Box v Commissioner of Taxation

In February 1946 the appellant entered into a contract in writing with Parkinson whereby, subject to the consent of the Treasurer of the Commonwealth, he agreed to grant a lease containing an option of purchase of 86 Elphin Road to the purchaser for a period of ten years. He agreed to sell to Parkinson the plant and utensils used in the business for the sum of £1,250; and also agreed that for this consideration the purchaser should be entitled to the goodwill of the business, together with the proprietary recipes, if any, used in connection therewith; and that the purchaser should be entitled to the zone or area allotted to the vendor under the Bread Industry (Tasmania) Order made under the National Security (General) Regulations. By cl. 3 of the contract, it was provided that in consideration of the further sum of £1,750 (this being the sum claimed by the respondent to be assessable income) to be paid by the purchaser to the vendor on completion, the vendor agreed with the purchaser that during the term of the lease, or any extension thereof (and if the purchaser should exercise the option of purchase contained in the lease for a period of ten years from the expiration of the notice exercising such option), the vendor would not directly or indirectly carry on the trade or business of a baker or sell bread within a radius of five miles from the Launceston Post Office, nor would he permit the name of the vendor or the business style of "Elphin Bakery" to be used for such purposes within the same area. By an indenture made on 21st February 1946, the appellant, subject to the consent of the Treasurer of the Commonwealth, leased No. 86 Elphin Road to Parkinson for a term of ten years from 10th March 1946 at a monthly rent of £21 13s. 4d. The indenture contained an option for the lessee to purchase the premises during the month of September 1955 for £2,400. It also contained a covenant by the lessee that during the lease, or any extension thereof, the lessee would use and occupy the premises as a shop for carrying on the trade or business of a baker and pastrycook, and would, at all such times, keep the shop open for the sale of bread and small goods, and would not permit or suffer the premises or any part thereof to be closed or remain unused or permit or suffer the same to be used for any purposes other than as aforesaid without the consent in writing of the owner. The reference in the contract to the zone or area allotted under the Bread Industry (Tasmania) Order was a reference to the exclusive personal licence held by the appellant under that order to sell bread in the zone where he was selling his bread. The order was made on 13th July 1942 under the provisions of the National Security (General) Regulations. Hostilities had ceased six months before the date of the contract and it was evident that the validity of this order as an exercise of delegated legislation under the defence power was likely to be short-lived. But while it existed it gave the holder of the licence a monopoly to sell bread in the area in question.

The £1,750 was paid as consideration for the vendor entering into the restrictive covenant. It was not paid directly for the purchase of the goodwill. But such a covenant enhances the value of the goodwill because without it a vendor is not precluded from commencing a new business although he must not hold himself out as carrying on the old business or solicit its customers. Thus in Kennedy v. Lee [1] Lord Eldon said: - "There is another way in which the good-will of a trade may be rendered still more valuable; as by certain stipulations entered into between the parties at the time of the one relinquishing his share of the business; as by inserting a condition that the withdrawing partner shall not carry on the same trade any longer, or that he shall not carry it on within a certain distance of the place where the partnership trade was carried on". In Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. [2] , Lord Macmillan, delivering the judgment of the Privy Council, said: "The law does not condemn every covenant which is in restraint of trade, for it recognizes that in certain cases it may be legitimate, and indeed beneficial, that a person should limit his future commercial activities, as, for example, where he would be unable to obtain a good price on the sale of his business unless he came under an obligation not to compete with the purchaser". In Townsend v. Jarman [3] Farwell J. pointed out such a covenant plainly increases the value of the business in the hands of an assignee.

1. (1817) 3 Mer. 441, at p. 452. [ 36 E.R. 170, at p. 174]. 2. (1934) A.C. 181, at p. 189. 3. (1900) 2 Ch. 698, at p. 703.

