taxation law
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Moving Beyond Murry – From Attraction of Custom to Everything that Adds Value Tyrone M Carlin*
This article examines the jurisprudence of goodwill in Australia with particular focus on the nature and application of the attraction of custom doctrine. While in Commissioner of Taxation (Cth) v Murry the High Court endorsed this doctrine as being of central importance to the concept of legal goodwill, it also sowed the seeds of confusion by appearing to embrace a broader, value- added approach to understanding goodwill. As a result, stark differences of judicial opinion have emerged with respect to whether or not the attraction of custom doctrine operates to sharply circumscribe the universe of fact circumstances where material legal goodwill may be found to exist. This has generated substantial uncertainty in cases in which an inquiry into the value of goodwill is of importance and driven conflicting understandings of the relationship between goodwill for accounting and legal purposes. It is argued that the time has come for the High Court to decisively settle these matters.
INTRODUCTION When the High Court delivered its judgment in Commissioner of Taxation (Cth) v Murry1 it was welcomed as an important decision that represented a watershed in Australian property law.2 In Murry, the reasons of the majority3 included a comprehensive discussion of the nature of goodwill, distilling more than a century’s worth of sometimes complex and often confusing jurisprudence down to the proposition that goodwill may be conceptualised on three axes – property, sources and value.4
The decision put to rest debates about the status of goodwill as property5 and resolved the tension between an elements-based approach in which goodwill may be regarded as consisting of multiple elements each potentially divisible from a business and a source-based analysis in which goodwill is understood to flow from many sources but nonetheless be indivisible in character in favour of the latter view.6 Arguably, however, a consequence of the approach taken by the majority in Murry has been the
* Professor of Financial Reporting & Regulation, The University of Sydney Business School. 1 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; [1998] HCA 42. 2 CJ Bevan, “Resuscitating the Old Jurisprudence on Goodwill” (1998) 27 AT Rev 148. 3 Comprised of Gaudron, McHugh, Gummow and Hayne JJ. 4 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614–615. 5 There exists a long line of cases, stretching back at least as far as Potter v Commissioner of Inland Revenue (1854) 156 ER 392, in which there is clear recognition of the concept of goodwill as property. It is for this reason that by the time Lord Macnaghten set out his decision in Inland Revenue Commissioner v Muller & Co’s Margarine Ltd [1901] AC 217, he was moved to observe (223) that “it is very difficult to say that goodwill is not property”. Despite this, a number of notable legal thinkers continued for decades to rail against the notion that goodwill could be regarded as property. A notable example of this is set out in an article by Anthony Slater QC who, inter alia, argues that goodwill is not property, but rather a property of other assets and that legislation that accords goodwill the status of property creates a form of statutory fiction. See AH Slater, “The Nature of Goodwill” (1995) 24 AT Rev 31. 6 In Commissioner of Taxation (Cth) v Kracos Investments Pty Ltd (1995) 61 FCR 489 (Kracos) as part of a unanimous decision, Hill J made an argument (496) that goodwill could be regarded as having different “aspects” (rather than being one whole) and that the idea that goodwill must attach to a business in order to exist must be regarded with suspicion. This has been called the “elements”-based approach to analysing goodwill. It suggests both that goodwill is divisible into multiple elements and that it may be disposed of independently of a business in which it may have been generated. In Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614–615, this analysis was squarely rejected as bad law, the majority observing (36) that “such a conclusion contradicts the two fundamental premises of the law of goodwill, that is to say, that goodwill has no existence independently of a business and that goodwill cannot be severed from the business which created it”. As their Honours saw it, in his reasons in Kracos, Hill J had made the fundamental error of mistaking the sources of goodwill with goodwill itself.
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creation of conditions in which a practical understanding of the third limb, value, has become more rather than less vexed.
While questions with respect to the value of goodwill have always and likely will always involve challenges, in large part due to the inherently elusive nature of goodwill as a construct, the additional difficulty that has arisen in the Australian context post Murry is the emergence of a jurisprudential landscape in which a narrow conceptualisation of the existence and value of goodwill competes with a more expansive conceptualisation.
Though contradictory, both narrow7 and expansive8 judicial conceptualisations evident in the Australian cases subsequent to Murry are anchored on appeals to that case as authority for their respective preferred approaches. The practical consequences of this situation of ongoing and unresolved tension are significant, particularly in cases in which there are material questions requiring determination with respect to the existence and or value of goodwill.
