Hepples v Commissioner of Taxation

The appellant Commissioner of Taxation appeals from the judgment of a judge of this Court (Branson J). At issue in the appeal is whether a payment of $420,000 made by Mr and Mrs Kestell-Buscombe ("the purchasers"), pursuant to an agreement dated 17 November 1989 to Krakos Investments Pty Ltd ("Krakos") was a premium paid or payable for the grant by Krakos of a lease. The background to the dispute between the parties may be shortly stated. Krakos, since December 1984, owned and operated a hotel under the name "The Cove Tavern" at Hallett Cove in South Australia. It held a licence in respect of the hotel, initially under the Licensing Act 1967 (SA) and later under the Liquor Licensing Act 1985 (SA). On 31 January 1990 that licence was transferred to the purchasers with the consent of the Licensing Authority. On 17 November 1989 Krakos entered into an agreement with the purchasers for the sale of the hotel business. It will be necessary to note the terms of the agreement in greater detail shortly. Suffice it to say here that the agreement provided for a total consideration of $840,000 being payable by the purchasers to Krakos, together with an amount equal to the value of stock in trade, and that a clause in the agreement allocated that $840,000 as to $420,000 in respect of plant and equipment and $420,000 in respect of "goodwill value". Krakos did not sell to the purchasers the freehold upon which the hotel stood. Instead, it agreed to grant to the purchasers a lease of the premises for a term of five years at an initial rental of $185,000 per annum, subject to increase yearly in accordance with the consumer price index. The agreement contained an option for two further renewals, each of five years. The agreement was completed, the purchase price paid and the lease granted to the purchasers. It is the sum of $420,000 which, in accordance with the agreement, was said to be allocated to "goodwill value" which the Commissioner says should be treated as a premium payable or paid for the grant of the lease to the purchasers.

THE STATUTORY BACKGROUND The issue between the parties arises in the context of Part IIIA of the Income Tax Assessment Act 1936 (Cth) ("the Act"), which Part is concerned with including in assessable income certain capital gains. It is unnecessary for the purposes of the present case to consider in detail the scheme of that Division. It suffices to refer to the discussion in the judgment of Brennan J in Hepples v Commissioner of Taxation (1992) 173 CLR 492 at 499 et seq. Relevant to the present case is the fact that the Part applies only in respect of the disposal of an asset which was acquired by a person on or after 20 September 1985. The term "asset" was defined at the relevant time in s160A as follows: "In this Part, unless the contrary intention appears, `asset' means any form of property and includes - (a) ... goodwill ...".

Thus a disposal of goodwill, being an "asset", after the introduction of Part IIIA may result in a gain being included in assessable income but only if the goodwill was acquired on or after 20 September 1985. From this it follows that if the payment of $420,000 is properly to be characterised as consideration for the disposal by Krakos of the goodwill of the hotel business, since that goodwill was clearly acquired before 20 September 1985, Part IIIA will have no application. Central to the dispute between the parties is s160ZS(1) of the Act which provides 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."

Subsection (2) of the same section has the consequence that the cost base of the lease to the lessor is limited only to such expenditure as has been incurred by the lessor in respect of the grant of the lease. Specifically, it would thus exclude any part of the cost of the underlying asset. One consequence of s160ZS is that the date of acquisition by the lessor of the underlying land leased is immaterial. A lease of land acquired a century ago would, if granted for a premium, bring about a taxable gain by force of s160ZS of the Act. It is the Commissioner's case that completion of the sale agreement by the grant by Krakos of a lease to the purchasers was a grant of a lease for a consideration by way of a premium of $420,000 with the consequence that there was a disposal by Krakos of an asset (the lease so granted) for a consideration equal to the so-called premium of $420,000. Finally, although not directly relevant to a resolution of the dispute between the parties but relevant to the argument between them, reference may be made to the provisions of s160ZZR. That section operates to reduce by a defined percentage the amount of a capital gain in the event of the disposal of a business or interest in the business, where that disposal includes goodwill or an interest in goodwill. The relevant percentage was initially twenty percent but was increased to fifty percent with effect to disposals occurring after 26 February 1992. The operation of s160ZZR is limited by an "exemption threshold" provided for in s160ZZRAA. Section 160ZZR was 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. The section is relied upon by Krakos which submits that the application of the concessional treatment of s160ZZR would be denied by the Commissioner in every case of a hotel acquired after September 1985, the goodwill of which was then sold to a purchaser who took a lease of the freehold. This is a powerful, although not conclusive, argument against the approach taken by the Commissioner.

