Commissioner of Taxation v Murry M36/1996 [1997] HCATrans 109 (4 April 1997)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B36 of 1996

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

JUDITH STELLA MURRY

Respondent

Application for special leave to appeal

BRENNAN CJ

DAWSON J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 4 APRIL 1997, AT 10.29 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC: If the Court please, I appear with my learned friend, MR J.A. LOGAN, for the applicant. (instructed by the Australian Government Solicitor)

MR R.W. GOTTERSON, QC: May it please the Court, I appear with my learned friend, MR G.W. O'GRADY, for the respondent. (instructed by Messrs McCullough Robertson)

MR SLATER: Your Honours, what justifies the grant of special leave in this case is not the amount of tax at stake. The amount of tax is only some $7,000 and it is considerably less than the costs of this application. What justifies the grant of special leave, in our respectful submission, is the inconsistencies in, and the aberrant results from, the treatment of the acquisition and disposal of a range of business assets which would follow if the decision below stands as correct.

May I briefly remind the Court of the essential facts. The taxpayer was a member of a partnership which owned two taxi cab licences. One was applied to a motor vehicle driven by the licensed husband of the taxpayer in the course of the partnership activities and the other, the licence at issue, was leased to an unrelated but licensed driver and used with a vehicle owned by that unrelated driver. That second licence, together with the related co-operative shares, was sold to a purchaser by agreement on a departmental form. The essential terms of that departmental form appear at page 18 of the application book. Your Honours will see that there is a sale price of the vehicle of $6,000 nominated at about line 14, then the two items sold by the partnership described as "shares" for $25,000, and what the departmental form describes as goodwill (licence value) for $189,000.

BRENNAN CJ: What was sold? Those assets separately, or was a business sold?

MR SLATER: Your Honour, what was sold was those assets. The taxpayer chooses to call - - -

BRENNAN CJ: Seriatim, as it were; one by one?

MR SLATER: They were sold - I am not sure that "seriatim" is an appropriate expression to use in this context, your Honour. They were sold by the one agreement. They are denominated individually, they are each individual items of property and each of them has a price allocated to it. Nothing else was done. That is to say, there was nothing by way of a convenant in restraint of trade, there was nothing by way of introduction to clients, there was no use of premises, there was no clientele passed across, there was no vehicle passed across, there was no licence to drive the cab passed across. All that was passed across - - -

BRENNAN CJ: But it was an entire contract?

MR SLATER: In the sense that that is the entirety of the contract, yes, your Honour.

BRENNAN CJ: No, that is not the question. Was it an entire contract in the sense that the parties were obliged on each side to execute the contract fully?

MR SLATER: Yes, your Honour.

BRENNAN CJ: Then was the subject of the sale a business?

MR SLATER: In our submission, no, your Honour.

BRENNAN CJ: Why not?

MR SLATER: In our submission, the subject of the sale was simply shares and the licence because those assets of themselves do not comprise a business. They are part of the wherewithal with which a business might be conducted, but only part. You cannot operate a cab without the car and the partnership did not own or sell the car. You cannot operate a cab without a licensed driver. The partnership did not pass to the purchaser the use of a driver's licence or a driver. So that all you had here was some of what you needed to conduct a business, in the same way as if one were to sell a piece of machinery which was used in manufacturing widgets. That would be part of what was needed to conduct a manufacturing business but it would not be the sale of a business.

BRENNAN CJ: But if you sold the piece of equipment and the shed in which the equipment was placed for the manufacture of widgets and an on-sale widgets agreement to purchasers, all to the same purchaser, and allocated separate prices to each, what would you then sell?

MR SLATER: In those circumstances, just the assets your Honour has identified because an operating business requires, as well, the benefit of staff to operate it, the benefit of supply contracts - I think your Honour has identified use of premises - it probably involves the use of a business name and various other things that I am afraid I cannot think of just on my feet - but you would require all of those and normally it would be done by way of an agreement which is described as an agreement for sale of business and is truly and correctly described as such, but this agreement was simply particular of vehicle sold by somebody else, shares sold by the partnership, and the licence sold by the partnership, accepting as I do that the departmental form describes the licence as "goodwill". But we say that that label cannot determine the true nature of the transaction.

