ADMINISTRATIVE APPEALS TRIBUNAL
TAXATION APPEALS DIVISION
P. GERBER (Deputy President)
31 October 1995
Counsel for the Respondent:
Mr A.H. Slater QC
Mr J. Logan
Solicitors for the Respondent:
Australian Government Solicitor
Mr R. Lamont appeared for the Applicant.
The Tribunal decides that:
2. The applicant claims that having disposed of a business at a profit, some $72,071 of the capital gain for the partnership constitutes "goodwill" of the business within the meaning of s160ZZR of the Income Tax Assessment Act 1936 ("the Tax Act"). Further, being an "asset" for capital gain purposes (cf s160A(a)), the effect of the s160ZZR partial exemption is that the amount of the capital gain, which would otherwise accrue on disposal should be reduced by 50%. The Commissioner of Taxation ("the Commissioner") disagreed, claiming that the business consists of plying a cab for hire and that this is incapable of transfer when the licence is sold, hence there can be no goodwill, characterising the consideration (over and above the shares and cab) as a "premium", paid by the purchaser in order to enter the market. He therefore treated - and taxed - the whole of the applicant's half share of the profit ($36,036) as a capital gain. Hence this reference.
3. At the hearing in Brisbane, the taxpayer was represented by Mr R Lamont of Lamont See and Co, Accountants in Moloolaba, the Australian Government Solicitor, acting for the Commissioner, flew in Mr AH Slater of Queen's Counsel from Sydney, with him Mr JA Logan of learned counsel. Given the apparent significance the Commissioner attaches to the outcome of this case, I cannot refrain from expressing profound regret at the one-sidedness of the argument, the hearing taking, from beginning to end, just over two hours.
4. I was informed that the number of taxi licences authorised to operate in what is delineated as the "licensed area" was regulated at the relevant time by the Transport Act and Regulations (Qld). Thus a licensed vehicle may only operate within the area endorsed on the licence. Taxi licences are transferable (reg 22), albeit all transfers are required to go through - and be approved by - the Department of Transport ("the Department") and are subject to certain departmental requirements. Relevant for present purposes is the requirement that in order to operate on the Sunshine Coast, licensees must be members of the local co-operative, ie Suncoast, which has a monopoly in the area. At present, there are 43 taxi licence owners in the area.
5. The evidence, given by the taxpayer's partner/husband, established that there are two ways of acquiring a taxi licence in Queensland. One is to buy an existing licence, the other is to acquire a licence from the Department if and when it decides to issue new licences. This, in turn, depends on perceived need after a Departmental survey of the area. When the Department does release new licences, it fixes the price after consultation with the local co-operative and looking at previous sales. (The licence in dispute was a "new" licence acquired by the couple from the Department; their other licence was purchased on the open market.) However, since there is no certainty that any additional licences will be released, private sales are subject to market forces, and the sale price is, presumably, arrived at by nicely calculating the net worth of the business after everything else has been identified, including the risk of additional licences being released by the Department, the deregulation of the industry at some future time and the possibility of another pilot strike.
6. It became clear during the hearing that the gross operating profit of a taxi is largely dependent on how much the owner is prepared to commit him or herself to the business and the extent the vehicle is on the road plying for hire. The witness described running taxis as "a good little business", with an excellent cash flow and few outstanding debts: "It is a business that gives you all the advantages of most small businesses today without many of the disadvantages of owning a small business" (Transcript p.7).
7. The "T" documents included a copy of the application for the transfer of the licence on the official Department form, which sets out a description of the vehicle, the licence number, the sale price of the vehicle ($6,000), the value of the shares ($25,000), as well as what the form describes as "GOODWILL (Licence Value) $189,000". It goes without saying that whether or not any part of the consideration constitutes "goodwill" is to be determined by the law, not the label put on it in the instrument of transfer, just as "... the parties cannot by the mere words of their contract turn it into something else"; Facchini v Bryson (1952) 1 TLR 1386, per Denning LJ.
