High Court reprises Federal Commissioner of Taxation v Murry in Placer Dome
If you or your company has a business, there is probably goodwill for the business. But it may not be quite what you think.
What is goodwill?
The first meaning of “goodwill” in the Oxford English Dictionary is “virtuous, pious or upright disposition or intention”, but that does not sound like what we are talking about. The last meaning given in the OED, in relation to commerce, is “The privilege, granted by the seller of a business to the purchaser, of trading as his recognised successor; the possession of a ready-formed ‘connexion’ of customers, considered as an element in the saleable value of a business, additional to the value of the plant, stock-in-trade, book-debts, etc”.
That sounds more like it. Goodwill is the difference between the value of tangible assets on the one hand and the value of the business as a going concern, or market capitalisation of the company on the stock exchange, right? Wrong, at least from a legal perspective, rather than accounting practice.
It is now nearly 21 years since the High Court delivered its judgement in Federal Commissioner of Taxation v Murry and in a unanimous judgement of four judges, with Kirby J dissenting, set out principles as to what constitutes goodwill at law and said that the accounting and commercial view of goodwill should not be regarded as an accurate statement of the legal definition of goodwill. The Court made reference to one of the most frequently quoted definitions of goodwill by Lord McNaughton reading, in part, that goodwill is “… the attractive force which brings in custom”.
The main feature of goodwill emphasised by the High Court was that goodwill is not something that is separate from a business, or which can be dealt with separately. The Court, however, did recognise that goodwill is property saying:
“From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is a valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes “the attractive force which brings in custom” goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct the business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business”.
Applying these concepts, the majority of the Court held that the transfer of a taxi license together with a vehicle and shares in a taxi company for a total consideration of $220,000 of which $189,000 was asserted to constitute goodwill did not include any goodwill for the purposes of the exemption of part of a capital gain in accordance with section 160ZZR of the Income Tax Assessment Act 1936, emphasising that “Care must be taken to distinguish the sources of the goodwill of a business from goodwill itself”.
The High Court has recently had cause to consider again the concept of goodwill in Commissioner of State Revenue v Placer Dome Inc, and in a judgement delivered on 5 December 2018 has reaffirmed the principles in Murry’s Case, again in a majority judgement of four judges, with the fifth judge agreeing with the decision for somewhat different reasons.
There was somewhat more at stake in the Placer Dome matter than in Murry. The matter involved the now repealed “land rich”provisions of the Stamp Act 1921 (WA) and the central question was whether the acquisition of the shares in Placer Dome Inc by Barrick Gold Corporation was assessable for stamp duty on the basis that Placer Dome was a “listed landholder corporation”. This depended on whether the value of Placer’s land was below the 60% threshold specified in the legislation.
Barrick contended that prior to its acquisition Placer had goodwill with a value of $6.506 billion, and that the value of its land was less than 60% of its assets. The Commissioner disagreed and assessed ad valorem stamp duty of $54,825,300. This assessment was objected to by Barrick, and an appeal made to the State Administration Tribunal and then to the W.A. Court of Appeal which held that Placer had substantial legal goodwill on the basis of the value of its business as a going concern.
The Commissioner appealed to the High Court and the appeal was allowed. The conclusions of the majority judgement, after first emphasising that any valuation exercise must be undertaken in the legal and factual context which arises were that:
“… at the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to good will. That unexplained gap suggests that the DCF calculations used by Barrick’s valuers to value Placer’s land, its principal asset, were wrong. Put in different terms the danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent.
… goodwill has sources, not elements, and the sources of goodwill for legal purposes are those which generate or add value (or earnings) to the visitors by attracting custom. But, in seeking to identify the sources that generate the custom of the business, it is important to recognise that goodwill has no existence independently of the conduct of that business; goodwill cannot be severed from the business which created it”.
Apart from going concern value, Barrick identified a number of asserted objective sources of goodwill which included Placer’s personnel, the technical capacity of the personnel, innovative mining techniques, strong and experienced management, structures and systems, and synergies of the combined entities. The Court held however that none of these sources were capable of generating any relevant goodwill or goodwill of any material value. In relation to synergies, it pointed out that these were not a source of places goodwill but, if any, the combined entities.
Although the “land rich” stamp duty legislation in Western Australia and elsewhere has been replaced, the existence of goodwilland the principles derived from Murry and Placer Dome may still be relevant for stamp duty and other taxation purposes. Clearly, if the existence or value of goodwill is likely to be an issue, the balance sheet of the business should not be relied on to determine this and careful consideration should be given to whether there is any goodwill which can be substantiated for legal purposes.