GUMMOW J: Is not your real complaint, in a practical sense, that this permits an attribution of a section of the purchase price to this particular asset which may be disproportionate, thereby gaining the advantage for the taxpayer of section 160ZZR?

MR SLATER: It goes beyond being disproportionate, your Honour, because we say that what has been done here is to give to that which was sold a character which is not warranted under the Act. We say that what was sold here was the licence and that in point of fact there was no goodwill in the sense in which that expression has been used, for example, by Justice McHugh in Hepples' Case as being the difference between the acquisition cost and the fair value of the assets acquired under the purchase agreement. Goodwill is that advantage which is contributed to by the assets transferred, but it is not the assets transferred themselves. It is the equation of goodwill with the assets transferred which, in our submission, produces the aberrant results which we say would follow from this decision if it were left standing.

Your Honours, the ordinary conception of goodwill is that which is stated in the accounting standard, which is binding upon - - -

GUMMOW J: Is there only one ordinary conception of goodwill?

MR SLATER: In our respectful submission, yes, your Honour. It can be expressed in a variety of ways, but it is nonetheless the one conception. We would say that it is best expressed in the accounting standards which appear at folio 28 of the materials which we forwarded to the Court at about point 8 of the page, paragraph 31 of the accounting standard:

Goodwill which is purchased by the company shall be measured as the excess of the cost of acquisition incurred by the company over the fair value of the identifiable net assets acquired.

While your Honours have that material open, can I draw your Honours' attention to paragraphs 34 and 35 on folio 29 which require:

34 Goodwill which is purchased by the company shall be brought to account as a non-current asset at acquisition.

35 Goodwill which is purchased by the company shall be systematically amortised to the profit and loss account over the period of time during which the benefits are expected to arise.....shall not exceed twenty years.

BRENNAN CJ: Mr Slater, we cannot really determine this by reference to accounting standards, can we, nor, for that matter, by reference even to the provisions of the Act? In other words, one does not approach this on the footing that we must allocate something as between headings of an Act. The question is whether or not, upon the terms of the Act, it applies to that which exists. The question must be whether or not there was a sale of a business, including goodwill.

MR SLATER: In the ultimate, your Honour, the question whether goodwill is sold is the question at issue between the parties. What, however, in our submission, merits a review of the matter by the Court is the process by which that ultimate question is determined.

BRENNAN CJ: Now, what is the actual contract of sale, because it is not the form, is it? Where is the contract of sale?

MR SLATER: The only record of the contract of sale, your Honour, is in the form. That is the only document - - -

BRENNAN CJ: That is the only record, but the finding of fact that is made by Justice Beaumont, if I understand it correctly, is that a "business" was sold and then a record was provided on the form. Now, "business" is in inverted commas, but what does one find? What did the partnership purport to dispose of by contract?

MR SLATER: In a sense, your Honour, the best answer I can give your Honour to that is the finding in the tribunal in paragraph 7 on page 3 at line 35 and all that the tribunal said was that:

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".

Although his Honour Justice Beaumont characterised that as the sale of a "business", that is not a finding of fact. That is just a characterisation. The transaction between the parties was simply that they agreed to execute an application for transfer of licence, and that is the title to the document. "Application for Transfer of Licence to Hire".

BRENNAN CJ: Where do we find that agreement?

GUMMOW J: The only finding of fact seems to be on page 2, paragraph 1 in the tribunal's reasons which is not a very thorough finding of fact.

