Federal Commissioner of Taxation v Connolly

The Federal Commissioner of Taxation appealed to the High Court of Australia against a decision of the Board of Review. The dispute concerned the inclusion of £500 in the assessable income of Thomas Hugh Connolly, the respondent taxpayer. This sum represented consideration paid to Connolly for a restrictive covenant entered into upon the sale of his retail storekeeper and newsagency business, which was conducted on leased premises. The Commissioner contended that this amount was assessable income as it constituted consideration paid for or in connection with goodwill attached to or connected with the land, pursuant to sections 83(1) and 84(1) of the *Income Tax Assessment Act 1936-1947*.

The legal issues before the High Court were whether the £500 paid for the restrictive covenant was consideration paid in connection with goodwill, and if so, whether that goodwill was attached to or connected with the land. The Court was also required to determine the incidence of the onus of proof in establishing whether goodwill was attached to the land, particularly in the absence of direct evidence.

The Court reasoned that, by analogy with the decision in *Box v. Federal Commissioner of Taxation*, the £500 paid for the restrictive covenant should be regarded as consideration paid in connection with goodwill. This was because such a covenant enhances the value of the goodwill by preventing the vendor from competing with the sold business. The critical question then became whether this goodwill was attached to or connected with the land. Unlike in *Box's Case*, where the taxpayer had adduced evidence to prove the absence of goodwill attached to the land, in this instance, there was no evidence presented by Connolly to discharge the onus of proof that rested upon him under section 190(b) of the Act. The Court held that for a retail business, goodwill is often connected with the locality where it is carried on, and in the absence of evidence to the contrary, the taxpayer failed to prove that the goodwill was not attached to the land.

Consequently, the High Court allowed the Commissioner's appeal, set aside the decision of the Board of Review, and affirmed the Commissioner's assessment. Connolly was ordered to pay the Commissioner's costs of the appeal.