J; TNT Skypak International (Aust.) Pty. Ltd. v Federal Commissioner of Taxation (1988) 82 ALR 175 and Collector of Customs v Davis (1989) 23 FCR 378).
COSTS
Although the taxpayer has succeeded on the point of substance argued on the appeal, the Commissioner has been successful on the objection, informally raised, as to competency. In the circumstances, it is fair that the taxpayer should receive seven-eighths of her costs of the whole proceedings.
I certify that this and the preceding nineteen (19) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Beaumont.
Associate
Dated:
IN THE FEDERAL COURT OF AUSTRALIA ) No. QG 189 of 1995
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
ON APPEAL FROM THE
ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: THE COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Applicant
AND: JUDITH STELLA MURRY
Respondent
Coram: Beaumont, Drummond and Kiefel JJ
Place: Brisbane
Date: 25 July 1996
REASONS FOR JUDGMENT
DRUMMOND J:
I have had the advantage of reading in draft the reasons of Beaumont J.
The Commissioner's primary contention was that that part of the sale price listed against the printed words, "GOODWILL (Licence Value)", in the form of application for approval to transfer the licence lodged with the Department of Transport did not represent goodwill, but rather the consideration for the assignment of
the licence; it was said that a licensed taxicab business of the kind here in question can have no goodwill. It was also contended that the exemption in s 160ZZR the Income Tax Assessment Act 1936 (Cth) can only apply on the sale of a business where a value can be attached to the asset described as the business's goodwill that is separate from the value of each of the other assets of the business the subject of the sale. This was said to follow not only from the provisions of s 160ZZR, but from the scheme of Part IIIA, which exposes to capital gains tax each gain that accrues to the taxpayer from the disposal of each separate asset. It was also said that (if a taxicab business can have goodwill, contrary to the Commissioner’s primary argument) where the sale of a business by the taxpayer that has goodwill can be seen to involve the disposal of a particular asset, eg, a licence like that in the present case, which is not goodwill, but merely an asset that contributes to the generation of the goodwill of the business, s 160ZZR cannot operate to give partial exemption from the capital gains tax liability arising from the disposal of that particular asset: the section only operates upon the disposal of the taxpayer's entire interest in the goodwill itself.As is apparent from the Tribunal's reasons and the undisputed evidence, a licensed taxicab business like that which the respondent conducted in partnership with her husband and then sold in the transaction that has raised the question for decision, and which I will refer to as her business, is a special kind of business. To operate a cab on the Sunshine Coast, a person has to have a licence to hire issued by the Department of Transport in respect of a nominated vehicle; it is also a requirement of the Department of Transport that a cab licensee in this area be a member of the local taxicab co-operative, whose main operational function is to allocate telephone requests for cabs equitably among its members. A taxicab licence issued under the State Transport Act 1960-1981 (Qld) and regulations is a permission to do that which would be unlawful without it: s 20 the State Transport Act and reg 9 the State Transport Regulations 1987. Apart from this permission, the licence confers no benefits, it only imposes burdens. A licensee cannot transfer it or otherwise deal with it without prior approval from the Transport Commissioner (ss 17(1) and (6)). The cab can only lawfully be operated in the area for which it is licensed: reg 21(a)(i). The driver of the licensed cab must accept all offers to hire within that area: reg 21(a)(ii). He is bound to charge only the fares fixed by the regulations: regs 31, 33 and 34. The regulations impose very extensive restrictions on the manner of operation of the licensed cab and on the conduct of the driver: see, eg, regs 35, 36, 38, 39, 41, 42 and 49. The cab must be constructed and equipped in the manner prescribed in great detail by regs 54 and 55. The licence can be cancelled for a number of reasons, including breach by the licensee of the conditions of his licence and of the regulations: reg 23.
