Goodwill and business assets

Goodwill is an accounting, business, and legal term, and the meaning for each can differ.

It is intangible, and difficult to define.

In Bender’s Australian Stamp Duties, author Dr Philip Bender attempts to do just that, looking at the definition of goodwill, how it is valued, and setting out some case law examples relating to goodwill, providing a summary of the facts in each, and the finding.

The following excerpt is taken from the section ‘Business assets’ of Chapter 2 ‘Liability for duty’, of Bender’s Australian Stamp Duties.

Goodwill and business assets

Historically, “goodwill” was regarded as property for stamp duty purposes. Even for those jurisdictions where duty is not imposed on business assets (or only on a limited category of business assets), it is still important to determine what constitutes goodwill and what is the value of that goodwill. This is because, in the sale of a business, there may be other dutiable property.

Accordingly, determining the existence and value of goodwill may be important to determining how much of the sale consideration is attributed to dutiable property and what the value is of the dutiable property.

What is goodwill and how is it valued?

“Goodwill” is notoriously difficult to define. The ordinary meaning of goodwill is an intangible, saleable asset, arising from the reputation of a business and its relationship with its customers, as distinct from the value of its stock.

At law, goodwill is the right or privilege to make use of all that constitutes the attractive force which brings custom to the business (ie tangible, intangible and human assets). That is, goodwill is the formation of a connection of customers with the business that attracts them to that business.

Goodwill is property. It is a legal right to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It can even attach to a rent roll of real estate agent or a client list of a business. It is also possible to license goodwill. There is, however, no property in “get-up”; rather, the legal rights in get-up are rights to protect goodwill through particular common law or statutory causes of action. Further, a mere statutory licence to commence a business is not generally a source of goodwill. A business name, on the other hand, could potentially be a source of the goodwill of the business.

A person acquires goodwill when they acquire that legal right. Goodwill is both an accounting and business term, as well as a legal term. The meaning for legal purposes may differ from that for accounting and business purposes.

The High Court’s decision in FCT v Murry is the leading authority on the nature of goodwill. The following principles emerge from Murry’s case and other authorities:

  • goodwill may arise from a site, personality,
    service, price or habit that obtains custom. Goodwill may also arise from a
    statutory licence or similar, or from the name of the business;
  • goodwill is property which has no existence
    independently from a business and which is unable to be severed from a business
    and is indivisible. Goodwill is, however, not a tangible or physical thing and,
    even where associated with a particular location, is not a chattel attached to
    the land;
  • goodwill is a quality or an attribute that
    derives from using or applying other assets of the business (eg a particular
    site). Goodwill is not, however, made up of those assets. That is, goodwill has
    sources rather than being composed of elements. It is legally distinct from
    those sources;
  • many sources of goodwill are not themselves
    property. This may include manufacturing and distribution techniques, the
    efficient use of assets, superior management and good industrial relations. These
    can be sources of goodwill because they may result in better service or
    competitive prices that attract customers;
  • the existence of goodwill depends on proof that
    the business generates and is likely to continue to generate earnings from the
    use of the identifiable assets, locations, people, efficiencies, systems,
    processes and techniques of the business;
  • a sale of an asset that is a source of goodwill,
    separate from the business itself, does not involve any disposal of the
    goodwill of the business. To transfer goodwill, the sale of an asset would need
    to be accompanied by or carry the right to conduct the business;
  • although goodwill can arise from a business
    name, it does not necessarily include the trade name of a business. Goodwill of
    a business can be transferred without the name of the business being attached
    to such a transfer. Whether the trade name is transferred will depend on the
    terms of the agreement between the parties or the surrounding circumstances;
  • whether, on the sale of a business, goodwill
    passes with the business premises, the trading stock or some other asset will
    depend on the circumstances of each case;
  • “personal” goodwill does not just refer to the
    unique attributes of a particular individual. A particular individual may have
    certain skills and attributes that have built up the business. Even where that
    individual has left, there may still be “personal” goodwill if new individuals
    join the business who continue the same practices and have the same skills to
    maintain profitability;
  • the goodwill of a business may derive from
    location. This is more likely to be the case where there is no nearby
    competitor and custom is drawn from nearby residents or those who must pass the
    site of the business. A business may have become identified with that location
    (eg a hotel), such that the business could not survive without that particular
    asset. Simply because there is a business site, however, does not mean that it
    is a substantial source of goodwill. It may, for example, be personal relationships
    that draw customers to the site, rather than the location itself. Although
    goodwill is not able to be severed from a business, it could be located in more
    than one place. This could become relevant if one location is sold as a
    separate business with its own goodwill attached;