8. In cross-examination, the witness agreed that the major part of taxi work comes from kerbside pick-ups and through radio bookings. It seems a minor component may be said to be derived from personal contact, where customers may insist on the services of a particular driver. However that may be, this cannot affect my decision since, whatever may be said to be personal goodwill arising from driving cabs, none was shown to exist in the instant case. What did become clear was that driving cabs profitably requires a good deal of know-how ("experienced operators will know which (cab) ranks work best at which times"). From this, it was only a short hop, skip and jump for Mr Slater to get the witness to agree that it was not the licence which made the difference, but the skill of the driver, suggesting to the witness that, holding two licensed vehicles at the relevant time, the witness driving one and leasing the other, if they were to "swap" vehicles, their respective earnings would remain the same. In other words, quoting from Mr Slater: "It is not the particular licence that makes the difference, it is the skill of the driver". I suspect that the witness' response is more a tribute to Mr Slater's forensic skill in cross-examination than providing me with the answer to the issue I have to decide.
9. Addressing me on the law, Mr Slater, with his customary thoroughness, began by rounding up the usual suspects, giving me a list of cases going right back to Cruttwell v Lye (1810) 17 Ves 335, 34 ER 129. Having studied them all, I am more than ever confused by these cases, highlighting as they do, the complexity of identifying the characteristics of this elusive compound, which includes personal goodwill, goodwill of site, goodwill of name and/or reputation and, to further confuse the issue, the somewhat metaphysical goodwill adopted by accountants, who lump together as "goodwill" any potential future gain which may be derived from assets not otherwise identifiable.
10. Turning to the Transport Act (Qld), it may be said to "cover the field" with respect to taxi licences. For present purposes, I am satisfied that the only relevant provisions which may impinge on the issue of goodwill are the sections which deal with the transfer and renewal of licences (ss17 and 77 and regs 22 and 36(3), the last setting out, inter alia, the duties and obligations of cab drivers who "... shall at any time when (the cab) is available for hire accept a hiring to carry passengers or goods from any place within the vehicle's licensed area to any other place ...". Obversely, a member of the public is entitled to hail a cab and expect that it will take him or her to where they want to go within the licensed area "or within forty (40) kilometres of the principal post office within the licensed area". In other words, the vendor of a taxi licence sells (i) the right (subject to certain conditions) that the licence will be renewed and/or may be transferred, and (ii) the expectation that the cab will be patronised by the public.
11. Turning to the case law, I sighed with relief on reading Lord Macnaghten's observation in IR Commrs v Muller and Co's Margarine Ltd (1901) AC 213 that "goodwill is a thing easy to describe but very difficult to define" (a view obviously shared by the draftsperson of Part IIIA of the Act, which helpfully includes "goodwill" in the definition of "asset" but - less helpfully - fails to define it). Lord Macnaghten went on to state that goodwill:
12. This view is, of course, consistent with a long line of cases, beginning with Cruttwell v Lye (supra), where, at p346, Lord Eldon observed:
Mr Slater referred to Lord Eldon's dictum as "perhaps the classic statement of what is meant by goodwill." I doubt it, if only because it ignores the "dogs" and "rats", of which more later. Indeed, it took less than 50 years for Lord Eldon's definition to be questioned. Very properly, Mr Slater referred me to Churton v Douglas (1859) Johns 174; 70 ER 385 where Sir W Page-Wood VC noted (at p 188) that Lord Eldon's view of goodwill was "too narrow" and substituted his own view:
13. Next I was referred to the famous case of Trego v Hunt (1886) AC 7, a case involving the extent a vendor of a business may compete with the purchaser absent a restraint provision in the contract of sale. To this may be added the observation of Warrington J who, in Hill v Fearis (1905) 1 Ch 466, after noting the speeches of Lords Herschell and Macnaghten in Trego, stated:
14. It is with no disrespect to Mr Slater to state that, put end to end, the bulk of these early cases do little more than reflect a 19th century view of free trade, reflecting a laissez-faire philosophy, Lord Macnaghten observing in Trego that Sir George Jessel MR (in Ginesi v Cooper 14 ChD 599) "went too far" in holding "that a person who had sold the goodwill of his business could not even deal with his former customers". Indeed, searching through the Year Books for cases dealing with the rights and wrongs of restraint of trade, ie having sold the "goodwill", may the vendor continue in the very kind of business he has sold - "to withdraw from the purchaser the benefit of his purchase", do little to help me in determining whether a taxi licence contains an element of goodwill for purposes of capital gains tax.
