KRAKOS INVESTMENTS PTY LIMITED v DFC of T
Judges:Branson J
Court:
Federal Court
Branson J
Background
In this case the applicant appeals to the Court against an appealable objection decision (see Taxation Administration Act 1953 s 14ZQ), namely a decision of the respondent notified to the applicant by letter dated 22 July 1993 whereby the respondent disallowed the applicant's objection against an assessment dated 20 July 1992. The applicant's objection
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was against the inclusion of an amount in the assessable income of the applicant as a capital gain.On this appeal the applicant has the burden of proving that the assessment is excessive (Taxation Administration Act s 14ZZO(b)(1)).
Facts
The applicant is a South Australian company. Mr Jihad Hani (``Mr Hani'') is the managing director of the applicant. The applicant has been the registered proprietor of land at 4 Ramrod Avenue, Hallett Cove in South Australia (``the land'') since 25 September 1984. At about the time that it acquired the land the applicant caused a hotel (``the hotel'') to be constructed on the land. The applicant commenced to operate the hotel under the name ``The Cove Tavern'' in December 1984. It obtained a full publican's licence under the Licensing Act 1967 which became a hotel licence under the Liquor Licensing Act 1985. Such licence was held by the applicant until 31 January 1990.
On 17 November 1989 the applicant as vendor entered into a memorandum of agreement with Lorraine Shirley Kestell- Buscombe and Brian Leslie Kestell-Buscombe and/or nominees as purchasers (``the agreement''). The agreement provides that ``the Vendor... Hereby Agrees to Sell and the Purchaser... Hereby Agrees to Purchase the business plant and equipment (if any) and the stock in trade of the business (if any) upon the terms and conditions herein contained for the price specified in the... Schedule to be paid by the Purchaser at the times and in the manner specified herein and in the said Schedule''.
The Schedule to the memorandum of agreement contains the following definition of the business agreed to be sold:-
``The Business of hotel/tavern (leasehold) conducted at the licensed premises known and described as The Cove Tavern, 4 Ramrod Avenue, Hallett Cove, South Australia 5158 together with the goodwill thereof and all the fixtures fittings plant and equipment specified in the inventory annexed hereto.''
As to the Purchase Price the Schedule provides as follows:-
``Purchase Price: the sum of eight hundred and forty thousand dollars ($840,000) which sum shall be apportioned as follows between:
The business ............ $840,000.00 The land ................ $ N/(indecipherable) $840,000.00 -----------Plus an amount equivalent to the value of the stock in trade of the business (if any) as shall be determined as herein provided.''
The memorandum of agreement contains, amongst others, the following terms and conditions:-
``16. Plant Depreciation: The Purchase Price of any asset or assets subject to this Agreement in respect of which depreciation has been allowed or is allowable under the Income Tax Assessment Act 1936-1968... shall be the depreciated value thereof as at the date of settlement herein provided for the purposes of the (sic.) Section 60 of the Income Tax Act (sic.) or such value as declared in Form 6 of the Regulations of the Land and Business Agents Act 1973 or as amended if annexed hereto.''
(The exact meaning of this clause seems to me to be unclear but I do not regard this as significant for present purposes.)
``19. Name Rights: Subject to the provisions of special condition No. 5 the Vendor shall on settlement assign to the Purchaser the whole of the Vendor's right, title and interest in and to the business name and the Vendor shall deliver to the Purchaser on settlement a Notice in the appropriate form to the Registrar of Companies that the Vendor has ceased to carry on business under the business name and that the Purchaser has commenced to carry on business under the business name and the Purchaser shall forthwith sign that Notice and shall lodge the same in the office of the Registrar of companies.
20. Restrictions: The Vendor will not carry on or be interested directly or indirectly (whether as proprietor partner manager servant agent or beneficiary or otherwise) in any business of a like nature within a radius of three kilometres from the said premises for a period of two years from the date of possession and upon breach of this Clause the Vendor shall pay to the Purchaser the sum of $390,000 ($390,000) as and for liquidated damages and not by way of penalty.