  • local or site goodwill (discussed above) is that
    part of the business which is not dependent on the characteristics of the
    person conducting the business from time to time and the rest of the goodwill is
    personal goodwill. Goodwill is local to the extent to which a trade connection
    is carried on, and personal to the extent to which it is the personality,
    ability and good reputation of the trader that attract the trade. Personal
    goodwill may not, however, be limited only to the unique attributes of a
    particular individual. The matter must be looked at as a practical question of
    business. Where management entails personal relationships with customers, there
    may be personal goodwill even when the particular individuals whose skills,
    attributes and activities have built up the profitability of the business have
    left and are replaced. This is because the continuance of those same practices with
    new individuals may be necessary to maintain profitability;
  • goodwill which has its source in land (see
    above) is inseparable from the land and the business with which it is
    associated. If a business changes location, any “site” goodwill does not remain
    with the land on which the business was conducted — it disappears. Compare that
    principle to the comments of O’Connor J in
    Racecourse Co v Commissioner of Stamp Duties (NSW),
    where his Honour
    suggests that there may be cases in which goodwill can be separable from the
    land and have an independent existence apart from the land, making it capable
    of being carried away from the land. There may, of course, be situations where
    there is “personal” goodwill of a business that does not depend on its
    location, and it may be possible to transfer the business and that goodwill without
    transferring the business premises. A change in ownership of a business may not
    destroy personal goodwill because the same structure (eg employees) may be in
    place that may not be affected by such a change. That is, an owner of land
    which has a business conducted on it may effectively transfer ownership of the
    business and land separately. It does not necessarily mean that such an owner
    may separately convey the goodwill of a business once the premises are
    transferred without restriction or without prior reservation of an adequate
    proprietary interest to secure the business and its goodwill. Site goodwill
    cannot pass with land where there is an independent purchaser of the business —
    it will retain its character as personal property and will not become part of
    the land. Whether goodwill passes with land that is transferred may depend on
    the intention of the parties to the transfer based on a construction of the
    relevant document (eg the contract of sale);
  • a contract for the sale of the goodwill of a
    business will ordinarily transfer to the purchaser all of those matters and
    things essential to the existence of the goodwill, unless the terms of the
    contract or the surrounding circumstances indicate otherwise. When deciding
    whether any transaction involves a transfer of a business with goodwill, regard
    must still be had to its substance rather than its form. Consideration must be
    given to the whole of the circumstances, weighing all of the factors, and the
    vital consideration is whether the effect of the transaction is to put the
    transferee in possession of a going concern, the activities of which they could
    carry on without interruption. It is a mixed question of fact and law whether a
    person has taken over or succeeded to a business or part of a business;
  • whether a
    business has been purchased depends on whether, along with any relevant assets,
    a person has acquired the capacity or entitlement to use such assets for the
    purpose of generating an income or capital profit. Someone who leases an asset
    for use in someone else’s business is not conducting a business themself;
  • where a business ceases to be carried on, at
    some point, the goodwill will also cease because goodwill is incapable of
    existing independently of the business to which it is attached. There may,
    however, be residual goodwill for a time, for example, attached to the trade
    name of the business. It is a question of fact and degree at what point in time
    a person who ceases to carry on a business should be treated as no longer
    having the benefit of the goodwill which accrued from it; and
  • if a business is split into different parts,
    with one part transferred to another entity, that does not mean goodwill cannot
    attach to the part of the business that is transferred. The part that is
    transferred may form part of an existing business such that, on transfer, a new
    business is constituted with its own goodwill inherent in it.