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

Neither the contract nor the indenture of lease of 21st February 1946 provided for the payment of any consideration for the lease in the nature of a premium: consequently the respondent cannot rely on the first limb. No lease was surrendered as part of the transaction that took place between the appellant and Parkinson so that the respondent cannot rely on the second limb. He must rely on the third limb. The £1,750 was consideration paid in connection with the purchase of the goodwill of the business, so that the crucial question is whether this goodwill was attached to or connected with 86 Elphin Road. The majority of the board found that it was, but in our opinion this finding was not in law reasonably open on the evidence. The attributes of goodwill as a legal conception have been explored in many cases, including cases of the highest authority. At first the tendency was to place upon goodwill the limited meaning of nothing more than the probability that the customers would resort to the old place of business. Cruttwell v. Lye [1] . But a wider view soon prevailed. In Trego v. Hunt [2] Lord Herschell L.C. cited a passage from the judgment of Wood V.C. in Churton v. Douglas [3] that goodwill must mean every positive advantage that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was carried on, or with the name of the firm, or with other matter carrying with it the benefit of the business. He then cited a passage from the judgment of Jessel M.R. in Ginesi v. Cooper & Co. [4] in which his Lordship, discussing this passage, in relation to a business of stone merchants, said: - "attracting customers to the business is a matter connected with the carrying of it on. It is the formation of that connection which has made the value of the thing which the late firm sold, and they really had nothing else to sell in the shape of goodwill". Lord Herschell then continued: "I cannot myself doubt that they were right. It is the connection thus formed, together with the circumstances, whether of habit or otherwise, which tend to make it permanent, that constitutes the goodwill of a business". In Churton v. Douglas [5] Wood V.C., after referring to Cruttwell v. Lye [6] and Kennedy v. Lee [7] , pointed out that when in the latter case Lord Eldon was speaking of a nursery garden or a locality which customers must frequent to look at the plants and other things, and that when Sir Thomas Plumer in another case was speaking of a retail shop which a person must enter in order to buy the goods there exposed "they are only, as it appears to me, giving those as illustrations of what goodwill is. But it would be absurd to say that, where a large wholesale business is conducted, the public are mindful whether it is carried on at one end of the Strand or the other, or in Fleet Street, or in the Strand or any place adjoining, and that they regard that, and do not regard the identity of the house of business, namely, the firm When you are parting with the goodwill of a business you mean to part with all that good disposition which customers entertain towards the house of business identified by the particular name or firm, and which may induce them to continue giving their custom to it". In Inland Revenue Commissioners v. Muller and Co.'s Margarine Ltd. [8] Lord Lindley said "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. That in some cases and to some extent goodwill can and must be considered as having a distinct locality, is obvious, and was not in fact disputed. The goodwill of a public-house or of a retail shop is an instance. The goodwill of a business usually adds value to the land or house in which it is carried on if sold with the business; and so far as the goodwill adds value to land or buildings, the goodwill can only be regarded as situate where they are. In such a case the goodwill is said to be annexed to them."

1. (1810) 17 Ves. Jun. 335, at p. 346 [34 E.R. 129, at pp. 133, 134]. 2. (1896) A.C. 7, at pp. 17, 18. 3. (1859) Johns. 174, at p. 188 [ 70 E.R. 385, at p. 391]. 4. (1880) 14 Ch. D. 596, at p. 600. 5. (1859) Johns, at pp. 188, 189. [ 70 E.R., at p. 391]. 6. (1810) 17 Ves. Jun. 335 [34 E.R. 129]. 7. (1817) 3 Mer. 441 [36 E.R. 170]. 8. (1901) A.C. 217, at p. 235.

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

Section 84 (1) of the Income Tax Assessment Act makes premiums as defined by s. 83 part of the assessable income of a taxpayer. The Act does not provide for any apportionment of any sum paid for the goodwill of a business where the value of the goodwill may depend partly upon the business being carried on upon particular premises and partly upon other considerations. It would seem, therefore, that the whole of the consideration must form part of the assessable income if the situation of the premises of which the lease is granted or assigned is in any real sense an element in the value of the goodwill. 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: Potter v. Commissioners of Inland Revenue [1] . Clearly this is a common case where the goods are sold and delivered only over the counter, and it might often be so where the goods can also be ordered by telephone or mail and the store delivers the goods to the purchaser. In Federal Commissioner of Taxation v. Williamson [2] Rich J. said: - "The existence of local goodwill attached to premises is a matter of fact depending on the propensities of customers". These two forms of adherent goodwill have been discussed in the English decisions upon the meaning of s. 4 of the Landlord and Tenant Act 1927 Imp. - see, for instance, H. Morell & Sons Ltd. v. Canter [3] ; Stuchbery v. General Accident Fire and Life Assurance Corporation Ltd. [4] ; Lawrence v. Sinclair [5] .

1. (1854) 10 Exch. 147, at p. 159 [156 E.R. 392, at pp. 396, 397]. 2. (1943) 67 C.L.R. 561, at p. 565. 3. (1947) 2 All E.R. 533. 4. (1949) 2 K.B. 256. 5. (1949) 2 K.B. 77.