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21. Assistance: The Vendor shall without remuneration for 30 days immediately after the date of possession unless otherwise agreed with the Purchaser remain in the business and during the said period introduce customers and trade representatives to the Purchaser.''
The ``special conditions'' of the memorandum of agreement include the following:-
``1(5) The Vendor and the Purchaser agree that the purchase price of Eight Hundred and Forty Thousand Dollars shall in respect of Goodwill value be determined at Four Hundred and Twenty thousand dollars ($420,000) and in respect of Plant and Equipment value be determined at Four Hundred and Twenty thousand dollars ($420,000).''
``1(8) Upon payment of the purchase price and interest (if any) in the manner provided herein the Vendor will grant to the Purchaser a Lease for a term of 5 years commencing on the day of settlement at an initial rent of $185,000 per annum payable monthly in advance and otherwise subject to the terms and conditions of the Lease which is annexed to this agreement. The annual rental shall be increased at the expiration of each one year period by the greater of 5% or the increase in the Consumer Price Index over the same period together with the further option of two 5 year renewals subject to clause 3.00 sections 3.01, 3.02, 3.03, 3.04 of the Lease.''
(The proposed lease is annexed to the memorandum of agreement.)
``2. If:
- 2.1 After the first and initial term of the Lease of five years referred to in clause (1.8) of this Agreement (`Lease') and
- 2.2 at the expiration of the Term
- 2.2.1 the Vendor is the beneficial owner of the Land; and
- 2.2.2 the purchaser is the beneficial owner of the Lease and of the goodwill of the business; and
- 2.2.3 the Purchaser is not in breach of any of its obligations under the Lease.
then the Purchaser may, by written notice given to the Vendor not more than one month after the date of the expiration of the Term require the Vendor to buy back from the Purchaser the goodwill of the business for the sum of $420,000. (Four hundred and Twenty thousand dollars.)
3. The rights of the purchaser under clause 2 are personal to the Purchaser and may not be assigned either before or after settlement of the sale under this Agreement, nor will the Vendor be required under that clause to purchase any part of the business other than the goodwill, but in all other respects the rights of the parties under clause 1 will survive and not be merged in settlement under this Agreement.''
``5. The Purchaser agrees that upon the expiration or early termination of the Lease referred to in this agreement the Purchaser shall transfer over and assign to the Vendor the Business name `The Cove Tavern' and any other name pursuant to which the Purchaser is conducting business upon the subject premises at the time.''
Legislative framework
The legislative provisions here considered are those that were in force at the time relevant for these proceedings. Part IIIA of the Income Tax Assessment Act 1936 (``the Act'') is concerned with capital gains and capital losses upon disposal of assets acquired by the dispositor on or after 20 September 1985. Section 160A of the Act defines ``assets'' widely to mean ``any form of property'' and so as to include ``goodwill and any other form of incorporeal property''. Goodwill is not defined for the purposes of Part IIIA of the Act.
Section 160Z(1) of the Act deals with the determination of capital gains and capital losses. So far as capital gains are concerned it provides:-
``Subject to this Part, where an asset other than a personal-use asset has been disposed of during the year of income:
- (a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income; or
- (b) [not here relevant].''
The asset in question in this case is not a ``personal-use asset'' within the meaning of the Act. Section 160ZH of the Act defines the
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terms ``cost base'' and ``indexed cost base''. Nothing here turns on these definitions.Section 160ZO(1) of the Act brings capital gains to taxation. It provides as follows:-
``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 includes that net capital gain.''
The methodology of calculating net capital gains is set out in s 160ZC of the Act. Such methodology is not of importance in this case. If a capital gain accrued to the applicant in the circumstances of this case it is accepted that it was a net capital gain.
Section 160ZS(1) of the Act is central to this appeal. It provides for the calculation of capital gain upon the grant of a lease. Its terms are as follows:-
``For the purposes of this Part, the grant of a lease of property shall not be taken to constitute the disposal of part of the property but shall be deemed to constitute the disposal by the lessor to the lessee of an asset (that is to say, the lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the lease.''