It is necessary now to refer in greater detail to the terms of the agreement between the parties. The operative clause recorded an agreement for the sale and purchase of "the business, plant and equipment (if any) and the stock in trade of the business (if any) upon the terms and conditions herein contained." The expression "the business" referred to the business described in the Schedule said to be carried on in the licensed premises, also described in the Schedule. Reference to the Schedule shows the business as being described as: "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."

There is some confusion in the Schedule as to whether the description of the business then continues with the following words; "a leasehold interest in such terms as hereinafter described in that portion of land in allotment 5 of portion of section 478 ..." or whether those words refer to the definition of "the land", which is also contained in the Schedule. Nothing turns upon this. What is significant is that by the terms of the agreement Krakos agreed to sell to the purchasers the hotel business, including in that expression not merely fixtures, fittings, plant and equipment but also goodwill. Stock, which was also the subject of sale, was to be valued at the time possession was taken and paid for. The agreement provided that the purchase price of any asset depreciable under the provisions of the Act was to be the "depreciated value" as at the date of settlement. Other relevant provisions to the agreement were as follows: "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 Vendors' 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. 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. ... 23. Licence Approval: This contract shall be subject to the approval by the Licensing Authority of the transfer of the TAVERN Licence by the Vendor to the Purchaser and in the event that the transfer of the Licence is not approved by the Authority then this contract shall determine and the deposit, unless the termination of the contract is due to the default of the Purchaser, shall be refunded to the Purchaser after deduction of such costs, fees and expenses of and incidental to this contract as may be reasonably incurred at the time of the termination of this contract and in relation to or incidental to this contract. 24. Licence Conditions: The Vendor and the Purchaser shall each use their best endeavours respectively to obtain the approval of the Liquor Licensing Authority to a transfer of the TAVERN Licence from the Vendor to the Purchaser as soon as possible and, without limiting the Purchaser the foregoing: (a) An advertisement shall be published forthwith in at least one daily newspaper circulated in the State of South Australia of the intention of the Vendor and the Purchaser to apply for the transfer of the TAVERN Licence; and (b) the Vendor and the Purchaser shall jointly make application to the Liquor Licensing Authority for the transfer of the Licence as soon as may be possible; and (c) ...; and (d) The Vendor and the Purchaser shall certify a copy of this contract to be a copy of the contract of sale of the business; and the land (if y) [sic] (e) The Purchaser shall procure a certificate by each person who has agreed to advance moneys to the Purchaser for the purposes of this Contract setting forth full particulars of each such agreement."

A special condition 1(5) was in the following terms: "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)".

Special condition 1(8) dealt with the grant to the purchasers of a lease and was in the following terms: "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."

Special condition 2. provided: "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).

Finally, special condition 5. provided as follows: "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."

THE DECISION APPEALED AGAINST Branson J formed the view that the sum of $420,000 did not constitute a premium which the purchasers had paid to Krakos for the lease. In arriving at this conclusion her Honour placed weight upon the fact that the parties in an arm's length negotiation had apportioned the price payable by the purchasers between goodwill on the one hand and plant and equipment on the other. She referred to a number of authorities concerning the nature of goodwill and, in particular, the relationship between local goodwill and the site to which such goodwill may be seen to be annexed, and said: "Nothing in the authorities as I read them requires the conclusion that a payment made in 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 (s160ZS(1)), and secondly the disposal of a business which includes goodwill (s160ZZR(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 s160ZS(1) of the Act."