The chapter then looks at some of the principles on the valuation of goodwill that have emerged including:

  • how the value of goodwill, but not its existence, is governed by the extent to which earnings of a business exceed the norm in the context of the industry in which it operates; 
  • how goodwill includes everything that adds value to a business;
  • how a “bottom-up” method of valuing goodwill which deducts the fair value of identifiable assets from the value of the business as a whole usually provides a reliable means of valuing legal goodwill; 
  • that goodwill cannot be included in the value of real property as if it were simply an element of the real property because it is legally distinct from the sources by which the goodwill has been created;
  • and a number of others.
The chapter then sets out some case law examples relating to
goodwill, providing a summary of the facts in each, and covering the finding,
  • Rosehill Racecourse
    Company v Commissioner of Stamp Duties
    (NSW) (1905) 3 CLR 393
  • Roussos v Commissioner
    of Stamp Duties
    [1992] TASSC 97
  • Morvic Pty Ltd and
    Ashill Pty Ltd v Commissioner of State Revenue
    [2002] VSC 171
  • Commissioner of State
    Revenue v Uniqema Pty Ltd
    [2002] VSC 157 (trial); (2004) 9 VR 523 (appeal)
  • Palace Hotel
    (Hawthorn) Pty Ltd v Commissioner of State Revenue
    (2004) 55 ATR 534
  • Primelife (Glendale Hostel)
    Pty Ltd v Commissioner of State Revenue
    (2004) 56 ATR 192
  • Super Cheap Auto Pty
    Ltd and Commissioner of State Revenue
    [2006] WASAT 326
  • Tourism Holdings
    Australia Pty Ltd v Commissioner of Taxes (NT)
    [2007] NTCA 8
  • Sturt Football Club
    Inc v Commissioner of State Taxation
    [2010] SASC 279
  • Oranville Pty Ltd v
    Commissioner of State Revenue
    [2012] QCAT 643

NOTE: This section alone of Chapter 2 features more than 65 footnotes, which have been removed for this post for ease of reading.
This excerpt is taken from the section ‘Business assets’ of
Chapter 2 ‘Liability for duty’, of Bender’s Australian Stamp Duties.

This chapter commences with a consideration of various constitutional issues involving stamp duty.

It explores the key concepts involved in conveyance duty and transfer duty. Transfer duty is, broadly, imposed on certain dutiable transactions involving dutiable property. The application of conveyance and transfer duty to leases is also considered in this chapter, as is the imposition of duty in respect of business assets for the Northern Territory, Queensland and Western Australia. Transfer duty involving trusts and partnerships is discussed in chapter 3 of the book.

Finally, certain double duty provisions for those jurisdictions which impose duty on both agreements to convey or transfer and the conveyance or transfer itself are considered.

Find out more about Bender's Australian Stamp Duties on our website.

Author, Dr Philip Bender is a member of the NSW Bar Association and Victorian Bar, practising in Melbourne and Sydney, and other jurisdictions depending on the nature of the matter.

Philip has acted for both private taxpayers and federal and state revenue authorities, and has appeared a number of times in the High Court.

In the federal taxes field, he has acted in a range of GST, FBT and luxury car tax cases, as well as advising on anti-avoidance issues. He has also advised on and appeared in a diverse range of income tax matters. Philip has a particular interest in international tax, advising on and acting in a range of matters, and has also acted in a number of leading trusts/superannuation cases.

In the state taxes field, as well as stamp duties, Philip has advised on and appeared in land tax and payroll tax matters, including the first ever land tax grouping case in Victoria.

Philip also has a general practice in administrative law, and commercial and property law, including trusts and estates.

Important disclaimer: The information in this post, excerpted from Bender’s Australian Stamp Duties  does not constitute legal advice, financial advice, personal advice or any other form of advice, and is for general information purposes only. All readers — whether purchasers of the book or others — should seek advice from a professional adviser regarding the application of any of the comments in this publication to a particular fact scenario. Philip Bender and The Tax Institute exclude all liability (including liability for negligence) in relation to your use of this publication. All readers must only rely on their own professional advice.


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