Although not directly relevant in the circumstances of this case, it should be noted that s 160ZZR(1) of the Act provides for the exemption of part of any capital gain arising on the disposal of a business inclusive of goodwill. It is in the following terms:-
``Where-
- (a) a taxpayer disposes of, or of an interest in, a business (in this section referred to as the `relevant business' ), being a disposal that includes, or includes an interest in, the goodwill of the business;
- (b) in a case to which paragraph (c) does not apply - the net value of the relevant business, or the value of the taxpayer's interest in the net value of the relevant business, as the case may be, is less than $1,000,000;
- (c) [not here relevant]
- (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 one-fifth.''
The issue for determination
The issue for determination in these proceedings is whether the sum of $420,000 or some part thereof agreed to be paid for the goodwill of The Cove Tavern business was a premium paid by the purchaser to the applicant for the grant of the lease of the subject premises.
Contentions
It is contended on behalf of the applicant that there is a distinction between goodwill and a lease premium: that goodwill is a species of personal property which attaches to the conduct of a business whereas a lease premium is a payment made in consideration of the acquisition of a lease. On the applicant's case even local goodwill, that is goodwill referable to the locality of a business, retains its character as a separate asset and does not form part of the land. It is the case of the applicant that the sum of $420,000 apportioned by the agreement as consideration for the sale of the goodwill of the business of The Cove Tavern is properly characterised as consideration received in respect of the disposal of an asset, namely goodwill, acquired by the applicant prior to 20 September 1985. So characterised the sum is not taxable in the hands of the applicant.
It is contended on behalf of the respondent that the business of The Cove Tavern had at the relevant time no goodwill distinct from the benefit of trading from the tavern premises - i.e. that the goodwill of the business was entirely referable to the locality of the business. In the alternative it is contended on behalf of the respondent that the value of any goodwill in the business distinct from that inherent in the use of the tavern premises did not exceed $100,000. Mr Slater QC, who with Mr Gretsas, appeared for the respondent put the case of the respondent in the following way:-
``where the advantage of trading is one which derives from the right to occupy premises, what is called goodwill is inherent in that right... and the mechanism for its disposal is the transfer of that right and the transfer of that right can happen in any of a variety of ways.... [W]hen as here there is the grant of the lease for an extended term,
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what is achieved is a disposal of goodwill and what is paid is not paid for something tangible or some legally distinct property called goodwill but rather is paid for that advantage which confers the property of goodwill; that is goodwill as an adjective title rather than substantive.''
The taxation consequence for which the respondent contends is that the sum of $420,000, or alternatively $320,000, is taxable in the hands of the applicant as a premium paid on the grant of the lease of The Cove Tavern premises.
It was not contended on behalf of the respondent that if the $420,000 were properly to be characterised as consideration received by the applicant for the sale of an asset being the goodwill of the business of The Cove Tavern, such asset was acquired by the applicant on or after 20 September 1985.
The nature of a lease premium
The Act does not define the term premium for the purposes of Part IIIA although it does so for other purposes (see ss 26AB and 83(1)). The potential ambiguity of the term is discussed by the Full Court of the Supreme Court of New South Wales in
Nixon v Doney [1961] 61 SR (NSW) 311 at 316. In that case it was necessary for the Court to determine whether certain payments made to a landlord were ``a sum paid as rent for or in respect of the occupation of premises'' within the meaning of s 35(3) of the Landlord and Tenant (Amendment) Act 1948 or were properly characterised as a bonus or premium. The Court stated:-
``The precise task is to ascertain in what sense these expressions are used in ss. 35 and 36 of the Act, since a `rent' on the one hand, and a `bonus' or `premium' on the other, have not always been, and are not necessarily now in all contexts, clearly distinguishable one from the other.
These expressions have often been used to designate no more than two components in the full or true rent of premises - one component which, under the name of `premium' or `bonus', is made payable as a capital sum at the inception of a tenancy... and another component which, under the name of `rent', is made payable by periodical instalments throughout its duration. The expressions `premium' and `bonus', and the equivalent expression `fine', have frequently been used in our legislation in contexts indicative of a recognition that payments made or provided for under these designations are, in truth, of moneys which would otherwise be included in the periodic rent...