15. Returning to the famous Margarine case (supra), the case turned on two questions: (1) was the agreement to sell the manufacturing business (carried on abroad) "made" in England? and (2) was the goodwill of this business property "locally situate out of the United Kingdom" for purposes of the Stamp Act 1891? Mr Slater placed much reliance on some observations of Lord Macnaghten:
Lord Brampton asked himself (at p 230):
Finally, Mr Slater cited the extract from Lord Lindley's speech, who, at p 235 noted:
16. Next - and inevitably - came the reference to Whiteman Smith Morton Co v Chaplin (1934) 2KB 35 which resuscitated the somewhat obscure monograph on goodwill by Mr SPJ Merlin (Butterworth and Co 1907) in which the author divided goodwill, like Gaul, into three parts, one part ruled over by the cat, another governed by the dog and the third by the rat. This charming, if somewhat simplistic, epigram appealed to Scrutton LJ, who noted that:
17. The inadequacy of dividing goodwill into only three parts was already obvious to Maugham LJ, who in the same case felt compelled to add the rabbit (at p50). I am tempted to add the Falcon (falconis australis), that bird of prey which hovers over its marked territory hunting for its daily fare.
18. The Australian authorities to which I was referred really take the matter no further. In Bacchus Marsh Concentrated Milk Co Ltd (in liquidation) v Joseph Nathan and Co Ltd (1919) 26 CLR 410, Isaacs J noted (at p418), like Lord Lindley in the Margarine case, that goodwill is property and an asset capable of transfer. Nor does Box v FCT (1952) 86 CLR 561 do more than reiterate the "classical" view of goodwill.
19. A case I find of greater relevance is the decision of the High Court in Rosehill Racecourse Co v The Commissioner of Stamp Duties (NSW) (1905-1906) 3 CLR 393. The facts of that case, taken from the headnote, were as follows:
Griffith CJ concluded (at p 400):
O'Connor J (at p 409) noted:
20. I consider the case of some significance in that it concluded that goodwill may, in certain circumstances, be severable from the land and/or premises. In the Rosehill case, the goodwill was said to consist of a personal right or "privilege" which did not vest in a particular racecourse, but was accorded to a particular club. In other words, it did not go with the land. In that case, the land - like the cab in the instant case - was sold for a relatively minor amount; it was the right to hold race fixtures - the "goodwill" - which attracted the major consideration and was vested in the person of the vendor at the time of the sale. This, in turn, produced the comment by Rich J in FCT v Williamson (1943) 67 CLR 561 (cited by Mr Slater, albeit in a different context): "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."
21. In Williamson, the vendor of a chemist's business granted the purchaser a lease of the premises. In addition, the purchaser paid 500 pounds for the goodwill. The latter claimed to be entitled to deduct from his annual income a proportion of the 500 pounds being a "premium" within the meaning of s88 of the Tax Act. The Commissioner sought to argue that the goodwill of a pharmacy was personal and not attached to the land. The argument failed. In passing, Rich J observed that:
22. In other words, "goodwill" must be judged in each case against the background and the nature of the business in which it is claimed to arise. Above all, goodwill is a noun, not an adjective describing some elusive phosphorescent substance glowing in the dark or turning litmus paper blue given the right mystical incantations. It can be measured, weighed, valued, quantified - and sold. It is here that Mr Slater and I part company.