GOODWILL AS PROPERTY Before her Honour, counsel for the Commissioner had apparently argued that goodwill was not an asset at all, an argument which her Honour felt had "intellectual attraction". However, counsel for the Commissioner conceded before her Honour that Part IIIA of the act appeared to have been drafted on the basis that goodwill was property. Moreover, as her Honour observed, the trend of authorities clearly supports the view that goodwill is properly to be treated as property: cf, for example, Commissioners of Inland Revenue v Muller & Co's Margarine Limited [1901] AC 217 per Lord Macnaghten at 223-4. It is probably now too late in the day for such an argument to succeed. I need not, in any event, consider it because, before us, it was conceded that Part IIIA of the Act expressly treated goodwill as "an asset" capable of disposition. THE COMMISSIONER'S SUBMISSION The Commissioner's submissions may be summarised as follows. (1) In determining whether the proper characterisation of the sum of $420,000 is a premium for the grant of the lease or consideration for the sale of goodwill, the label which the parties have attached to the transaction is not determinative. Rather, the Court will look to the true nature of the transaction between the parties. (2) Goodwill of a licensed hotel of the kind the subject of the purchase and sale agreement necessarily adheres to the land upon which the hotel is erected. That goodwill was made available to the purchasers by force of the lease granted to them. Thus the consideration said in the agreement to be consideration for the goodwill was consideration for the grant of that lease. In consequence the consideration was a premium paid as consideration for the lease being granted. The first of these two propositions may generally be accepted. It is, of course, true that the Court will not be bound by the label which the parties have attributed to a particular transaction. The fact that the parties have, for example, described the agreement between them as a "Licence" would not be conclusive if the substance of their agreement was a lease: Radaich v Smith (1959) 101 CLR 209 at 214 per McTiernan J, 219 per Taylor J, 222 per Windeyer J. However, as the Privy Council observed in Australian Mutual Provident Society v Allan (1978) 52 ALJR 407 at 409, in the speech of Lord Fraser of Tullybelton in the context of whether the parties had established a relationship of master and servant, while the parties can not alter the truth of a relationship by putting a different label upon it, where their relationship is ambiguous, that ambiguity can be removed by the parties by the very agreement which they make with one another. That principle was reaffirmed in the same context in the subsequent decision of the Privy Council in Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] 2 NSWLR 597 at 601. Thus, in a case where no question of sham is suggested, and it is not suggested that the label used is not a genuine statement of the parties intention, that label will be given its proper weight. The Court, in support of the second proposition, was taken to a large number of authorities in which the nature of goodwill was discussed. Many of them were concerned with goodwill attached to premises, often referred to as "site goodwill". Not all of them were necessarily consistent. In the discussion which follows I have endeavoured to crystallise the relevant principles from these authorities. Goodwill is a species of intangible property (cf Potter v Commissioners of Inland Revenue (1854) 10 Ex 147) capable of being bought and sold. For the purposes of revenue legislation it is capable of having a local situs: Inland Revenue Commissioners v Muller & Co's Margarine (supra at 223). While goodwill may be not difficult to recognise it is difficult to define, at least in an exhaustive way. As an economic concept it may be seen as the difference in value between the tangible assets of a business and the value of the business if sold as a going concern. It is in this sense that it is often referred to as representing an "added value". There have been attempts in the cases to reach more useful and all embracing definitions. One such attempt, often referred to in the authorities, is to be found in the judgment of Lord Hershell in Trego v Hunt [1896] AC 7 at 16-17. Another is to be found in the often quoted discussion in Muller & Co's Margarine. Although goodwill was described in the latter case (at 223) as: "... the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom."

that description is, as Lord Macnaghten recognised, inadequate. Goodwill is, as his Lordship then said: composed of a variety of elements". Indeed these elements are 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. However, in Muller & Co's Margarine, Lord Macnaghten said (at 224):

"The goodwill of a business is one whole, and ... must be dealt with as such ... goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business."

Whether this proposition is universally correct must be doubted. For example, a business may have both goodwill attaching to a name and goodwill attaching to premises. There seems no reason why each of these aspects of the goodwill of such a business could not be dealt with separately. 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. The relationship between site goodwill and personal goodwill has been expressed in metaphorical ("zoological", the description adopted by Rich J in Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561 at 564; "Orwellian imagery", the description used by Lockhart, Wilcox and Gummow JJ in Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 at 256) terms by reference to the cat's, rat's, dog's (and perhaps the rabbit's) propensities to resort to a place or associate with a person: Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35 at 42 and at 50. I find it unnecessary to repeat that colourful discussion. What is more important is the distinction drawn in that case by Maugham LJ (at 48) between "adherent good will" and "net adherent goodwill". The latter is: "... the goodwill, if any, which will remain attached to the premises, not including the `site goodwill', that is, irrespective of customers who would come to a new tenant, starting a new business, simply because of their convenient situation."