There is, however, another sense in which the expression `bonus' or `premium' may be used. In this sense it is to be distinguished not only from the periodic rent payable under the lease but also from such a capital sum as has just been referred to. `The conception of ``requiring'' some money payment as a ``condition'' of the grant of a tenancy is well understood. To my mind, there is a real distinction between such a requirement as a condition precedent to the grant of a tenancy (on any terms) on the one hand, and, on the other hand, the provision in the lease or contract of tenancy for payment of some lump sum by way (as in the present case) of compounding of rent and in addition to the periodic rent....' `The latter, for reasons which I have already stated, if not in truth a disguised premium required as a condition of the grant, might, at lease, be properly regarded as a disguised part of the rent'. (
Woods v. Wise (1955) 2 Q.B. 29, at p. 48 per Lord Evershed M.R.). In this view of it, a premium is a `personal promise in consideration of the lease being granted' (
Hill v. Booth (1930) 1 K.B. 381, at p. 387 per Scrutton L.J.), as distinct from the rent which is a payment for the use of the land.''
Section 160ZS(1) of the Act speaks of a premium paid or payable for the grant of the lease. In my view this indicates that the term premium is used in the subsection in the second sense discussed in Nixon v Doney. That is, in the sense of a sum paid in consideration of the lease being granted as opposed to a sum paid in consideration of the right to occupy the relevant premises for the term of the lease (see also
King v Earl Cadogan [1915] 3 KB 485;
Hill v Booth [1930] 1 KB 381;
Strick (Inspector of Taxes) v Regent Oil Co Ltd [1966] AC 295;
Frazier v Commr of Stamp Duties (NSW) (1985) 17 ATR 64; 85 ATC 4735).
I did not understand Mr Slater to suggest to the contrary.
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Is goodwill property?
Mr Slater argued that on a proper analysis goodwill is not an asset at all: that there is no element of goodwill that is not properly characterised as being some other kind of right or property. The argument has intellectual attraction - although it is perhaps inconsistent with accepted authority that goodwill is indivisible (see, for example,
Geraghty & Anor v Minter & Anor (1979) 142 CLR 177 per Barwick CJ at p 181 and Stephen J at p 193. Also
Commrs of Inland Revenue v Muller & Co.'s Margarine Limited [1901] AC 217 per Lord Macnaghten at p 224). However, as Mr Slater acknowledged, Part IIIA of the Act with which this case is concerned is drafted on the basis that goodwill is property. Section 160A defines ``assets'' to include ``goodwill and any other form of incorporeal property''. Section 160ZZR(1) provides for the exemption from taxation of part of any capital gain arising on the disposal of the goodwill of a business.
Moreover the authorities plainly speak of goodwill as property. In Commrs of Inland Revenue v Muller & Co.'s Margarine Limited at 223 Lord Macnaghten said:-
``It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired, I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will - of course under the conditions attaching to property of that nature.''
It may be, as Mr Slater asserted, that it was not contended for the taxpayer in Muller & Co.'s Margarine Limited Case that goodwill was not property. However the speeches of each of their Lordships examine the concept of goodwill as property. For example, Lord Brampton stated at p 230:-
``Whether the goodwill and the land and the factory are rightly to be treated as combined and inseparable, or as separated from each other, each is undoubtedly property within the meaning of the Stamp Act, and has been decided so to be by a long string of cases...''
The Australian authorities similarly treat goodwill as property. (See
Tooth & Co Ltd v Commr of Stamp Duties [1909] 9 SR (NSW) 652;
Daniell v FC of T (1928) 42 CLR 296;
In re Income Tax Acts (Vic 1934 No 1) (1934) 3 ATD 4; [1934] VLR 250;
Appleby v Attard & Anor (1974) 48 ALJR 430;
Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 2 TPR 48;
Warman International Ltd & Anor v Dwyer & Ors (1995) 128 ALR 201.