The permission constituted by the licence authorises the holder to share in meeting the demand for taxi services in the area in respect of which it is issued, to the exclusion of everyone other than the limited number of other persons who also hold taxicab licences for the same area. At the relevant time, there were only 43 licences for, and so only 43 taxicabs operating in, the Sunshine Coast area. Most of the custom for a Sunshine Coast taxicab business comes from kerbside pick-ups and radio bookings: none, in the present case, was derived from personal contact, where, eg, customers insist on the services of a particular driver. Profits are largely
dependent on the extent to which the cab is on the road and on the skill of the driver, eg, in knowing which cab ranks to work at particular times. One cab operator can earn more than another by working harder and more efficiently. But, so far as customers are concerned, one cab is as good as another: no cab operating in the Sunshine Coast area is, by reason of the holding of any given licence, more likely than another to attract custom. Taxicab licences, whether newly issued by the Department of Transport or sold by an existing licensee, command very substantial prices. When the Department of Transport issues new licences for an area, it fixes the price by reference to private sales over the previous 12 months or so in that area. The prices at which taxicab businesses, typically comprising a licence, a cab, radio equipment and meter and shares in the taxi co-operative, change hands are governed by market forces, ie, they tend not to vary, at any particular time, from licence to licence. The appellant was essentially correct in submitting that all licences have the same value. There are, I think, a number of reasons for this: competition for custom for taxi services in a particular area is limited by the Department of Transport restrictions on the number of cab licences that it will issue for that area; an operator of one of the licensed cab businesses in the area is unable to differentiate, in the eyes of customers, the service he offers from the services provided by any of the competing cab operators. In any event, there is not “a significantly great margin between a bad operator and a good operator”: the limited opportunity to earn a greater income than another licensee which a licence confers on the holder thus appears to add little, if anything, to the market value of a licence.
The Tribunal’s decision shows that the respondent’s business did not include any element of personal or name or site goodwill. Yet her licence had a value on the open market far in excess of the business’ other assets. There is no challenge to the agreed apportionment by the respondent, as vendor, and the purchaser of the sale price of $220,000 for this one particular licensed cab business: the parties regarded the cab covered by their licence, and its meter, as worth $6,000 (the cab and apparently also the meter were owned by a third party who leased the licence from the respondent and her husband and who received this sum from the purchaser); they regarded the respondent’s shares in the co-operative attributable to this cab licence as worth $25,000 and the licence as worth $189,000.
The Commissioner’s submission is that the residue of the sale price, $189,000, is the value of the licence or the consideration for the transfer of the licence, not goodwill. That is not of itself sufficient to explain why an arm’s length purchaser is prepared to place a large monetary value on the licence.
A licence can be regarded as conferring on the purchaser a benefit, in the form of the opportunity of earning income by competing with only a limited number of others for the pool of custom for taxicab services in the area in respect of which those competing cabs and their operators are licensed; it can be said that it is that benefit which gives the licence its value. But although one licensee may be able to obtain a greater share of the pool of custom for cab services than another, the scope for doing that, according to the evidence to which I have referred, is limited. Moreover, in so far as the licence confers on the holder for the time being opportunity to earn an
income greater than the income of competing cab operators, that is not a factor which is reflected to any significant extent in the market value of the particular cab business: all licences for an area have much the same value. For practical purposes, the position is that each licensee is assured of a substantial share of that pool of custom by carrying on his own licensed taxicab business: his membership of the co-operative gives him an equitable share of telephone requests for cab services and queuing on cab ranks with other cabs gives him an equitable share of kerbside custom, the two major sources of business for cab operators on the Sunshine Coast. Since the market does not differentiate between the value of licences according to the income history of the individual licensees, the value of a licence, in my opinion, is more accurately identified as flowing not from the opportunity to earn income that it confers, but rather from the assurance every licensee obtains by holding a licence of the kind here in question that his business will have a significant part of the custom for taxicab services in the relevant area.This assurance of custom is well capable of being described as the “goodwill” of each taxicab business. The appellant submits that running through the discussions in the cases on the nature of goodwill is the notion that goodwill is that attribute of a business which attracts custom to it. That, in my opinion, identifies the essence of business goodwill. In IRC v Muller & Co’s Margarine Ltd [1901] AC 217, Lord Macnaghten, at 224, described the goodwill of a business briefly as: “the attractive force which brings in custom”. Lord Brampton, at 230, described it as “the value of the profit-earning quality” of the tangible assets of the business employed in the carrying on of the business “by reason of the attraction of customers ¼”. In FCT v Williamson (1943) 67 CLR 561 at 563, Rich J identified the essence of goodwill, whether it be local or personal goodwill, as in the attraction of customers to the business.
