the Commissioner of Taxation of the Commonwealth of Australia v Judith Stella Murry [1996] FCA 1647;

the Commissioner of Taxation of the Commonwealth of Australia v Judith Stella Murry [1996] FCA 1647; - FCA 1996 case summary — Zoe

[91]

4. The permission constituted by the licence authorises the holder to share in meeting the demand for taxi services in the area in respect of which it is issued, to the exclusion of everyone other than the limited number of other persons who also hold taxicab licences for the same area. At the relevant time, there were only 43 licences for, and so only 43 taxicabs operating in, the Sunshine Coast area. Most of the custom for a Sunshine Coast taxicab business comes from kerbside pick-ups and radio bookings: none, in the present case, was derived from personal contact, where, eg, customers insist on the services of a particular driver. Profits are largely dependent on the extent to which the cab is on the road and on the skill of the driver, eg, in knowing which cab ranks to work at particular times. One cab operator can earn more than another by working harder and more efficiently. But, so far as customers are concerned, one cab is as good as another: no cab operating in the Sunshine Coast area is, by reason of the holding of any given licence, more likely than another to attract custom. Taxicab licences, whether newly issued by the Department of Transport or sold by an existing licensee, command very substantial prices. When the Department of Transport issues new licences for an area, it fixes the price by reference to private sales over the previous 12 months or so in that area. The prices at which taxicab businesses, typically comprising a licence, a cab, radio equipment and meter and shares in the taxi co-operative, change hands are governed by market forces, ie, they tend not to vary, at any particular time, from licence to licence. The appellant was essentially correct in submitting that all licences have the same value. There are, I think, a number of reasons for this: competition for custom for taxi services in a particular area is limited by the Department of Transport restrictions on the number of cab licences that it will issue for that area; an operator of one of the licensed cab businesses in the area is unable to differentiate, in the eyes of customers, the service he offers from the services provided by any of the competing cab operators. In any event, there is not "a significantly great margin between a bad operator and a good operator": the limited opportunity to earn a greater income than another licensee which a licence confers on the holder thus appears to add little, if anything, to the market value of a licence.

[100]

13. Authority establishes that goodwill is not capable of an existence independently of the business in respect of which it exists and it follows that it cannot be transferred separately from that business. IRC v Muller and Co's Margarine Ltd, supra, at 223-224, 228, 235; Geraghty v Minter (1979) 142 CLR 177 at 181, 193; Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110 at 121-122. (But cf FCT v Krakos Investments Pty Ltd (1995) 133 ALR 545 at 551.) The evidence, which was not in dispute before the Tribunal, indicates that the Transport Commissioner is only prepared to approve the transfer of a taxicab licence if he is satisfied that the transferee is in a position to carry on the entire business of operating the cab in respect of which the licence is issued. Section 17(6) the State Transport Act prohibits the assignment, transfer, lease, encumbering or dealing in any other way with a licence without the prior approval of the Transport Commissioner. Regulation 11, read with reg 10, requires a person desiring to apply for a transfer of his licence to make application "in the form provided by the Commissioner in accordance with such directions and instructions as are specified therein". Although only extracts from the application for transfer of the licence of the respondent and her husband are included in the appeal book, it is clear enough that they did not purport to transfer the licence separately from the business: the sale price of $220,000 was for their whole business, comprising the cab in respect of which the licence was issued and its meter (although they were owned by the third party lessee of the licence); the shares owned by them in the taxi co-operative and the radio fitted to the cab (which was the property of the co-operative), as well as the licence. Item 1 of the printed form containing the information required by the Transport Commissioner in order to consider whether to approve the transfer of the licence from the respondent and her husband to the purchasers, is itself in the form of an application for the transfer of the licence to the purchasers.

[103]