23. If I understand Mr Slater's argument correctly, he sees no difference between a taxi licence and a block of land. Thus, although the land will increase in value with the increase in the population, it cannot ever be said to contain an element of "goodwill". I agree that bare land contains no element of goodwill. At its highest, it is an inert investment whose "profit" is derived solely from its enhanced capital value when sold. But a taxi licence is surely different. Goodwill, an "asset" by definition for purposes of Part IIIA, unlike ownership of a block of land, consists of what Lord Macnaghten described as a "composite", ie "made up of a variety of elements which differ in their composition in ... different businesses ... One element may preponderate here, and another element there". As I understand the taxi business, it involves (i) the right to ply for hire ("it is a good little business"), (ii) the right to substitute another licensee for valuable consideration (subject only to the condition that the substitute is approved by the Commissioner of Transport) and (iii) what Mr Slater refers to as "the monopoly right" to operate a taxi in the specified area.
24. On that view, it seems to me that the taxi service operated by the taxpayer contains goodwill and what Mr Slater refers to as a "monopoly right" is, in reality, an attempt by Government to limit the number of licences in order to regulate and stabilise the market. It follows that the holder of a taxi licence not only obtains the right to exploit the licence by plying his or her cab for hire, but the advantage conferred by virtue of the monopoly, or, in the words of Warrington J in Hill v Fearis (supra) "the advantage, whatever it may be, which the (purchaser) gets by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which has been carried on for some time previously". It is this "composite" that the vendors enjoyed and which - the business carried on by them not coming to an end when they sold the shares, cab and licence - they intended the purchasers to possess and enjoy. If a taxi business cannot be operated without a licence - and that is made clear in the Transport Act - it seems to me to follow that the licence is so intimately connected with the business as to constitute part of the goodwill of the business.
25. In economic terms, what was sold in the instant case consisted of the shares (whose value is fixed by the cooperative), the Falcon sedan (whose value is governed by the second-hand cab market) and the residue - being the difference between the total amount received for the shares and Falcon and what the vendor was able to negotiate "all up" on the open market - is - in my view, more appropriately described as "goodwill" than - with all due respect to Mr Slater - as a "premium" to enter the taxi business.
26. I had occasion to deal with what constitutes a "premium" (albeit in a different context) in Case 51/94 94 ATC 447, in which I rejected the Commissioner's contention (as set out in IT2535) that the sale of a leasehold interest represents a "premium" rather than "goodwill". I remain unrepentant of the views I expressed on that occasion.
27. It is, in my view, overly simplistic to regard the consideration paid by the transferee to the transferor merely as consideration for the grant of a licence to operate a cab. As I noted in Case 51/94, the test whether an amount in question is a premium is to be determined by considering for what was that amount given. Applied to this case, was the amount given for the mere right to operate the cab, or was it for the benefit obtained by continuing the business which the transferor, as part of the cooperative, had carried on before him, ie joining the elite "club" of plying his cab for hire in the specified area? Once the issue is put in those terms, the "premium" analysis falls to the ground.
28. Turning to the Tax Act, it is now academic whether goodwill can constitute "property" capable of being disposed of, if only because of its inclusion in sec 160A(a) ("asset means any form of property, and includes an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property")). It follows that, provided the sale of the cab/shares/licence contains an element of goodwill, 50% of that otherwise taxable capital gain which accrued on disposal is exempt.
29. It was not submitted by Mr Slater that - if contrary to his submission - the licence were to contain an element of goodwill, it belonged to the cooperative rather than the licensee.
30. For these reasons I have concluded - albeit with some hesitation - that the instant composite sale of the cab, licence and shares contains an element of goodwill and that the amount is the difference between the identifiable components (shares and cab) and the open market price the taxpayer achieved in an arm's length transaction - in accounting terms: "the excess of the cost of acquisition incurred by the (purchaser) over the fair value of the identifiable net assets acquired." There is no dispute on quantum.
31. For the above reasons the objection decision will be set aside and the objection allowed in full.