The former is the totality of the goodwill related to the site, that is to say, the net inherent goodwill together with the site goodwill. The point of the distinction is that site goodwill may really be no more than the added value of the site, which reflects the fact that some customers are attracted merely by the convenience to them of the site. Just how specific that sort of site goodwill must be is unclear. If the owner of a shop in Pitt Street moved the shop to the opposite side of the road in the same street, it is hard to imagine that there would be any special value to either site. It may be otherwise if the shop were moved to another end of town. Site goodwill is usually referred to as the "mere habit of the customers resorting to the site". The nature of site goodwill is well described in the joint judgment of Dixon CJ, Williams, Fullagar and Kitto JJ in Box v Federal Commissioner of Taxation (1952) 86 CLR 387 at 398: "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."

Personal goodwill is best illustrated by the example of a pastry shop or restaurant whose customers return not because of the location of the business but because of some personal characteristic (such as the culinary talents) of the proprietor or chef. Personal goodwill has no relationship to premises but follows the person to whom it is attached. It is incapable by its very nature of being directly assigned to another, although it may be availed of by another securing the services of the person to whom the goodwill attaches and perhaps by that person agreeing not to work for another or in competition. For this reason, it may not be strictly accurate to refer to personal goodwill as "property". Because personal goodwill depends upon some personal characteristic of the owner of that goodwill, it, on any view, could not attach to the land on which the business was carried on: Cooper v Metropolitan Board of Works (1883) 25 Ch D 472 at 480, Box at 396. Then there is what may be referred to as "name goodwill". The proprietor of a business may have developed a particular reputation in a name which the law will protect. In such a case, custom may be attracted to the business by the very use of the name. In turn, the value of that name may be turned to account by its proprietor. An example of name goodwill is to be found in the Muller & Co's Margarine case, to which reference has already been made. Another is the Rosehill Racecourse Company v Commissioner of Stamp Duties (NSW) (1905) 3 CLR 393 where some (although on the facts of that case not much) value was attributable to the name "Rosehill Racecourse". While there may be difficulties in law in dealing with a trade name independently of the business to which it is related (cf Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110), modern experience makes it clear that names may be turned to account by means other than assigning or leasing a business (cf Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Limited (1986) 86 ATC 4740. No one could doubt the enormous value which accrues to brand names (such as Coca Cola) or business names (such as Macdonalds). 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. In such cases, as the High Court pointed out in Box (at 397): "... 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 (1947) 75 CLR 332."

It may well be that a liquor licence should be treated, for present purposes, as the grant of a statutory monopoly in a limited area and that significant goodwill may, in the result, attach to the licence. That is a matter to which I shall return later in these reasons. It suffices here to note that part of the goodwill which did not pass with the land upon which the Rosehill Racecourse was constructed, considered in Rosehill Racecourse Company v Commissioner of Stamp Duties (NSW) (supra), was the licence to run a racecourse conferred by agreement with the Australian Jockey Club which had a statutory right to license clubs to conduct race meetings. As indicated earlier, goodwill is often referred to as being that which adds value to a business. As Lord Lindley said in Muller & Co's Margarine (at 235) that added value may arise: "... by reasons 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...". There is a tendency in many of the cases to treat the goodwill of a public house as requiring the application of principles different from those applicable to other businesses. For my part, I do not think that is the correct approach. From the very earliest cases there was some dispute whether goodwill or "custom" of a public house should be treated as an independent species of property or merely as an adjunct to the property in which the public house was conducted. That dispute runs through the decision of the House of Lords in one of the earliest cases to deal with goodwill: Ricket v The Directors of the Metropolitan Railway Company (1867) 2 LR H L 175, see especially in the reasons of Lord Westbury (dissenting) at 204-5. In West London Syndicate v Inland Revenue Commissioners [1898] 1 QB 226 Channell J emphasised that the goodwill of a public house was inseverable from the enjoyment of the land and attached to possession of the land. So seen it was "an addition to the value of the land" (at 239). On appeal ([1898] 2 QB 507) the majority of the Court of Appeal (A L Smith LJ and Rigby LJ) took the view on the facts of the case that the goodwill was capable of separate sale because, at least in great part, it derived from the land of the establishment. The public house in question, it would seem, derived the greater part of its business from accommodation. As pointed out by Rigby LJ, customers would go to the hotel whether the building was at one address in the street or at another. Some part of the goodwill also depended upon the reputation of the proprietor. In the course of his Lordship's judgment, Rigby LJ placed emphasis upon the fact that the parties had bargained for and attributed a value for goodwill, in holding the goodwill to be separate from the lease of the hotel. A L Smith LJ (in a passage cited by Branson J below) said (at 513-4): "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."

