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Australian Lawyers and Consultants

High Court Upholds Restrictive Definition of Goodwill

July 1998 (revised May 1999)

The High Court decision in Commissioner of Taxation v Murry 98 ATC 4585 (judgment handed down 16 June 1998) involved the issue of whether moneys received on the sale of a taxi licence held by a person who does not run a taxi business can be said to constitute part of the goodwill proceeds from the business. The issue is important because there is a partial exemption from Australian capital gains tax (CGT) applying to goodwill of small businesses.

The facts of the case were that Ms Murry had realised a capital gain from the sale of a Queensland taxi licence which she part-owned, and she argued that the $189,000 paid for the licence was for goodwill (which attracts the 50% reduction in the capital gain under the tax relief scheme). The Court held, however, that the licence was not part of the goodwill of the business, but rather a separate asset.

The High Court took the opportunity to engage in a detailed discussion on the nature of business goodwill. The majority judgment of Justices Gaudron, McHugh, Gummow and Hayne stated that "the sources of goodwill of a business may change" but that "as long as the business remains the 'same business', the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise transferred". The majority held that Ms Murry’s taxi licence was merely "a prerequisite to the conduct of many professions, trades, businesses and callings" and "not a source of the goodwill of the business". A customer base and repeat business are important elements of goodwill.

The decision is going to impact on future vendors of businesses thinking of maximising the capital gains tax relief concession for goodwill.

The ATO has issued a draft tax ruling TR 98/D13 re-defining goodwill and the component of a sale price that will be attributable to goodwill. The ruling also covers the contentious topics of when goodwill is acquired and the cost-base of goodwill. Circumstances will vary from business to business but clients are urged to seek early legal advice in this area before commencement of business sale negotiations.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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