In my view goodwill as that term is generally understood is property. Nothing, in my view, suggests that the term goodwill is used in the Act in other than its ordinary meaning. Indeed the terms of ss 26AB and 83(1) of the Act might be thought to suggest to the contrary. More importantly the language of Part IIIA of the Act clearly indicates that the Part has been drafted on the assumption that goodwill is property.
To the extent that it was pressed, I reject the submission that goodwill is not itself an asset within the meaning of Part IIIA of the Act.
The nature of goodwill
What is the nature of goodwill? The analysis of Lord Macnaghten in Muller & Co.'s Margarine Limited Case at pp 223-224 has long been regarded as authoritative. His Lordship there said:-
``What is goodwill? It is a thing very easy to describe, very difficult to define. 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 power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyze goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve
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the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such.For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. 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. No doubt, where the reputation of a business is very widely spread or where it is the article produced rather than the producer of the article that has won popular favour, it may be difficult to localise goodwill.''
The following passage from the joint judgment of Dixon CJ, Williams, Fullagar and Kitto JJ in
Box v FC of T (1952) 10 ATD 71 at 75; (1952) 86 CLR 387 at 397 is also frequently quoted:-
``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.''
I see no relevant conflict between the above authorities. I am content to adopt the descriptions of goodwill contained therein.
Local goodwill
Local goodwill, or site goodwill, was described in Box v FC of T in the following passage from the joint judgment of Dixon CJ, Williams, Fullagar and Kitto JJ:-
``Some premises have a site goodwill because the site has some particular advantage for carrying on a business as where premises adapted for a shop are situated in a position specially favourable for the business in a busy shopping area or where a licence can be obtained for carrying on a business such as that of a publican on a suitable site on which it would otherwise be unlawful to carry it on. Other premises may have acquired a site goodwill, as in the case of a retail store, because a profitable business has been carried on there for a number of years and people have become accustomed to resort to that site to do their business.''
(ATD p 75; CLR p 398)
There appears to be a conflict on the authorities as to whether local goodwill or site goodwill necessarily passes with the right to occupy the relevant land - i.e. whether it is severable from the land.
West London Syndicate Limited v Commrs of Inland Revenue [1898] 2 QB 507 involved a determination of whether an instrument pursuant to which the goodwill of a hotel business was sold was a ``sale of property other than lands''. The taxpayers argued that the goodwill in that case was ``nothing but the enhancement of the value of the premises agreed to be sold... and is not, property apart from such premises''. The majority of the Court of Appeal rejected this argument. A.L. Smith LJ said at pp 513-514:-
``I do not agree in this, for in my opinion goodwill is as capable of being sold as a separate entity for what it is worth as is the tenant's interest in the lease. It may be that by the terms of a lease each must be sold, if sold at all, to the same person; but that does not prevent them being sold as separate and distinct entities; and if so sold goodwill, in my judgment, is property, and is clearly not land.''
By contrast in Tooth & Co Ltd v Commr of Stamp Duties the majority of the Full Court of the Supreme Court of New South Wales, in a case concerned with the assessment of duty on the consideration for the transfer of a lease of a hotel in a circumstance in which the lease, goodwill and licence had been sold together, took the view that local goodwill attached to the premises necessarily passed by the transfer of the lease and was not separable from the premises. I do not read the majority judgments, however, as denying that local goodwill is properly characterised as goodwill. Indeed the following passage from the decision of Sly J at p 668 would seem to suggest to the contrary:-
``The next question to consider is whether the goodwill passed by the transfer of the lease. I am of opinion that the local goodwill attached to the premises necessarily passed by the transfer of the lease; such goodwill is not separable from the premises, and can
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only be regarded as situated where the premises are...''