Vaughan Williams LJ in the same case, in a dissenting judgment which had, so it was said, become authorative (but which had been not cited by her Honour), took the view that the goodwill in that case was inseparable from the land and passed with it, although accepting that in some cases goodwill could be dealt with separately, as, for example where a retiring partner assigned an equitable interest in goodwill to the continuing partners. It might incidentally be noted that it is the majority judgment (the passage cited above from the judgment of A L Smith LJ) which is cited with approval by Barton J in Rosehill Racecourse, to which reference has already been made. On the termination of a lease of a public house the goodwill adheres to the owner of the premises and is lost to the tenant. However, the parties to the lease may agree that the owner recompense the tenant for the goodwill: Llewellyn v Rutherford (1875) LR 10 CP 456 at 466-7 per Coleridge CJ and at 469 per Brett J, cited with approval by Lockhart, Wilcox and Gummow JJ in Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 at 256. During the continuance of the lease, however, the tenant is the only person who alone can sell the goodwill. Some cases, such as Ex parte Punnett; In re Kitchin (1880-1881) 21 Ch D 226 (see per Jessell MR at 233) may suggest the conclusion that there is a universal principle of law that the goodwill of a public house, in the sense of goodwill in all its aspects, must always pass with the house. Such a conclusion would clearly be in conflict with cases such as Tooth & Co Ltd v The Commissioner of Stamp Duties (1909) 9 SR (NSW) 652; and Daniell v Federal Commissioner of Taxation (1928) 42 CLR 296. In Tooth & Co the majority was of the view that a transfer of a leasehold estate in land upon which was conducted the business of a public house did not carry with it a transfer of the whole good will, some of which was personal, and did not pass with the premises. Cohen J, who dissented, was of the view that because the parties had contracted for goodwill separately from the lease, no part of the goodwill passed with the transfer. In Daniell, Knox CJ took what, with respect, I would see as the correct position, namely that the question whether goodwill of a public house in all its elements attaches to the land on which that business is conducted, is a question of fact to be determined by reference to the facts of each case. What his Honour there said (at 302-3), after referring to the English cases, was: "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 should be treated as an enhancement of the value of the premises."

