Between: Commissioner of Taxation (Cth) -Appellant
And: Judith Stella Murry -Respondent

Judges: Gaudron J
McHugh J
Gummow J

Kirby JHayne J

Subject References:
INCOME TAX
Capital gains
Exemptions
Goodwill
Disposal of taxi licence and shares
Whether disposal of a 'business' that 'includes, or includes an interest in, goodwill of the business'
Nature of goodwill
Sources of goodwill
Value of goodwill
-asset
-goodwill

Legislative References:
Income Tax Assessment Act 1936 (Cth) - Pt IIIA; s 160A; s 160ZZR

Judgment date: 16 June 1998

Decision by:
Kirby J

[72] The amount of trouble which the concept of goodwill has occasioned to revenue law (not to say in other areas of discourse) is remarkable. For this reason, I differ from the majority in this appeal with hesitation. The fundamental reason for the difference derives from my conception of how the relevant provisions in the Income Tax Assessment Act 1936 (Cth) ("the Act") were intended to operate in a situation such as the present.

[73] For me, the solution to the problem before the Court is to be found in a consideration of the scheme of Pt IIIA of the Act (which, in part, makes provision for the taxation of capital gains as part of assessable income) rather than from a review of the way in which goodwill has been used in other legal and statutory contexts or explained by judges in their sometimes confusing and conflicting reasons. Necessarily, such reasons are addressed to the word in the particular context in hand. I have concluded that, on the better reading of the statutory provisions (which are all that are under our present scrutiny), the capital gain declared by the taxpayer was deemed to be reduced by half ^[F87] as she asserted. It follows that, in my view, the appeal from the Full Court of the Federal Court of Australia ^[F88] should be dismissed.

[74] As mine is a minority opinion with no consequence for the outcome of this appeal or precedential value, I will state it as briefly as I can. I am assisted in doing so because the relevant factual matters are not in dispute. They, together with the applicable statutory provisions, are set out in the reasons of the majority. I accept those reasons for the purpose of stating the facts and the legislation. In the approach which I favour, the only questions for decision relate to the meaning of goodwill in the provisions of Pt IIIA of the Act and the characterisation of the facts as found by reference to goodwill as that word is to be understood in this context.

[75] To explain how I part company with the majority, let me trace the reasoning which brings me to my differing conclusion.

The Difficulty of Defining Goodwill

[76] There is no definition of goodwill in Pt IIIA of the Act. The reason may be the great difficulty which has been experienced in formulating a definition of the concept. ^[F89] Almost a hundred years ago, the House of Lords declared that "goodwill" was "a thing very easy to describe, very difficult to define". ^[F90] Because no special definition is offered, several principles of construction may be availed of to help ascertain the meaning of the word in this context. As an ordinary word of the English language, it should be given the meaning which it usually bears, appropriate to the particular context and purpose. Because two centuries of jurisprudence have now gathered around the word ^[F91] there will sometimes be imputed to the legislature an intention to use the word in the way in which courts have explained it in like contexts. However, since there are clear differences in judicial expositions of the ideas inherent in the notion of goodwill and since the context of Pt IIIA is in some ways special, ingenious arguments should ultimately take second place to "the application of ... common sense". ^[F92] Words chosen to explain the concept of goodwill in differing contexts and in relation to different statutory language will only be of limited help in the elucidation of the way in which the word is intended to be understood in the scheme of Pt IIIA of this Act.

Approach to the Construction of Provisions for Tax Relief

[77] The introduction of capital gains tax provisions in 1986 ^[F93] brought about new problems for the meaning of the Act. There are various approaches that might be taken to ascertaining the meaning of a provision such as s 160ZZR of the Act which provides the relief to the taxpayer which she claims. ^[F94] Although the general purpose of taxation legislation is to raise revenue, a relieving provision, such as s 160ZZR, is designed, by definition, to lighten the burden cast upon the taxpayer. It may also be designed to achieve other social purposes. One, which was mentioned in the context of Pt IIIA, is the encouragement of small business, thought to be an important growth area for the provision of new employment opportunities: an objective of successive governments and parliaments of the Commonwealth. Provisions of this kind, affording relief to the taxpayer, have conventionally been treated as, to some extent, beneficial. It has been said that they "should not be narrowly construed and should be interpreted to promote the purpose or object underlying the relevant Act". ^[F95] Each case must depend upon its own statutory language and apparent statutory purposes. However, I consider that the foregoing approach is the correct one. It is the approach which I would adopt to the relieving provisions of s 160ZZR, understood in their context and construed against the undisputed facts of this case.