In the present case the value of the goodwill could not be said to be derived in any real sense from the situation of the shop and bakery at 86 Elphin Road. The premises are not situated in what is naturally a good shopping area and nothing had been done to build up a profitable trade over the counter resulting in a large number of customers forming the habit of resorting to the shop to buy their bread. The business did not add any value to the site. The land and premises would have had the same value whether the bakery was situated there or not. The uncontradicted evidence is that the rent payable under the lease and the purchase money payable if the option of purchase was exercised represented the full rental and sale value of the premises. The real benefit that Parkinson derived from the purchase of the goodwill and from the vendor entering into the restrictive covenant was that he could continue the business of selling bread to the old customers of the Elphin Bakery under that style and without competition from the appellant. The great bulk of the sales to these customers was made in their own homes, so that the real value of the goodwill had nothing to do with any particular site but consisted in the formation of a personal connection with a large number of purchasers of bread who were quite unmindful where the bread was baked, whether at 86 Elphin Road or elsewhere, so long as bread of the same quality continued to be delivered to them by the Elphin Bakery at their own homes. As the appellant said in his evidence, the sales in the shop were negligible and the only reason for the business being carried on at all was the bread round. The formation of that connection by the appellant must have been assisted by the exclusive licence which he had held since 1942 to sell bread in the zone area, and the transfer of that licence to Parkinson made it almost certain that he would be able to hold that connection and consolidate his position, for it would be inconvenient for an inhabitant of the area to have to purchase his bread elsewhere. This temporary advantage may have added something to the value of the goodwill. But there is no reason to suppose that the real consideration for the payment of the £1,750 was not what it purported to be, namely, the added value that the business would derive from the absence of competition by the appellant. Goodwill can only be said to be connected with land, however wide the meaning of the words "connected with" in s. 83, if the site forms a real element in the value of the business, so that the land has an added value because the purchaser of the business must purchase the land or obtain a lease and continue to carry on the business there, at least for a time, if he is to retain the real value of what he has bought.

The covenant in the lease to keep the premises open as a shop does not throw any light upon the question whether the goodwill was attached to or connected with 86 Elphin Road or not. No doubt the appellant contemplated that, if Parkinson did not exercise his option of purchase, the premises would revert to him at the end of the lease and that his restrictive covenant would then cease, so that he could, if he wished, recommence the business of a baker or relet or sell the premises to a lessee or purchaser desirous of doing so. It was therefore an advantage that the shop and bakehouse should be retained and there was a chance that a valuable goodwill might become attached to the premises because, owing to changes in the neighbourhood or as a result of the manner in which Parkinson carried on the business, a considerable number of the public had become accustomed to purchase their bread at the shop. But the fact that the appellant hoped to obtain these advantages at the conclusion of the lease could not throw any light upon the question whether the goodwill of the business was attached to or connected with the premises at the date of the contract.

It is to be observed that the payment in question in this case was not consideration "for" any goodwill; it could not fall within the definition of premium unless it were consideration "in connexion with" goodwill attached to or connected with the land leased. The case was argued on the assumption that the goodwill to be considered in such a case is the entire goodwill enjoyed in the carrying on of the business existing on the land, and therefore includes any goodwill which the land itself may be said to possess by reason of its natural or accrued suitability for that kind of business. We have discussed the case on that footing, and the conclusion we have reached makes it unnecessary to consider whether any payment which in truth is given for nothing more than a personal covenant against an individual engaging in a competing business could in any case be held to be consideration in connection with goodwill attached to or connected with land.

For these reasons the appeal should be allowed with costs and the respondent ordered to reduce the assessment under appeal by excluding the sum of £1,750 from the assessable income of the appellant derived during the year ended 30th June 1946.

The question in this case is whether the sum of £1,750 which was received by the appellant in the income year ended 30th June, 1946, was a premium within the meaning of s. 83 of the Income Tax Assessment Act 1936-1946 and, therefore, part of his assessable income for that year pursuant to s. 84.

It was contended on behalf of the respondent that the sum in question fell fairly within the third limb of the definition of "premium" as being consideration payable in connection with goodwill attached to or connected with land, a lease of which was granted by the appellant to the purchaser of his business. The appellant, on the other hand, argued firstly, that this sum did not become payable "for or in connexion" with any goodwill, and secondly, that even if it did, the goodwill was not "attached to or connected" with the land, a lease of which was granted.

I agree entirely with the conclusion contained in the joint judgment that "Goodwill can only be said to be connected with land if the site forms a real element in the value of the business, so that the land has an added value because the purchaser of the business must purchase the land or obtain a lease and continue to carry on the business there, at least for a time, if he is to retain the real value of what he has bought". Applying the test which is implicit in this statement it is, in my opinion, quite clear that there was no evidence before the Board of Review that the goodwill of the appellant's business was, in the sense in which the expression is used in s. 83, attached to or connected with the subject land.

I have stated my view on this point independently, because I am not, as at present advised, prepared to reject the first of the appellant's submissions. There is, I think, a great deal of force in the submission that, even if the goodwill of the business was in part connected with the subject land, the consideration for the appellant's covenant against competition was not consideration payable "for or in connexion with any goodwill attached to or connected with" the subject land. It was not suggested at any time during argument that the written agreement did not represent the real agreement between the parties or that the consideration provided thereby for the covenant against competition was not bona fide attributable to the giving of the covenant. This being so, I think it is open to argument that the sum in question was not consideration payable " in connexion with " the goodwill of the business nor in connection with any goodwill attached to or connected with the land and I wish to reserve my views on these points.

I agree that the appeal should be allowed and with the form of order proposed.