Beaumont J's analysis of the cases shows that the benefit conferred by the restriction on competition among service providers by a publicly or privately administered licensing system which limits the number of persons permitted to provide that service, can constitute an element of the goodwill of each provider's business separate from any other element of goodwill the particular business may possess. It is not uncommon for a business to have a monopoly or semi-monopoly in providing the goods or services it supplies to the market; this can comprise an element of the business’ goodwill, additional to all other elements of the particular business’ goodwill, which may include site and personal and name goodwill. For example, the goodwill of a licensed hotel business run by a popular hotelier in an attractive location may comprise all these elements. A particular business can have goodwill that is comprised solely of personal goodwill or solely of site goodwill: eg, a restaurant business in a remote location run by a notable chef may possess only personal goodwill. There is no reason why a business cannot have a goodwill comprised solely of monopoly goodwill: if a business has a monopoly on the supply of particular goods or services that are in demand, customers have to patronise it, irrespective of its location and the personality of the proprietor and it may well be irrelevant to the prosperity of such a business what trading name it adopts. That the goodwill of a particular business can consist solely of monopoly goodwill was accepted in Box v Commissioner of Taxation (1952) 86 CLR 387 at 397.
A licensed taxicab business, like the present respondent’s, is an unusual kind of business in so far as it has no element of site or personal or name goodwill, yet it has a monopoly goodwill conferred by the licence and it has a market value far in excess of the value of the tangible assets of the business, apart from the licence. In order to operate the business, the respondent needed a properly equipped vehicle and membership of a taxi co-operative, as well as her cab licence. But neither of those other assets of her business played any part in conferring a customer connection on it: one cab is as good as another, so far as customers are concerned. The only customer connection the respondent’s business had was the assurance that it would share in the demand for cab services in the relevant area, which flowed from the semi-monopoly in meeting that demand that possession of the licence conferred.
In my opinion, the only thing that gives a taxicab licence its commercial value is the assurance of sharing in the available custom which it confers on the holder: a cab licence confers no other benefit on the licensee. The value of the licence can therefore, in my view, fairly be regarded as the value of the only goodwill the taxicab business possesses. It is no misuse of language to say that the benefit comprising the semi-monopoly rights created and conferred by a licence of the kind here in question comprises the goodwill of the licensed business: see Box v Commissioner of Taxation, supra, at 397 where the High Court observed: "Goodwill includes whatever adds value to a business, and different businesses derive their value from different considerations." The Court went on to consider what comprised the goodwill of a business with a monopoly, such as an exclusive licence to sell newspapers only obtainable from the licensor in a particular area, saying that in such case: "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". The licence and the goodwill it creates are inseparable. Cf Duncan v Ridd [1976] 2 NSWLR 105 at 122.
The appellant submitted that a licensed taxicab business is incapable of possessing goodwill because there is nothing likely to attract custom to one licensed cab rather than another; the appellant contrasted such a business with that of the holder of a television broadcasting licence and pointed out that the latter business has goodwill which is contributed to, but separate from, the licence and from the other assets of the licensee because it is possible (and indeed vital) for a broadcasting licensee to differentiate the service it provides under the authority of its licence from the services provided by other organisations licensed to broadcast into the same area. But, in my opinion, the appellant’s analysis is incomplete. A television broadcast licensee, unlike a cab licensee, can attract viewing custom and thus advertising revenue to its service by differentiating that service appropriately from the services provided by competing licensees. A cab licensee cannot differentiate his service from that provided by other cab licensees operating in his area. But without being able to do that, his cab licence still commands substantial value in the market because of the peculiar nature of the semi-monopoly a cab licence confers in meeting the available demand in the relevant area for cab services, a semi-monopoly created by the cab licensing system administered by the Department of Transport, and by the way in which taxicab services are delivered to customers on the Sunshine Coast.