The Purpose: Relief to Small Businesses

[78] The precise purposes of s 160ZZR were not elaborated during argument by reference to the Minister's Second Reading Speech or the Explanatory Memorandum which accompanied the passage of the Bill introducing the provision into the Act. It was said that these were unhelpful and that, although some remarks made during the Parliamentary Debates were addressed to the construction, they fell outside permissible material. They were therefore not tendered.

[79] Nevertheless, in Commissioner of Taxation v. Krakos Investments Pty Ltd , Hill J, writing for the Full Court of the Federal Court, described s 160ZZR as having been "introduced to overcome small business objections to capital gains tax becoming payable on the full amount of a gain arising from the disposal of goodwill of a business". ^[F96] That description, which is certainly consistent with the language and apparent purposes of the section, seems uncontroversial. Part IIIA included in assessable income defined capital gains. ^[F97] The purpose of s 160ZZR was to reduce, by a defined percentage, the amount of a taxable capital gain in the event of the disposal of a business, or interest in a business, where that disposal includes goodwill or an interest in goodwill. Initially the percentage of reduction was fixed at 20 percent. Its increase, with effect on disposals occurring after 26 February 1992, to 50 percent ^[F98] was clearly intended, in the context (and by reference to the limitations imposed on its availability) ^[F99] to offer valuable and increased relief against taxation on capital gains in favour of small businesses.

[80] It is not really to the point to speculate on all of the social, economic or political reasons which may have lain behind this relief. But it is essential to appreciate the general statutory object if the scheme of Pt IIIA is to be accurately construed so as to give effect to the purpose of the Parliament. ^[F100]

[81] Common to most of the judicial attempts to describe "goodwill", in the various contexts in which the concept has been presented for elucidation, has been a recognition that the goodwill of a business is a "composite thing". ^[F101] It is a mistake to suggest that it is somehow divorced from the assets, personnel or other features of the business in question. It is not so disembodied as to have no connexion with such assets. The presence of such assets cannot deny the presence of goodwill which is related to the assets in a complex way which will vary from case to case. The components of goodwill necessarily depend on the peculiarities of the particular business in question -whether peculiarities as to locality, management, good employee relations, maintenance of a good "image", widespread recognition of a trade name or personal goodwill associated with particular employees of the business. ^[F102] Over the course of this century, from an "initial focus on maintaining customer relations" ^[F103] the concept of goodwill, in judicial elaborations, has gradually developed. It has expanded in "breadth, complexity and level of abstraction". ^[F104] Yet for all that, such expositions usually come back to common themes of "goodwill" as involving an intangible form of personal property that is somehow connected with bringing in custom. This is precisely how Lord Macnaghten described it so long ago in Muller. ^[F105] That description finds resonances in the opinion of Fuller CJ, writing for the Supreme Court of the United States in Metropolitan Bank v. St Louis Dispatch Co. ^[F106] It is also reflected in judicial discussions in other countries ^[F107] and in Australia. ^[F108]

Goodwill may Involve Absence or Reduction of Competition

[82] In many judicial analyses of the meaning of goodwill, the foregoing considerations have addressed attention to the extent to which there is an "absence of competition" in the particular market place where the goodwill is said to be operative. This may arise from a multitude of circumstances. They may include the nature and locality of the business, the costs and other impediments in setting it up ^[F109] or the execution of a restrictive covenant to restrain any return to the neighbourhood by a previous owner. ^[F110] But limitations on competition may also arise from a statutory licensing scheme which confers a right on the licensee to participate in a market where competition is confined to licence holders. ^[F111] In such a case, if goodwill is to enjoy a meaning apt to the small businesses affected by such licence schemes, the latter may be relevant to the source and quantification of the goodwill.

[83] As important to this case as consideration of Pt IIIA of the Act is the need to pay careful attention to the Queensland legislation under which the issue, renewal and transfer of taxi licences are regulated. ^[F112] Such licences afford to those who hold them oligopoly (sometimes referred to as "monopoly" or "semi-monopoly") interests which exclude competition with the "business" which holds the taxi licence in question in relation to the district or "licensed area" ^[F113] to which the authority, given by the licence, extends. The fact that a particular taxicab or driver might not enjoy the personal "goodwill" of identifiable taxi customers loyal to that particular driver is not conclusive. The "business" constituted by the vehicle, statutory licence and shares in the taxi cooperative etc does enjoy an undoubted, even guaranteed, absence of (or, more accurately, limitation upon) competition. To that extent the business enjoys the advantage of an "attractive force which brings in custom". ^[F114] The "attractive force" might not rest, as goodwill often does, upon warm feelings by the customers towards the particular business in question. But there must be many cases where goodwill depends not on the cheery faces of the officers and employees of the business but upon such considerations as the availability of the business when needed, as well as its proximity and convenience to customers. This is what the taxi business of the taxpayer offers. But it cannot offer it without the statutory licence which is the sine qua non of the business's goodwill.