MR SLATER: No. That is partly because the tribunal was addressing its mind to a question which we say was not the question in issue, but that finding, in our respectful submission, does correctly describe what happened. The document of transfer is not in its entirety reproduced in the application book. It is a document which begins "Department of Transport Queensland". Then, under that, "Application for Transfer of Licence to Hire". Then it proceeds, "The holders of a licence to hire in respect of the vehicles described hereunder hereby apply for the transfer of the said licence to hire to" the purchaser. So that that is the document of transfer which is executed. The contract might best be described as an agreement to execute the application for transfer, and all that was transferred - - -

GUMMOW J: Well, it seems.....transfer for. Is that what it comes to? We do not know what the oral agreement was. The agreement is partly oral and partly in writing and in so far as it is in writing, it is in that form. That is all we know.

MR SLATER: We know, your Honour, that the agreement was to transfer the licence, to transfer the shares and to have somebody else provide a vehicle to the purchaser.

BRENNAN CJ: Yes, but that is, perhaps, in performance of the contract, but the question that arises under ZZR is whether there is a disposal of a business. Now, it is a question, no doubt, of what "disposal" means. But one would think perhaps it refers to a contract by which one party is bound to complete by transfer of property to another, and the question is what are they bound to transfer? If the answer to that question is "a business", then ZZR applies.

MR SLATER: May I respond to that this way, your Honour. A business is not actually an item of property which is capable of conveyance by instrument. All that one can do is to convey those things which are used in the business and provide the ancillary rights which may be necessary, such as rights not to compete. But a business is not an item of tangible property at law. That is, it is not either a chose in action or a chattel. It is a description used - - -

BRENNAN CJ: It is defined by section 6, is it not?

MR SLATER: Yes, your Honour.

BRENNAN CJ: And it is defined in a term which is merely inclusory. It includes any profession, trade, employment, vocation or calling.

MR SLATER: And that is descriptive, rather than definitional.

BRENNAN CJ: Yes.

MR SLATER: I mean, it does not describe an object; it describes a course of conduct. Now, what was sold here was the licence and the shares and the purchaser contemporaneously purchased the vehicle. But, in our submission, those transactions do not amount to the purchase of a business; they amount to the purchase of some assets which can be used to conduct a business.

BRENNAN CJ: Was there any business being conducted before the sale?

MR SLATER: In respect of this licence, your Honour - - -

BRENNAN CJ: No, in respect of what was sold. In fact, was a business being conducted?

MR SLATER: That question is susceptible of two answers, your Honour. The answer we would say is yes, there was a business being conducted by the taxpayer and her husband and that business was one of operating cabs, with the taxpayer's husband driving the cab. That business continued to be retained by the partnership, that is the partnership continued to drive cabs. This licence which was leased to somebody else was sold. That was not the sale of the partnership business, because the partnership business thereafter continued. The answer which the taxpayer gives is that merely to sell the licence is to sell the business because the licence is the business.

I see that I am running a little short of time. May I make this point about it. Ordinarily it does not matter what name you give to an asset. For example, a lease of a parcel of land can be called a chattel real, it can be called a contractual right, as it was in Progressive Mailing House v Tabali, it can be called an exclusive right to possession or use, and all of those descriptions are accurate. But in the present context, and in other statutory contexts, because of the way in which statutory language is framed, it does matter, for both fiscal and regulatory purposes, which appellation is properly used.

In the present context, the capital gains tax provisions treat what is properly called "goodwill" differently from other assets. Most obviously in section 160ZZR, which reduces the capital gain by half, but less obviously in section 160L which relieves some disposals of assets from tax altogether, because the relevant assets are acquired before 1985. The difficulty with characterising something as goodwill or not as goodwill is that if it is characterised as goodwill, then the business having been commenced either before or after 1985, and the asset having been acquired at a different time, one view may lead to the result that the gain is exempt and the other view may lead to the result that the gain is taxable. Individual cases can only be allocated to these different outcomes if a proper definition of goodwill is adopted for the statutory purposes.