Authority establishes that goodwill is not capable of an existence independently of the business in respect of which it exists and it follows that it cannot be transferred separately from that business. IRC v Muller & Co’s Margarine Ltd, supra, at 223-224, 228, 235; Geraghty v Minter (1979) 142 CLR 177 at 181, 193; Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110 at 121-122. (But cf FCT v Krakos Investments Pty Ltd (1995) 133 ALR 545 at 551.) The evidence, which was not in dispute before the Tribunal, indicates that the Transport Commissioner is only prepared to approve the transfer of a taxicab licence if he is satisfied that the transferee is in a position to carry on the entire business of operating the cab in respect of which the licence is issued. Section 17(6) the State Transport Act prohibits the assignment, transfer, lease, encumbering or dealing in any other way with a licence without the prior approval of the Transport Commissioner. Regulation 11, read with reg 10, requires a person desiring to apply for a transfer of his licence to make application “in the form provided by the Commissioner in accordance with such directions and instructions as are specified therein”. Although only extracts from the application for transfer of the licence of the respondent and her husband are included in the appeal book, it is clear enough that they did not purport to transfer the licence separately from the business: the sale price of $220,000 was for their whole business, comprising the cab in respect of which the licence was issued and its meter (although they were owned by the third party lessee of the licence); the shares owned by them in the taxi co-operative and the radio fitted to the cab (which was the property of the co-operative), as well as the licence. Item 1 of the printed form containing the information required by the Transport Commissioner in order to consider whether to approve the transfer of the licence from the respondent and her husband to the purchasers, is itself
in the form of an application for the transfer of the licence to the purchasers. Item 2 of the printed form headed “Description of Vehicles and Particulars of Sale” required the provision by the applicant-respondent and her husband of information with respect to the following: the licensed vehicle the subject of the transfer application; the entire sale price for the business and its apportionment between that vehicle; the price and description of the parts and other property associated with the vehicle, the shares to be transferred and what is referred to as the “goodwill (licence value)”. The applicant-respondent and her husband were required to give the Transport Commissioner an assurance, incorporated in item 3 of the form, of the truth of all the information in the application which they supplied, not just that relating to the licence or the cab in respect of which it was issued. The same was required of the purchaser-transferee: by item 4 of the form of application, the purchasers-transferees “apply for the transfer to us of licence to hire as detailed in item 2 of this application and certify that particulars on sale in item 2 are true and correct”. In applying in item 4 of the form of application for the transfer of licence to him as detailed in item 2, the purchaser of this business was referring to the transfer of the whole of the business, including vehicle, equipment, shares and licence. As to the shares, item 15 of the form is a certificate from the manager of the relevant taxicab company or group of cab operators that the purchasers had been accepted as members of the Sunshine Coast taxi co-operative. The officer of the Department of Transport whose statement was put in evidence described one of the essential steps in the licence transfer process as involving, where appropriate, the endorsement of the application for transfer by a recognised cab company or group of operators approved by the Commissioner.The Transport Commissioner requires, in order to decide whether to exercise his statutory discretion to approve the transfer of a taxicab licence from the holder to a purchaser, information not confined to the identity of the proposed transferee and the vehicle in respect of which the licence is issued, but extending to all the elements of the sale of which the licence is but one part, including confirmation that the proposed transferee is acceptable to the taxi company or group of operators to which he must belong, in accordance with Department of Transport requirements, if he is to be entitled to carry on the business of operating the licensed cab. This, I think, shows that a licence is only capable, in practical terms, of being transferred in the context of the transfer of the entire business to which it relates. Even though a taxicab licence may be a chose in action and capable in legal theory of being transferred as a separate item of property, it appears not to be possible, as a matter of fact, to transfer a taxicab licence, save as part of the transfer of the licensee’s entire business. The rule that goodwill cannot be dealt with separately from the business with which it is associated is therefore no impediment to this taxicab licence being identified as the source of the whole of the goodwill of the licensee’s business.