Goodwill may go with Monopoly or Oligopoly Rights

[84] The absence of competition has, therefore, long been recognised as an element of business goodwill. Such recognition is virtually as old as judicial explorations of the concept of goodwill itself. It has been mentioned frequently when common law courts have turned to examine goodwill, usually in a revenue context. ^[F115] A line of authority in this Court has recognised the importance to goodwill of licences, statutory or contractual, which confer on a particular licensee effective monopoly or oligopoly rights which might appreciate over time with the growth of the relevant population and market. ^[F116] This is not therefore a new notion. It is one which has been repeatedly and, as I think, realistically recognised by this Court and by individual members of it.

[85] For my part, I see no error in the remarks of Hill J in Krakos. After reference to the authority in this Court which I have noted, his Honour concluded in words which I find entirely persuasive: ^[F117]

"[C]ommon 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. In such cases, as the High Court pointed out in Box ^[F118] ...

'the real value of the goodwill would lie in the fact of sole ownership and, so far as it has a locality, would be situated in the area over which the monopoly extended: Phillips v. Commissioner of Taxation '". ^[F119]

[86] To deny such "monopoly goodwill" to a business for which it is relevant and to sever and assign it solely to the licence which permits the monopoly (or quasi monopoly) rights involves a characterisation that is, in my respectful view, neither necessary nor sensible. More to the point, it is not one which is required by Pt IIIA bearing in mind the purpose of s 160ZZR to provide the small business taxpayer with a particular form of tax relief.

Characterisation Requires Attention to Relevant Legislative Purposes

[87] Although this is a matter upon which minds may differ, and although it is ultimately a question of characterisation of facts for the purposes of Pt IIIA, I consider it to be artificial to divorce the statutory licence, with its oligopoly rights, granted to the taxpayer in this case, from the business which that licence permits and for which it is absolutely essential. The business is the conduct of a taxi service within a given district of Queensland protected from competition (by intruders) in that district by a legislative scheme. Those who acquire such licences clearly acquire a most valuable business asset. It acquires value because it carries with it an intangible benefit essential to the business which it permits, namely the operation of a taxicab in the district for which the licence is issued. In my respectful view, the approach of the Commissioner in viewing the licence as a mere enhancement in value of other business assets is inconsistent with the recognition in Pt IIIA of the Act that, for its purposes (whatever may be the case more generally) goodwill is one of a number of forms of property. In this context, uniquely, it is included in the meaning of an "asset". It is to be recognised, as such, as a form of incorporeal property. It is possible to criticise these notions and to protest, against the background of general judicial exposition about the nature of goodwill, that they create difficulties because they involve erroneous assumptions. ^[F120] Perhaps at a theoretical level they do. However, these are protests to which the judges must turn deaf ears. Their duty is to give effect to the purpose of the Parliament as expressed in the language which it has chosen. It is not to stamp on that language preconceptions about the meaning of goodwill which have been formulated in other and different contexts and to achieve distinguishable legislative purposes.

Policy Considerations for a Broad View of Goodwill

[88] There are many reasons for adopting the broad view about goodwill in this context which found favour in the Administrative Appeals Tribunal ^[F121] and with the majority of the Full Court of the Federal Court. ^[F122] Not only does such an approach achieve what I take to be the purpose of Pt IIIA. It is in harmony with the fundamental notion that goodwill means every positive advantage which is acquired by an owner in carrying on a business. ^[F123] It is wrong, in my opinion, to take a narrow view of the nature of goodwill in the present context, not least because of the changing ways in which small businesses, including trans-national businesses, are now performed under a multitude of franchise and other licensing agreements, treaties and other legal rights. ^[F124] It is also wrong because it introduces a serious gulf between the notions of goodwill which are held by economists and accountants (on the one hand) and those which lawyers insist upon (on the other). One accounting text, for example, has expressly singled out the holding of a taxi licence as constituting "the major portion of the goodwill of that business". ^[F125] When, in revenue law, judges reach results which are out of harmony with economic analysis and accounting expertise, it is time for them to reconsider their preconceptions about the requirements of the legislation. ^[F126] Especially is this so where those requirements are found to produce results which involve conclusions which seem at odds with common sense.