Now, what makes this case significant is the line of reasoning which led the majority below to extend goodwill to all monopoly rights because that line of reasoning is fundamental to the majority decision in this case and it dictates strange results in other cases. We have mentioned some of those in our written submissions in paragraphs 17 and 24 and I will not take time to reiterate those. But we do say that although as our learned friends say in their written argument, and as was put to me earlier, none of those issues arises directly in this appeal. This application is about the principles which underlie the majority's decision. Essentially that principle is that if an asset confers monopoly rights, then the asset is not to be called a licence or a lease or a mining right, it is to be called goodwill, with different results under the Act.

Would your Honours indulge me for another two minutes?

BRENNAN CJ: Yes, Mr Slater.

MR SLATER: I am obliged to your Honours. May I put it this way. The taxpayer says, "This is just a taxi licence and the Court need not confront the problems which we have sought to raise as justifying the grant of special leave". But the majority reasoning which produces the problems that we have identified is one which is fundamental to the decision below. If that decision is left undisturbed, it establishes what we submit is the irrational legal principle that monopoly rights are goodwill, with the statutory consequences which follow.

Your Honours, tax law is not a wilderness of single instance cases, although it sometimes seems like a bit of a jungle, but it does proceed on applying principle to the facts of a particular case. We have not taken the Court to the logical faults in the majority judgment because to do so would go no further than to demonstrate that the decision below was wrong. That, as we understand it, would not of itself justify special leave. What we say makes the decision important is its implications, especially given that the court below, the Full Federal Court, has been said to be the court which is normally the final court of appeal. When the implications of the decision below are as aberrant as we say they are in this case then, in our submission, the decision needs correction by this Court.

It would be difficult to find a clearer, starker and less cluttered case on which to debate the issue than the present. The facts are very simple. The case is not about $7,000 of tax, nor about the assessment - at least so far as this application is concerned, it is about the implications of the majority decision both for other taxpayers dealing with similar assets but also for other factual and statutory contests. For the reasons in our written argument, and those which we have endeavoured to present this morning, in our submission, those implications do warrant the grant of special leave. If the Court pleases.

BRENNAN CJ: Yes, Mr Gotterson.

MR GOTTERSON: If the Court pleases, the respondent's principal submission is that the decision of the majority below is not attended by sufficient doubt as to warrant a grant of special leave here. The subject of the sale was a business. Indeed, the Court has already been taken to the passages in the decision below demonstrating that that was so. It was a business which consisted of operating a licensed taxi cab.

BRENNAN CJ: Operating how, Mr Gotterson? How was the licensed taxi cab operated?

MR GOTTERSON: It is operated by the benefit of a licence which is particular to the vehicle in question and authorises and allows that vehicle in question to be operated as a licensed cab in that manner.

BRENNAN CJ: That is a licence which allows certain things to be done.

MR GOTTERSON: Yes.

BRENNAN CJ: But where is the evidence of some business being carried on with respect to it?

MR GOTTERSON: Your Honour, it is best found and recorded, firstly, at page 2 of the record in the first paragraph.

In March 1992, they sold the shares, cab and licence "all up" for $220,000.

Preceding that the reference to:

the applicant who, at all relevant times operated a cab business on the Sunshine Coast in partnership with her husband - - -

DAWSON J: But surely, Mr Gotterson, one should look at the time when the licence is first issued. As I understand it, the price of the licence when it is first issued is quite high. It is the market value of the licence as at that time, is that not right?

MR GOTTERSON: That is correct, your Honour.

DAWSON J: Yes. And one cannot say that in issuing that licence one is transferring a business. In other words, all one needs to start up a business is a licence and a taxi cab, and that is what happened here. Armed with these things, the purchaser set up a business, just as the person who first gets the licence sets up a business. In those circumstances, there is no transfer of any business.

MR GOTTERSON: Not at that point, but of course, subsequently and as happened on this occasion, there is a transfer of the business.

DAWSON J: But where is the goodwill? There is no goodwill in the issue of the licence for the first time, is there?

MR GOTTERSON: The goodwill inheres in the rights which lie behind the licence.

DAWSON J: But you can only have goodwill where you have an existing business, can you not?