The licence here in question was purchased by the respondent and her husband from the Department of Transport as a newly issued licence in 1987. The appellant submitted that there could then have been no goodwill associated with the licence because there was then no business in existence with which it could be associated; the appellant referred to dicta in authorities such as IRC v Muller & Co’s Margarine Ltd, supra, at 224 to the effect that goodwill “is the one thing which distinguishes an old-established business from a new business at its first start”. The appellant argued that, if the $189,000 sale consideration attributed by the parties to the licence represented the value of the licence, as opposed to the goodwill of the business sold, the capital gain upon that disposal would be $72,071, ie, the difference between the $189,000 sale consideration and the price of $85,000 paid by the respondent and her husband to the Department of Transport, appropriately indexed, when they acquired the licence. If, however, the $189,000 was characterised as goodwill, the capital gain on disposal would be the whole of the $189,000 because, there being no business in existence when the licence was acquired in 1987, there could be no goodwill involved in the $85,000 then paid for the licence. However, while it is no doubt true, as a general rule, that only established businesses can have goodwill, that is not an inflexible rule: McHugh J, in Hepples v FCT (1991-1992) 173 CLR 492, pointed out, at 542, that, while goodwill is commonly valued by estimating the worth of purchasing several years of the past profits of a business, goodwill may exist in the case of some kinds of new business before they ever start to trade. Further, it appears to be established that the location of a particular site may be such as to ensure the attraction of custom to it, quite independently of the efforts of the proprietor of the business if a particular kind of business is operated there. See Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35 at 41 and 48 and Box v FCT, supra, at 398. This inherent site goodwill attaches to a new business of an appropriate kind from the moment operations commence; whether the proprietor of the business can realise the value of the inherent site goodwill on a disposal of his business, ie, whether it will comprise an element of the goodwill of his business, will depend upon his capacity to transfer an interest in the land in which such site goodwill inheres on the disposal of his business. If, as I think is the case, it is not essential that
a business be an established business with a history showing the existence of a customer connection likely to endure into the future before it can be said to have goodwill, once it is accepted that a business can possess monopoly goodwill, it is difficult to see why a new business cannot have a value from the outset in excess of the value of its tangible assets, because of that monopoly: the proprietor could be confident from the first day of his business operations that its monopoly will attract custom to it, ie, that it has an already existing goodwill. The whole value of the licence purchased from the Department in 1987 for $85,000 was in the assurance it conferred on the respondent and her husband that they would have a share of the custom for cab services on the Sunshine Coast, ie, that sum was the measure of the monopoly goodwill that acquisition of this licence conferred on the new cab business with which it was necessarily associated. It must be taken into account in assessing the amount of the gain that accrued to the respondent upon the disposal of her interest in the goodwill of the taxicab business in 1992.I agree with Beaumont J’s reasons for rejecting the respondent’s objection to the competency of the appeal.
In my opinion the appeal should be dismissed. I agree with the order as to costs proposed by Beaumont J, for the reasons his Honour gives.
I certify that this and the preceding 13 pages
are a true copy of the reasons for judgment
herein of the Honourable Justice Drummond.
Associate:
Date:
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION No. QG 189 of 1995
On appeal from the Administrative Appeals Tribunal
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant
AND:JUDITH STELLA MURRY
Respondent
BEFORE:Beaumont, Drummond and Kiefel JJ
PLACE: Brisbane
DATE:25 July 196
REASONS FOR JUDGMENT
KIEFEL J:
I have read the reasons of Beaumont J but I am, with respect, unable to agree that the assignment, for consideration, of the taxi licence in question equates with a disposal of "goodwill" or that such a licence can itself be regarded as a form of goodwill.
I understand the term "goodwill" to refer to an asset which has no existence independent of the business to which it relates and one which is comprised of a number of elements. It would not therefore include a singular asset, even if it assures income, which can be sold or assigned as a distinct item of property. It is those two features which, in my view, the cases have regarded as essential to describe the "goodwill" of a business. I do not, respectfully, share the view that the cases have departed from such a definition and
that some new technical meaning ought now to be attributed to the term when it is used in legislation.
In Federal Commissioner of Taxation v Krakos Investments Pty Ltd(1995) 133 ALR 545 Hill J in a detailed discussion of what his Honour described as "types" of goodwill at some points may be seen to have cast doubt upon the requirement that goodwill is always inseverable from its business. The views expressed by his Honour do not, in my respectful view, accord with the authorities as to the meaning to be attributed to goodwill and, in any event, did not form part of the reasoning to the decision in that case.
The facts relevant to this appeal are set out by Beaumont J. Here a motor vehicle, a radio and meter, shares in the taxi cooperative and the licence in question were sold. For my purposes I need only emphasise that there was disclosed no basis for differentiating between one licence and another. The advantage that a licence secured, by the permission it granted, was the ability to earn an income in a particular area. In that sense its "value", it might be inferred, would be affected by the number of them in that area. Whilst one licence-holder could earn more than another, this would generally be brought about by longer hours worked than more customers being drawn to the business by any special feature of it. And the licence here could be productive of income not only by way of receipt of fares from the use of the taxi to which it related, but also by way of rental where the licence was leased or hired out, as had earlier taken place.