[89] One such conclusion, as it respectfully seems to me, is that the taxpayer in this appeal (the respondent) had "no interest" in the subject "taxi business" so that the "goodwill" is found to have belonged exclusively to the driver who owned the vehicle and used it. Owning the vehicle did not permit that driver to use it as a taxi or for hire. Indeed, he was forbidden by law from doing so without the licence which belonged to the taxpayer. To characterise that licence as a severable asset of the business in the context of Pt IIIA of the Act fails to recognise the special meaning of "goodwill" in that context. That meaning takes its colour from the purpose of s 160ZZR(1) being to provide relief to a taxpayer disposing of a business or an interest in a business. If the benefits of a statutory licence which assure a market share that brings in custom were not to be regarded as part of the incorporeal property constituting the goodwill of a business for which that licence was necessary, it was for the Parliament to say so expressly. Far from excluding the advantages of such licences from the ambit of goodwill under Pt IIIA of the Act, the inclusion of "goodwill" in the definition of "asset" in s 160A (at the beginning of the Part) lends force to the taxpayer's suggestion that, in this context, "goodwill" is to be given a broad, and not a narrow, meaning.

The Lease of the Taxi Licence

[90] The fact that the taxi licence was leased to another person (Mr Gower) does not preclude its being a source of goodwill. One can readily imagine instances in which an asset which is leased out accrues in value through an increase in goodwill. A franchisor, having leased premises to a franchisee for a number of years, could reasonably expect his or her business to have gained value, as a result of an increase in goodwill. Once it is accepted that goodwill can be gained whilst the asset is in the hands of the lessee, it seems absurd to conclude that such an increase would not accrue to the benefit of the lessor in the event that the lease was terminated.

Other Issues

[91] In the Federal Court, the taxpayer raised a challenge to the competency of the appeal from the Administrative Appeals Tribunal which, if good, would have required rejection of the Commissioner's appeal which is confined to a question of law. ^[F127] That point was unanimously determined against the taxpayer in the Full Court. ^[F128] It was not reagitated before this Court. I shall assume that it was correctly decided.

[92] A significant part of the Commissioner's argument before this Court at first related to a suggestion that the taxpayer was not entitled to the benefits of s 160ZZR(1) for the reason that she had not "dispose[d] of, or of an interest in, a business" within that sub-section. It was pointed out that when the taxpayer and her husband transferred (with the necessary consents) the licence and shares that went with this particular taxicab, they retained two other taxicabs and the licences, shares and other "get up" which went with them. It was submitted that s 160ZZR(1) of the Act only had operation, according to its terms, where the taxpayer disposed of the entirety of his or her business or, where disposing of an interest in a business, thereafter continued in the business in a partnership or other relationship with the purchaser. There are various problems with this submission, not least that the Act refers to "a business", not "the business". In the end, however, the Commissioner accepted that this point had not been litigated in the Federal Court, nor expressly raised in the grounds of appeal to this Court. The point was therefore conceded, somewhat reluctantly, in favour of the taxpayer. I am content to accept that concession. However, at some future time, in the approach which I favour, it would have been necessary to return to the point in a case where it had been properly litigated.

Conclusion: The Capital Gain was Deemed to be Reduced

[93] The taxpayer disposed of a business within s 160ZZR(1), being the business of operating a taxicab in accordance with the taxi licence in question. Subject to taking a number of steps, all of which were duly taken, it was the taxpayer's right to dispose of the business. Without the statutory licence, there would have been no such business still less one to be disposed of. With it, the business enjoyed the oligopoly protection of access to a market of customers for taxis in the Sunshine Coast district of Queensland. Inherent in that business was therefore an element of goodwill being that which derived from the exclusion by the licensee of further competitors. To that extent the business with the licence offered the "attractive force which brings in custom". This has conventionally been a feature of goodwill in other contexts. Whatever doubts might otherwise have existed about the application of that notion to this context, they are dispelled by a consideration of the context in which s 160ZZR appears. Key factors to be borne in mind include (1) that s 160ZZR is a relieving provision, intended to afford small business owners a measure of relief from capital gains tax; (2) that a broad view of goodwill accords with the terms of s 160A; and (3) that such an approach is more in keeping with the way in which the term is understood by economists and accountants.

[94] In the context, therefore, the appreciation over time in the value of the taxpayer's assets included the component of goodwill which was protected by the licence. It was not, properly characterised, a separate asset of the business. It was the very essence, cause and entitlement that made the business possible, without which it would have been unlawful.

Order

Appeal dismissed.

[95] The taxpayer was therefore entitled to relief under s 160ZZR(1). The Administrative Appeals Tribunal and the majority of the Full Court of the Federal Court were right to so determine. I would dismiss the appeal.

[96] In accordance with the terms imposed on the grant of special leave, the appellant must pay the respondent's taxed costs of and incidental to this appeal and the special leave application and the costs in the Full Court of the Federal Court.