Apart from the existence of the liquor licence, the significance of which I will discuss later, there is, as I have already suggested, no particular reason to think that the principles relating to the goodwill of a public house should be any different from those which relate to other businesses: cf Brown v Potter (1965) Qd R 268 at 273. The goodwill of a public house is like other businesses, in part referable to locality, in part to the way in which the business is conducted, in part to the personality of the publican and, perhaps, in part by the name of the public house to which some reputation may attach: cf Federal Commissioner of Taxation v Williamson (1943) 67 CLR 561 at 564. What makes the situation of a public house unique is the system of licensing applicable to the sale of liquor. The early history of the regulation of the sale of liquor in the United Kingdom is summarised in the Report of the Royal Commission on Licensing (England and Wales) 1929-31 (Cmd. 3988). It reflects a perceived need to control the sale of alcohol and thereby prevent drunkenness, a desire to ensure that those who retailed alcohol were of good character, a growing desire to reduce the number of outlets through which alcohol was sold and a desire to secure revenue in the nature of excise from the sale of licences. The foundation of the modern law may be seem to be the Alehouse Act 1828 (UK) which, with some amendments, remained in force until its repeal in 1910. Annual licences were issued authorising the sale of liquor on licensed premises. Licences could be transferred from person to person but were specific to the premises. The traditional theory was that the licensee would actually reside on the premises. Licences could not be removed from one premises to another except where the house was destroyed or in the case of public improvement. It was not until the Intoxicating Liquors Licences Suspension Act 1871 (UK) that there was jurisdiction conferred upon the justices to grant a removal of a licence to other eligible premises. That jurisdiction was limited to permitting removal only within the particular division in which the justice exercised jurisdiction and was conditioned upon the justice being of the opinion that removal was necessary to meet the wants of the neighbourhood to which the removal was to be made. Further, removal was possible only if no objection was made by the occupier of the premises from which the removal was to be effected and the justice was directed to take into account other reasonable objections. The 1871 legislation operated only for a year on a temporary basis. This limited power of removal was continued in the Licensing Act of the next year, although the discretion to permit removal was further cut down in the 1872 legislation and in the Licensing (Consolidation) Act 1910 (UK). The combination of a policy directed at the reduction of licences and no or limited power of removal evident in the United Kingdom clearly ensured in the latter part of last century and the early decades of the present century that goodwill in that country of a public house was substantially connected to the premises the subject of the licence. The Australian States, not unsurprisingly, inherited the temperance zeal of regulating and reducing liquor outlets, as well as the taxing zeal of funding the revenue through licensing fees. Thus, Australian liquor laws generally followed the English pattern, with some States enacting more liberal laws than others. At the relevant time, liquor licensing in South Australia was governed by the Liquor Licensing Act 1985 (SA). The scheme of the Act is to proscribe absolutely the sale of liquor without a licence: s129(1). It is also an offence for a licensee not to comply with the conditions of a licence: s129(4). The legislation then provides for the issue of various kinds of licence. Relevant to the present case is the hotel licence issued under s25. The holder of a hotel licence is authorised to sell liquor at certain times set out in the legislation "on the licensed premises", that is to say, the "premises in respect of which a licence is in force (being premises identified and delimited in the licence)": s26 and s4(1). An hotel licence is subject to the conditions set out in s27. Additional conditions may be imposed by the licensing authority: s50. In South Australia (the situation is not the same in some other States) a licence may be held by a corporation. The licensing authority has an unqualified discretion to grant or refuse applications made to it for reasons that it considers sufficient: s59. Applications which may be made to the authority are applications for new licences, applications for the transfer of licences from one licensee to another and applications for the removal of licences from one premises to another. Before granting a licence to an applicant, the authority must be satisfied that the applicant is a fit and proper person to hold the licence: s61. The authority must also be satisfied that the premises in respect of which a licence is sought are of a "sufficient standard" for the purpose and will not cause offence: s62. There is also a need, in the case of an application for the grant of a licence in respect of premises or the removal of a licence, to demonstrate the necessity of the licence to provide for the needs of the public in the locality: ss63, 67.