The two explanations of the concept of goodwill most often quoted are those of Lord Lindley and Lord Macnaghten in Commissioners of Inland Revenue v Muller & Co's Margarine Ltd[1901] AC 217:
"Goodwill regarded as 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 this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on."
(Lord Lindley, 235)
"It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has the power of attraction sufficient to bring customers home to the source from which it emanates."
...
"For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again...".
(Lord Macnaghten, 223-4)
By reference to one aspect of Lord Macnaghten's description, it might be said that a statutory licence could never attract customers, in the sense of operating to draw them to a business. It operates to the holder's advantage by simply ensuring that, by lack of choice, a number of people will have to use the taxi to which it is connected. A
statutory permit or licence is effective in the manner mentioned without being connected to any other feature relating to custom. It cannot be said to influence or secure custom. In this connexion one might compare it with a restrictive covenant given by a seller of a business which has been said to "enhance" the level of custom already built up by preventing the seller engaging in competition, and in that sense is taken to be part of goodwill: see Hepples v Commissioner of Taxation(1992) 173 CLR 492, 520 (Dawson J).
That goodwill is indivisible from the business to which it relates was confirmed in Bacchus Marsh Concentrated Milk Company Limited (In Liq) v Joseph Nathan & Company Limited(1919) 26 CLR 410; reiterated in Geraghty v Minter(1979) 142 CLR 177, 181, and 193; applied in Commissioner of Taxation v Just Jeans Pty Ltd(1987) 16 FCR 110, 122 and confirmed in Hepples' case 523, 542-3. In Geraghty v Minter Barwick CJ, after referring to the definitions in Muller's case, expressed the view that goodwill could not be conveyed in gross and that it remained attached to a business although its value, when it was realised, might be shared in proportions (181). Stephen J (193) did refer to the possibility of the goodwill of a partnership business consisting in a series of separate goodwills, but his Honour was speaking of distinct areas or activities in the business. His Honour did not at any point suggest that they might be taken to have a separate existence as "goodwill" and confirmed that goodwill could not be separated from the business.
The conclusion that goodwill cannot be separated from the business also reflects the concept of goodwill as a composite of a number of factors or elements working together, rather than as representing an income producing item of property which may be quite separately valued and dealt with. In Hepples' case McHugh J at 542-3 said: "It will be seen from the statements in Inland Revenue Commissioners v Muller that goodwill is the collective name for various intangible sources of the earnings of a business which are not able to be individually quantified and recorded in the accounts as assets of the business. The goodwill may be constituted by sources internally generated by the business entity or `from the combination or inter-relationship of entitles or groups of assets (synergistic benefits)' or both. [See the Statement of Accounting Standards AAS 18: Accounting for Goodwill (March 1984, par 7)]. Goodwill, therefore, is `inherently inseverable from the business to which it relates' (Geraghty v Minter (1979) 142 CLR 177 at p 193). It does not survive the cessation of the business and cannot be dealt with independently of that business [ibid, at pp 181, 193; Red Wing Malting Co v Willcuts (1926) 15F.(2d) 626, at p 633]."
(see also Toohey J at 519). The necessity that there be an interaction of elements to produce goodwill was also confirmed in Federal Commissioner of Taxation v Williamson(1943) 67 CLR 561.