MR GOTTERSON: No. Indeed, in Hepples' Case, your Honour, Justice McHugh recognised the possibility that starting up businesses may indeed have a goodwill and particularly where there is, as in the case of a taxi licence - - -

DAWSON J: When you start them up the goodwill might be there, but it is not in the issue of the licence.

MR GOTTERSON: In our submission, your Honour, the correct approach in a case like this is to identify, as the majority did, the benefit or the advantage in which the value in the licence inheres, and then to determine whether that benefit or advantage was recognised by authority as goodwill. Indeed, that was the approach of the majority here. The benefits or advantages that are recognised are, in the case of Mr Justice Beaumont, the benefit or advantage as the partial absence of competition arising from the limited form of monopoly which is granted under the licensing system. His Honour found that at page 33 at lines 7 to 10. To similar effect, Mr Justice Drummond identified it as the assurance of custom in the taxi area which is guaranteed by the licence. That is at page 41.

What the appellant seeks to do in this case is, in our submission, far too blunt to state that the asset transferred is the licence and then to attribute the value for the licence without searching for the inherent rights and benefits behind the licence, or within the licence, in which the value inheres. That certainly is the restrictive benefits, statutory benefits, that the licence holder has. Once one identifies those benefits and advantages and tests them against, really, unbroken line of authority, one is compelled, as the majority were, to the conclusion that here there is a disposal of goodwill.

The cases, and we do not wish to read from them, or the line of authority is as one finds set out at pages 29 to 32 in the judgment of Mr Justice Beaumont, starting with an extract from the judgment of Lord Lindley in Muller's Case, particularly the reference to the "agreed absence from competition", through Box's Case, a passage particularly on page 30:

"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 ... ."

Similarly, through Phillips' Case, to Hepples' Case, and more recently, in the Full Court of the Federal Court, the judgment of Mr Justice Hill in Krakos' Case, the reference to the "monopoly goodwill" and the remarks by his Honour that:

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.

The point that has been consistently advanced by the applicant throughout this case is that the licence or any value is in the licence as a singular and separate asset and cannot be of the nature of goodwill. There has not been, as I understand it, any point ever raised below that here ZZR is not satisfied because there was not a disposal of a business. It really has been on quite another footing and illustrated by the extensive references to other provisions in the Act, to other revenue statutes where, as it is said candidly, that goodwill is referred to but not raised directly for consideration here.

If the Court pleases, what is sought to be done here is to use this case as a vehicle for this Court to resolve a question of a very broad nature, and that is the question of the nature or classification, if you like, of statutory licences, particularly in a context of goodwill, and this really is not a suitable vehicle for doing it. In our submission, the majority's decision is not attended by sufficient doubt and this is not, as is admitted, a suitable - or at least a vehicle which directly raises the broad issues about which the Court may consider in a way which would be usefully determinative of other aspects of revenue law. If the Court pleases.

BRENNAN CJ: Mr Gotterson, in the order that was made in the court below I see that the provision in relation to costs was deleted. This is on page 62. Is there some explanation for that?

MR GOTTERSON: There is an explanation, your Honour, and that is that by agreement the Commissioner has undertaken to meet the respondent's costs, as agreed, not only of this application but also of an appeal, should leaved be granted. I am told also of the costs below.

BRENNAN CJ: I see.

MR GOTTERSON: That is of the costs before the Full Court of the Federal Court.

BRENNAN CJ: Yes. Thank you, Mr Gotterson.

Mr Slater, we need not hear you on the merits, but a grant of special leave would be upon the terms that the applicant pay the respondent's taxed costs of and incidental to the appeal in any event, and the costs in the Full Court of the Federal Court. Is that correct?

MR SLATER: Yes, your Honour. That undertaking has been given throughout. The Commissioner has regarded this as a test case from the outset.

BRENNAN CJ: So long as that undertaking is given. It will be upon those terms that special leave will be granted.

MR SLATER: If the Court please.

AT 11.03 AM THE MATTER WAS CONCLUDED