In
Daniell v FC of T (1928) 42 CLR 296 Knox CJ was required to consider s 16(d) of the Income Tax Assessment Act 1922-1925 which provided that the assessable income of a person shall include ``premiums fines or foregifts or consideration in the nature of premiums fines or foregifts demanded and given in connection with leasehold estates''. At pp 302-303 His Honour, after reviewing many of the then authorities on the nature of local goodwill, said:-
``If, having regard to the decisions and dicta in these cases, I am at liberty to express an opinion on the abstract question whether the goodwill of a licensed victualler's business is separable from the premises in which it is carried on, my opinion is that while it cannot be said to be absolutely and necessarily inseparable from the premises or to have no separate value, prima facie at any rate it may be treated as attached to the premises and whatever its value may be should be treated as an enhancement of the value of the premises... There is no evidence that the goodwill as a separate item formed the subject of negotiations between the parties; on the contrary, the consideration for the lease and goodwill is stated in the agreement as a lump sum, and in the lease the whole sum is referred to as consideration for the granting of the lease.''
It seems to me that His Honour accepted that local goodwill, although it may be attached to premises, is yet distinct from such premises. I find no suggestion in His Honour's reasons that local goodwill is not properly characterised as goodwill.
The case of
FC of T v Williamson (1943) 7 ATD 272; (1943) 67 CLR 561, a decision of Rich J on appeal from the Taxation Board of Review, required consideration of s 88 of the Income Tax Assessment Act 1936-1940. Section 88 provided for an allowable deduction of a proportionate part of the amount of any premium paid by a taxpayer in respect of land which the taxpayer as lessee used for the purpose of producing assessable income during that year of income. By statutory definition in that case ``premium'' meant any consideration payable for or in connection with any goodwill attached to or connected with the relevant land. At ATD p 273; CLR p 563 of the report Rich J states:-
``As an abstract proposition, there can be no doubt that a particular goodwill may be local or personal or partly one and partly the other. Its character depends on the nature of the business or the circumstances. It is local to the extent to which the trade connection depends on the place in which the business is carried on, for example where there is only one hotel in a place the connection may be for all practical purposes entirely local. It is personal to the extent to which it is the personality, ability and good reputation of the trader that attract the trade and not the place where it is carried on. To the extent to which the goodwill is local it is attached to and cannot be severed from the land on which the business is carried on.''
However, His Honour went on at ATD p 273; CLR p 564:-
``But in the present case, the Court has little concern with the inherent nature of goodwill. It has to deal with a claim to a deduction based on a contention that the taxpayer paid a premium of £500 in respect of land of which he is lessee, because he paid it for goodwill attached to or connected with the land which was leased to him; and the question is whether the goodwill for which he paid was in fact connected with the land.''
His Honour concluded that there was no evidence in the case that personal as opposed to local goodwill was the subject of the payment sought to be characterised as a premium within the meaning of the Act as it was then framed. He therefore upheld the determination of the Board of Review that the premium paid for goodwill was a consideration payable for or in connection with goodwill attached to the relevant land.
As Mr Whitington, who with Mr Manetta appeared for the taxpayer, stressed, the particular statutory provisions under consideration in Williamson's Case make it difficult to give the remarks of Rich J a general application. However it may be noted that His Honour did not suggest that local goodwill is not properly characterised as goodwill: his concern was with whether the goodwill contracted to be paid for was goodwill attached to or connected with the relevant land. In
Berry v FC of T (1953) 10 ATD 262; (1953) 89 CLR653
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Kitto J in dealing with the same provisions of the Income Tax Assessment Act appeared to have no difficulty in characterising local goodwill of a business site as goodwill.It seems to me that local goodwill, in the sense of the particular advantage which a site has for carrying on a business, does necessarily pass with the right to occupy that site for the purpose of carrying on such a business. This does not mean, however, that local goodwill is not properly characterised as goodwill. In my view nothing in the authorities compels the conclusion that local goodwill is not goodwill as that term is ordinarily understood. Indeed as I read them the authorities assume that local goodwill is goodwill or, depending on the relevant circumstances, an element of goodwill. I can identify nothing in Part IIIA of the Act which suggests that the term goodwill is there used so as to exclude local goodwill.