The Deputy President constituting the Administrative Appeals Tribunal did refer to Bacchus Marsh; Muller's case and Box v Federal Commissioner of Taxation(1952) 85 CLR 387 but considered that they expounded no more than the "classical view of goodwill". The case which the Tribunal found of greater assistance, on the facts of this case, was Rosehill Racecourse Company v The Commissioner of Stamp Duties (NSW)(1906) 3 CLR 393 because it held that goodwill may, in some circumstances, be considered as severable from land or premises - which led to the comment by Rich J in Williamson's case that "to the extent [the goodwill] is personal it is only accidentally
associated with the land, and may be severed from it and dealt with it separately". With respect, in my view neither case is authority for the view that an asset which permits a person to earn income and which may be assigned or otherwise dealt with by leasing or hiring it, can itself amount to goodwill. As with a number of other cases referred to in connection with "goodwill", including Krakos' case to which I shall later refer, the Court in the Rosehill Racecourse case was concerned with whether goodwill (in the business of the racecourse) must have passed under the conveyance of the land. It held that the sale of the undertaking, business and goodwill of the racecourse were able to be considered separately from the land. But it did not hold, relevantly for present purposes, either that the privilege conferred by the licence was itself goodwill or that goodwill could be considered separately from the business and not just the land. Barton J (402) did refer to the decision in West London Syndicate Limited v Commissioners of Inland Revenue[1898] 2 QB 507 as authority for the view that goodwill was "separable". This was the subject of reference in Krakos' case (554). In context however I take his Honour to convey merely that goodwill was capable of being sold apart from the land which, it seems to me, was the sense in which A L Smith LJ spoke in West London Syndicate.
The Deputy President did acknowledge the need for a close connection between the licence, as goodwill, and the taxi business, in holding the licence was "so intimately connected with the business as to constitute part of the goodwill of the business". In my respectful opinion the fact that an asset be important, indeed essential, to a business and its income, does not render it goodwill. And, although the Deputy President also made reference to goodwill being composed of various elements, I am unable to agree that the
collection of "rights" there referred to (the "right to ply for hire"; "the right to substantiate another licensee" and the "monopoly right" in the licence), whilst indicative of aspects of the licence itself, describe goodwill. It would then be equated with a person's ability to earn income and not particular aspects of an established business which combine to draw and keep custom. By way of example, a business constituted by the holding of permission to hire a cab (or hire out the licence itself) is devoid of any additional feature as compared, say, with a business of hiring out vintage cars. Even then it would not be the licences to hire them out which amount to the goodwill of the business, but whatever is then developed as peculiar to that business and which then secures its portion of the market - for example the level or quality of personal service, the attractiveness of the car. And one might imagine that in some circumstances goodwill could develop with respect to a taxi cab operation, for example if a number of them and the licences associated with them were owned by one body and a reputation for service became associated with the name.
Krakos' case was not referred to in the decision of the Tribunal, but was the subject of argument before this Court as supporting the concept of severability of goodwill, which lies at the heart of the Tribunal's determination. The question in Krakos' case was whether a payment was, in truth, one by way of premium for the lease of the hotel premises or for the goodwill in the hotel business, as the parties had stated it to be in their contract documents. The discussion of severability with respect to the taxpayer's contention had as its focus what his Honour called the "prima facie rule" - that the whole goodwill of a public house had historically been seen as attached to premises (557). Hill J, with whom the other members of the Court agreed, was of the view however that at least
some part of the goodwill of the business in question must attach to the licence rather than the premises and that "more weight should now be given to the relationship between goodwill on the one hand and the limited statutory monopoly granted in the form of the licence on the other". The conclusion, that the payment was not to be characterised as a premium, was however reached by reference to the evidence, which did not suggest that aspects of the transaction were other than they purported to be. And it was facilitated by the provisions of a special condition which helped to characterise the payment in question (559). His Honour, (558) considered the earlier discussion concerning goodwill to be distinct from and detract from this "main issue". Nevertheless since reliance was placed upon the opinions expressed in that discussion is necessary to refer to it.
His Honour (551) doubted the proposition put forward by Lord Macnaghten in Muller's case - that goodwill has no independent existence - at least as one which could be universally correct. His Honour was of the view that the elements referred to which were said to make up goodwill, were:
"So disparate as to suggest that the different elements of goodwill are in fact different species of property or at least different kinds of valuable rights"
and that there seemed to be no reason why goodwill attaching to a name or to premises could not be dealt with separately. The decision of the Full Court in Commissioner of Taxation v Just Jeans Pty Ltd (122), (which his Honour later referred to (553)) is not supportive of this approach. His Honour then went on to refer to these "elements" as themselves "kinds of goodwill" - for instance site goodwill, personal goodwill and what his Honour described as "monopoly goodwill" such as may arise from patents or statutory
licences. There is no doubt that some assets, such a trade name or a patent, may be sold separately. But in my view, one is not then talking of a sale of "goodwill", even if the removal of one asset central to the business and its goodwill may be largely destructive of it. What one is speaking of is the sale of a distinct asset, separate from the goodwill to which it contributes as one might speak, for instance, of the sale of essential plant and machinery.