The licensing authority may approve the transfer of a licence from one person to another provided that the transferee is a fit and proper person to hold a licence. There is a prohibition upon a licensee selling or assigning his or her rights to carry on business in pursuance of a licence, unless the transfer has been approved by the licensing authority: s71. That prohibition, however, does not prevent a licensee from entering into a contract for the sale or assignment of his rights to carry on business subject to a condition precedent under which the sale is not to take effect until the transfer or assignment of the licence has been approved by the licensing authority. The only restriction placed upon the removal of licences is that if the new premises are the subject of a lease the lessor (and if there is a sub-lease the ultimate owner) must consent to the application. Thus, in South Australia, licences to sell alcohol are limited both to the person licensed and the premises licensed. However, subject to the discretion of the licensing authority and the matters referred to above, there is now no impediment in transferring a licence from one set of premises to another, just as there is no impediment in transferring a licence to another person who is a fit and proper person to hold a licence. Given the legislative difference between the situation existing in South Australia and that existing in 19th century England, it may well be there is a need to rethink the prima facie rule that the whole goodwill of a public house attaches to the premises. Socially the public house in an Australian city may well play a different role from that played by the local "pub" in 19th century England. But more significantly, the ability in South Australia to secure a transfer of the licence from one set of premises to another (albeit with the approval of the licensing authority) may lead to the conclusion 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 owner of premises the subject of a licence may sell those premises without the licence. A purchaser in the result obtains unlicensed premises which can not, unless a new licence is acquired, be used for the purpose of the sale of alcohol. The purchaser does not obtain the goodwill of the business theretofore carried on on the premises merely because those premises have been sold. The same is, of course, true where instead of a sale there is a grant of a lease, although the lessee may, by virtue of the terms of that lease, be obliged to carry on at all times the business of the sale of alcohol and, if permitted at all to assign the lease, may be required to transfer the lease only in conjunction with the licence. The true position is that the goodwill of the business carried on at licensed premises can only be transferred if the licence is also transferred with the premises. But with the ability to remove a licence from one premises to another the holder of the licence may well hold in the licence significant value. Put simply, at least some part of the goodwill of the business must attach to the licence rather than the premises. In summary I think it may be said that there are various kinds of goodwill, all of which, with the exception of personal goodwill, attach to property. Site goodwill clearly attaches to the site, although in the case of a public house the conclusion that all aspects of goodwill attach to the site ignores the significance in South Australia of the licence. Name goodwill clearly attaches to the trade name and at least where this involves a trade mark (registered or unregistered,) this name will be property. A mere business name may not be property. Monopoly goodwill attaches to the statutory monopoly right. Having regard to the disparate nature of these rights which together make up the goodwill of a particular business and which to some extent can be dealt with separately, I do not think it can be correct today to say that although comprised of separate elements goodwill is to be treated as inseverable. It is, however, correct to say that to the extent that the goodwill attaches to a species of property it may only be dealt with together with that property. But this is not to say that it is not capable of being dealt with as a separate species of property or as being the subject of a bargain and sale at a price. In the present case, the contract provided for the monopoly goodwill to be transferred by clauses dealing with the transfer of the liquor licence to the purchaser. It dealt with the personal goodwill by requiring the vendor to provide assistance during the thirty days after possession was given and in the covenant of the vendors not to compete; it dealt with the name goodwill by the requirement that the vendor assign its right title and interest to it and the contract ensured that site goodwill would pass by providing for the execution of the lease. The parties bargained that the purchase price for the business was to be $840,000, the rights to be sold being plant and equipment and "goodwill". I see no reason why this Court should rewrite the bargain between the parties so that the sale of the business is for $420,000, no part of the purchase price is to be allocated to the aspects of goodwill which I have referred to as personal goodwill, name goodwill and monopoly goodwill, but $420,000 is to be treated as the consideration for the site goodwill, even if it were then to follow that that $420,000 should be treated as a premium for the grant of the lease. I have discussed the cases dealing with goodwill and particularly the relationship of site goodwill to the land on which the business is conducted in deference to the submissions of counsel who, in a careful argument, took the Court to the most significant of the cases in support of his argument that, because the premises were licensed premises the goodwill of the hotel necessarily attached to the premises and so passed with the grant of the lease to the purchasers with the result that the consideration for goodwill was properly to be seen as consideration for the grant of the lease rather than consideration for the sale of goodwill. I think, however, that a consideration of these cases may well distract from the real issue in the case, namely, whether the payment expressed in the agreement to be the consideration for the goodwill of the business was a "premium" for the grant of a lease. For the purposes of considering this issue, I am happy to accept that goodwill adheres to the premises on which the business is carried on. The parties were in agreement as to the proper test to be applied in determining whether a payment was to be characterised as a premium for the grant of a lease. A sum will be a premium where it is paid as consideration for the grant of the lease. The expression is used in contradistinction to rent which is the consideration payable under the lease for the right of use and occupation of the leased premises during the term of the lease: King v Earl Cadogan [1915] 3 KB 485, Strick (Inspector of Taxes) v Regent Oil Co Ltd [1966] AC 295, Frazier v Commissioner of Stamp Duties (NSW) (1985) 17 ATR 64, Nixon v Doney [1961] SR (NSW) 311 at 316. It may, in passing, be noted, as McHugh JA pointed out in Commissioner of Stamp Duties (NSW) v JV (Crows Nest) Pty Ltd (1986) 86 ATC 4740 at 4747, in a judgment with which Samuels JA concurred, that the distinction between a payment which is made for the use of property for a term and a payment made by a lessee to the lessor not relating to the use of the property, is a difficult one. While that comment was made in the context of payments for services to be performed by the lessor, additional rates and the like, the same can be said of the distinction between rent and premium. As his Honour observed, in the decided cases the distinction seems often to turn on matters of form rather than matters of substance. That gives additional significance to the form which the parties in their bargain adopted, namely, that the payment made was consideration for goodwill, rather than for the grant of the lease. There have been a number of cases in the context of income tax where the courts have been required to consider whether a particular payment was to be treated as a premium for particular statutory purposes. We were taken to many of them by senior counsel for the Commissioner. I gain little assistance from most of these cases. Such assistance as can be derived from these cases supports Krakos rather than the Commissioner. Thus, in In re Income Tax Acts [1934] VLR 250 where the parties had apportioned the purchase price between lease, licence and furniture and there was evidence that the apportionment was agreed to as representing real values, it was held that the Commissioner was not bound to regard the sum of the amounts paid for the lease and licence as being consideration for the grant of the lease. Two propositions emerge from the decision. First, the allocation adopted by the parties was given effect to. Second, there was no principle of law that the licence could not be sold separately from the premises. This, the Court said, in what is clearly only dicta, was also the case with goodwill. Thus Mann ACJ said (at 254): "The authorities show that the licence as well as the goodwill attached to licensed premises may be the subject of a separate sale or lease, even although the premises themselves are demised or transferred by the same document, and that it is none the less true to say that there are two sales or two transfers because in practice and by reason of the circumstances attaching to the licence the transferee must in each case, from the nature of the business, be the same person." (emphasis added).