I conclude that the term goodwill as used in Part IIIA of the Act includes local goodwill. That is, that local goodwill is an asset, or an element of an asset as the case may be, for the purposes of Part IIIA of the Act.
Was a premium paid for the lease?
It was not suggested in argument that the agreement was other than the result of arm's- length negotiations. It was not suggested to have been a sham or a deliberate contrivance to avoid the payment of capital gains tax. In my view the following passage from the reasons for decision of Hill J (with whom von Doussa J agreed) in
JB Chandler Investment Co Ltd v FC of T 93 ATC 5182 at 5190; (1993) 47 FCR 588 at 598 is of assistance in this case. His Honour after referring to views expressed by him in
FC of T v Cooling 90 ATC 4472 at pp 4481-4482; (1990) 22 FCR 42 at p 53 said:-
``In considering the entire context in which the payment was made and that context included the relationship between the firm and its service company, I expressed the view that the character of the payment in the hands of the recipient as income was not to be determined by focussing upon the words of the letter of the payer to the exclusion of all surrounding circumstances. My judgment in this respect was agreed to by the other members of the Court, Lockhart and Gummow JJ. But to accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case... where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.''
In this case arm's length negotiations resulted in an agreement to sell the business of The Cove Tavern for the sum of $840,000. Clause 1(8) of the ``special conditions'' of the agreement is set out in full earlier in these reasons. It provides that ``Upon payment of the purchase price... the vendor will grant to the Purchaser a Lease...''. I do not consider that these words in the context of the agreement as a whole are to be read as indicating that the payment of the purchase price, or any part of it, was consideration for the grant of the lease. The words ``[u]pon payment'' in the context of this agreement, in my view, identify the time at which the grant of lease was to be made, not the consideration for the grant. What the agreement identifies as the consideration for the payment of the purchase price is the business of The Cove Tavern together with the goodwill thereof and all the fixtures, fittings, plant and equipment specified in the schedule to the agreement.
By the agreement the parties apportioned the purchase price agreed to be paid for the business as to $420,000 as payment for plant and equipment and as to $420,000 as payment for the goodwill of the business. There is no issue between the parties as to the sum apportioned as payment for plant and equipment. The dispute between the parties relates solely to the $420,000 apportioned as payment for goodwill.
It is contended on behalf of the respondent that the goodwill of The Cove Tavern business was entirely local goodwill, or alternatively local goodwill to the extent of $390,000. On the view which I take of this case it is not necessary for me to make a finding in this regard. I note, however, that a number of clauses of the agreement appear to indicate that the parties regarded the business as having goodwill which was not local goodwill and ascribed value to such goodwill.
Nothing in the authorities as I read them requires the conclusion that a payment made in
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consideration of the passing of local, or any goodwill in a business conducted, or to be conducted, on leased premises is in reality the payment of a premium for the grant of the lease. I leave to one side, of course, cases which turn on particular statutory definitions not included in the Act. Moreover, the structure of Part IIIA of the Act, in my view, suggests against any such conclusion. Part IIIA recognises goodwill as an asset and provides separately, and in conflicting terms, for the calculation of capital gains upon first, the grant of a lease for which a premium is paid (s 160ZS(1)), and secondly the disposal of a business which includes goodwill (s 160ZZR(1)).In my view, in the circumstances of this case, the character of the $420,000 payment in dispute is to be determined by reference to the agreement reached by the parties. The agreement reveals that the consideration for the sum of $420,000 in issue was the goodwill of The Cove Tavern business. Part IIIA of the Act recognises goodwill as an asset capable of being disposed of with a business. It was not, in my view, open to the respondent to characterise such sum as a premium paid or payable for the grant of a lease within the meaning of s 160ZS(1) of the Act.
The applicant's appeal will be allowed. The assessment is to be remitted to the respondent to be amended in accordance with the law. I order the respondent to pay the applicant's costs of the application.
THE COURT ORDERS THAT:
1. The assessment of the applicant for the year ending 30 June 1990 be remitted to the respondent to be amended in accordance with the law.
2. The respondent pay the applicant's costs of the application.
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