Of the earlier cases dealing with the relationship of goodwill to site, Box v Federal Commissioner of Taxation perhaps contains some statements which come closest to supporting the argument for the taxpayer. At 397 it was said:
"...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 be 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."
(the emphasis is added by me).
Their Honours were however concerned to demonstrate that not all goodwill is to be seen as connected with land or premises. And, whilst their Honours obviously considered that some factors which enhance the value of a business are more or even most important, it was nowhere suggested that whilst goodwill "includes whatever adds value to a business" whatever does add value is itself goodwill. Their Honours cited the definition by Lord Lindley (396-7) referred to above and went on to describe features of the custom of the business, none of which, relevantly, had any substantial connection to the bakery premises. They consisted of a "personal connection" which had been formed with purchasers to
whom bread was delivered; an exclusive licence for the area which "may have added something to the value of the goodwill" and the restrictive covenant. The absence of competition from its former operator was said to "add value" to the business and was sufficient to show that the money in question was paid for it and not something associated with the premises. But the payment was not characterised as one for goodwill which, it follows from the reasons, was seen to be comprised of a number of elements. All that was spoken of as capable of separate transaction was the restrictive covenant which, however, when added to the business helped to retain the personal connection on which the established goodwill was largely based.
Section 160ZZR(1) does not refer to the disposal of individual elements which might make up goodwill. It refers, relevantly, to the disposal of a business or an interest in it that includes the goodwill of the business. And whilst that includes the disposal of an "interest" in the goodwill I do not take this to refer to a severable part of goodwill as a whole, but simply that proportion of the goodwill arrived at by reference to the taxpayer's interest in it.
Nor does the section, or the Part within which it is contained, convey any legislative intent "including any policy which may be discerned from those provisions" which would permit or require a departure from the ordinary meaning of the word "goodwill" see Cooper Brookes (Wollongong) Proprietary Limited v Federal Commissioner of Taxation(1981) 147 CLR 297, 320 and Hepples' case, (535). And it is that meaning, in my view, which the cases have consistently applied. Hill J in Krakos case
(547) said that the section was introduced to overcome the objections of persons or groups associated with small business to capital gains tax becoming payable on the full amount of the gain arising from the disposal of goodwill of a business. If the section was intended to be responsive to these complaints it has not said that a narrower view should be taken of the meaning of goodwill so as to extend the benefit of the section to the sale of some assets, but not others. The result here is not that apprehended by Hill J in Krakos (547). There if the Commissioner's argument had been accepted the benefit of the section would have to be denied to every sale which involved a lease of hotel premises. In the sphere of small business one would think that a larger part of goodwill is likely to be derived from personal endeavour although it may take different forms. That would certainly distinguish it from the sale of other assets in a business which may have increased in value for reasons unconnected with the operators of the business. It is not necessary, for the purpose of obtaining the meaning to be given to "goodwill" in the section, to refer to its Explanatory Memorandum but it is noteworthy that whoever drafted it thought that the section would require that goodwill be derived from particular sources or be created by the taxpayer. These requirements have not however found expression in the section. In any event it seems to me that to deny the operation of the section to an item of property such as a licence, which accrues in value according to factors unrelated to the particular business, is hardly a result which could be said to be unintended by provisions concerning capital gains.
Whilst I have been unable to concur in the approach to the substantive question on the appeal I agree that the appeal was competent, the question before the Court on appeal involving one of law.
For my part I would allow the appeal.
I certify that this and the preceding eleven pages are a true copy of the reasons for judgment of the Honourable Justice Kiefel.
Associate
Date:25 July 1996
Counsel and Solicitors for
the appellant: Mr A Slater QC and Mr J Logan instructed by Australian Government Solicitor
Counsel and Solicitors
for the respondents: Mr J Muir QC and Mr G O'Grady instructed by McCullough Robertson
Date of Hearing: 26 April 1996
Place of Hearing: Brisbane
Date of Judgment: 25 July 1996
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