Federal Commissioner of Taxation v Williamson (1941) 67 CLR 561 was a case concerned with a claim for a deduction under s88 of the Act, available in respect of any "premium in respect of land ... used for the purpose of producing assessable income". The word "premium" was, however, defined in s83(1) as meaning, relevantly: "a consideration ... where the consideration is- a) in the nature of a premium, fine or foregift payable to a person for or in connexion with the grant or assignment by him of a lease."

The words underlined make it clear that the defined meaning could be wider that the normal meaning to be attributed to the expression "goodwill". The decision that an amount allocated in a purchase agreement as the price for goodwill was deductible as a premium within this definition may be explained by this wider meaning, although it is not clear from the report that this is the reason Rich J so concluded. For the Commissioner to succeed in the present case it is not sufficient that he establish by reference to the cases that the goodwill of the business passed to the purchaser by the grant of the lease. Certainly, so far as that goodwill was site goodwill, it must be so. Rather, the Court must be satisfied, contrary to the bargain of the parties, that the payment agreed by them to be made for the business was consideration for the grant of that lease (and, it might be said, that alone, although it must be accepted that the taxpayer would have the burden of proof if a question of apportionment arose). The present, it must again be said, is not a case where it was suggested that the agreement was a sham. While there is no evidence that the parties themselves bargained specifically for the apportionment of the purchase price adopted, that apportionment was determined by the accountant for Krakos and by signing the agreement adopted by Krakos. The present is also not a case where the rental payable under the lease was lower than a market rental. This was a matter explored in evidence through the testimony of a valuer called by the Commissioner who took the view that, if anything, the purchaser was required to pay more than the market value rent. There is an ambiguity in that testimony which must be recognised in that a higher market rental may enure for "licensed premises" than would be the case where the licence did not accompany the grant of the lease. The conclusion that the payment in the present case is not to be characterised as a "premium" is facilitated by the provisions of special condition (2), set out earlier in these reasons, which provided an obligation on Krakos to buy back the goodwill, if required by the purchasers so to do, and to pay, subject to the terms of the clause, $420,000 for it. If the $420,000 presently in dispute was a premium or the consideration for the grant of the lease, once paid it would not be returnable. Yet the parties have bargained for a put option, pursuant to which that amount may come to be repaid to the purchasers at the expiration of the lease. That is inconsistent with the amount of $420,000 being treated as a premium, ie as consideration for the grant of the lease. In the result I would hold that the sum of $420,000 was not a premium for the grant by Krakos of the lease to the purchasers with the consequence that the appeal must be dismissed with costs. I certify that this and the preceding thirty-seven (37) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Hill. Associate: Date: 19 December 1995

IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIAN DISTRICT REGISTRY ) ) GENERAL DIVISION ) No. SG44 of 1995 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT B E T W E E N: COMMISSIONER OF TAXATION Appellant

• and - KRAKOS INVESTMENTS PTY LTD Respondent REASONS FOR JUDGMENT Coram: Hill, von Doussa and O'Loughlin JJ. Place: Adelaide Date : 19 December 1995

I have had the advantage of reading the Reasons for Judgment of Hill J. I agree with those reasons and have nothing further to add.

I certify that this is a true copy of the Reasons for Judgment of Justice O'Loughlin. Associate Dated:

Counsel for the appellant : Mr A H Slater QC with Mr G Gretsas Solicitor for the appellant : Australian Government Solicitor Counsel for the respondent : Mr R J Whitington with Mr T C Evans Solicitors for the respondent : Minter Ellison Baker O'Loughlin Date of hearing : 15 November 1995