15. The licence here in question was purchased by the respondent and her husband from the Department of Transport as a newly issued licence in 1987. The appellant submitted that there could then have been no goodwill associated with the licence because there was then no business in existence with which it could be associated; the appellant referred to dicta in authorities such as IRC v Muller and Co's Margarine Ltd, supra, at 224 to the effect that goodwill "is the one thing which distinguishes an old-established business from a new business at its first start". The appellant argued that, if the $189,000 sale consideration attributed by the parties to the licence represented the value of the licence, as opposed to the goodwill of the business sold, the capital gain upon that disposal would be $72,071, ie, the difference between the $189,000 sale consideration and the price of $85,000 paid by the respondent and her husband to the Department of Transport, appropriately indexed, when they acquired the licence. If, however, the $189,000 was characterised as goodwill, the capital gain on disposal would be the whole of the $189,000 because, there being no business in existence when the licence was acquired in 1987, there could be no goodwill involved in the $85,000 then paid for the licence. However, while it is no doubt true, as a general rule, that only established businesses can have goodwill, that is not an inflexible rule: McHugh J, in Hepples v FCT [1992] HCA 3; (1991-1992) 173 CLR 492, pointed out, at 542, that, while goodwill is commonly valued by estimating the worth of purchasing several years of the past profits of a business, goodwill may exist in the case of some kinds of new business before they ever start to trade. Further, it appears to be established that the location of a particular site may be such as to ensure the attraction of custom to it, quite independently of the efforts of the proprietor of the business if a particular kind of business is operated there. See

[119]

9. The Deputy President constituting the Administrative Appeals Tribunal did refer to Bacchus Marsh; Muller's case and Box v Federal Commissioner of Taxation (1952) 85 CLR 387 but considered that they expounded no more than the "classical view of goodwill". The case which the Tribunal found of greater assistance, on the facts of this case, was Rosehill Racecourse Company v The Commissioner of Stamp Duties (NSW) [1905] HCA 57; (1906) 3 CLR 393 because it held that goodwill may, in some circumstances, be considered as severable from land or premises - which led to the comment by Rich J in Williamson's case that "to the extent (the goodwill) is personal it is only accidentally associated with the land, and may be severed from it and dealt with it separately". With respect, in my view neither case is authority for the view that an asset which permits a person to earn income and which may be assigned or otherwise dealt with by leasing or hiring it, can itself amount to goodwill. As with a number of other cases referred to in connection with "goodwill", including Krakos' case to which I shall later refer, the Court in the Rosehill Racecourse case was concerned with whether goodwill (in the business of the racecourse) must have passed under the conveyance of the land. It held that the sale of the undertaking, business and goodwill of the racecourse were able to be considered separately from the land. But it did not hold, relevantly for present purposes, either that the privilege conferred by the licence was itself goodwill or that goodwill could be considered separately from the business and not just the land. Barton J (402) did refer to the decision in West London Syndicate Limited v Commissioners of Inland Revenue (1898) 2 QB 507 as authority for the view that goodwill was "separable". This was the subject of reference in Krakos' case (554). In context however I take his Honour to convey merely that goodwill was capable of being sold apart from the land which, it seems to me, was the sense in which A L Smith LJ spoke in West London Syndicate.

[129]

15. Nor does the section, or the Part within which it is contained, convey any legislative intent "including any policy which may be discerned from those provisions" which would permit or require a departure from the ordinary meaning of the word "goodwill" see Cooper Brookes (Wollongong) Proprietary Limited v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297, 320 and Hepples' case, (535). And it is that meaning, in my view, which the cases have consistently applied. Hill J in Krakos case (547) said that the section was introduced to overcome the objections of persons or groups associated with small business to capital gains tax becoming payable on the full amount of the gain arising from the disposal of goodwill of a business. If the section was intended to be responsive to these complaints it has not said that a narrower view should be taken of the meaning of goodwill so as to extend the benefit of the section to the sale of some assets, but not others. The result here is not that apprehended by Hill J in Krakos (547). There if the Commissioner's argument had been accepted the benefit of the section would have to be denied to every sale which involved a lease of hotel premises. In the sphere of small business one would think that a larger part of goodwill is likely to be derived from personal endeavour although it may take different forms. That would certainly distinguish it from the sale of other assets in a business which may have increased in value for reasons unconnected with the operators of the business. It is not necessary, for the purpose of obtaining the meaning to be given to "goodwill" in the section, to refer to its Explanatory Memorandum but it is noteworthy that whoever drafted it thought that the section would require that goodwill be derived from particular sources or be created by the taxpayer. These requirements have not however found expression in the section. In any event it seems to me that to deny the operation of the section to an item of property such as a licence, which accrues in value according to factors unrelated to the particular business, is hardly a result which could be said to be unintended by provisions concerning capital gains.

At a glance

Court

Decision date

Before

Source

Judgment (131 paragraphs)

the Commissioner of Taxation of the Commonwealth of Australia v Judith Stella Murry [1996] FCA 1647; (1997) 149 ALR 56 (25 July 1996)

Parties

Legislation Cited (4)

Cases Cited (21)