In this article, it is argued that a root cause of much of the confusion that is now evident in the Australian jurisprudence with respect to goodwill flows from the decision on the part of the majority in Murry to assert the existence of a schism between goodwill for legal and accounting purposes.9 It was this assertion that bolstered the analysis supporting the kind of narrow conceptualisation of goodwill that emerged in cases such as Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes10 and which has subsequently been replicated elsewhere.11
Yet there is a strong case that there is no substantial void between the accounting and legal conceptualisations of goodwill and that where gaps arise, at least from the perspective of value, the effects are generally modest. It follows that in any future examination of goodwill by the High Court, there is an opportunity for the Court not only to reject narrow conceptualisations of goodwill as bad law, but to demonstrate on a principled basis why a more expansive approach is to be preferred and more in keeping with the contemporary commercial context.
ACCOUNTING AND LEGAL GOODWILL There exists an enormous volume of accounting literature dedicated to the subject of goodwill. Even a sampling of this material quickly demonstrates that within that domain, just as has been the case within the law, there has been a history of confusion and controversy.12 Yet stripped of unnecessary noise and distraction the essence of the concept of goodwill in the accounting context is as a term to describe valuable intangible assets of a business that are not capable of identification in their own right.
While the practicalities of measuring and reporting on goodwill have caused unending consternation and debate within the accounting domain13 the key to understanding the construct itself is that it is built on inclusionary rather than exclusionary foundations. This is necessary because there may be an enormous number of phenomena within and around businesses that give rise to value that are not capable of being otherwise reflected among the identifiable assets of an enterprise – tangible or intangible.
7 An example of a case in which this approach is embraced is Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9. 8 An example of a case in which a more expansive approach is evident is Placer Dome Inc v Commissioner of State Revenue (2017) 106 ATR 511; [2017] WASCA. 9 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614. 10 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9. 11 See, eg, Origin Energy Power Ltd v Commissioner of State Revenue (2007) 70 ATR 64; [2007] WASAT 302; Placer Dome Inc v Commissioner of State Revenue (WA) [2015] WASAT 142. 12 For a detailed review of and commentary on key themes from this literature see: T Carlin and N Finch, “Goodwill Impairment Testing under IFRS: A False Impossible Shore?” (2011) 23 Pacific Accounting Review 368. 13 For a comprehensive discussion of this see M Bloom, Double Accounting for Goodwill: A Problem Redefined (Routledge, 2008).
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From a legal perspective, the fundamental analytical starting point as things presently stand in Australia is with reference to goodwill as a set of rights. As the majority in Murry note:14
From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business to produce income.15
Though the settled law is that goodwill for legal purposes is to be treated as one whole rather than as having multiple forms, it is clear that the basis for legal goodwill’s value can flow from a large number of sources. In the main, these sources are not in the nature of property,16 yet they enliven the value of the right to use the assets of the business in order to derive income.
In Murry, the majority enumerated a substantial number of different categories of sources of goodwill, including location,17 people,18 the manner in which business is conducted19 and superior management practices.20 Yet the richness of this descriptive tapestry flowed not from a desire on the part of the Court to comprehensively catalogue all the possible sources of goodwill, but rather to underscore the open- ended nature of the set of phenomena that could support the existence of goodwill.
Bearing in mind this evident harmony between the notion of an open-ended set of sources for legal goodwill and the inclusionary approach to conceptualising accounting goodwill, it is understandable that over time, a number of jurists have proposed approaches to thinking about goodwill that essentially merge the accounting and legal frameworks into a single unified approach. An example of this approach may be found in Nella v Kingia Pty Ltd21 in which French J (as he then was) said:22
The notion of goodwill is not easy of definition. On one view it may be nothing more than the difference between the value of all other assets and what the business in question will fetch in the market place.
Later, in Hepples v Federal Commissioner of Taxation,23 McHugh J said:24
It will be seen from the statements in Inland Revenue Commissioners v Muller that goodwill is the collective name for various intangible sources of the earnings of a business which are not able to be individually quantified and recorded in the accounts as assets of the business. The goodwill may be constituted by sources internally generated by the business or from the combination or inter-relationship of entities or groups of assets (synergistic benefits) or both.
In Murry, the majority acknowledged the existence of situations in which for all practical purposes, accounting and legal goodwill are identical. In instances where businesses are profitable (and expected to remain so), the majority noted that:
the value of goodwill for legal and accounting purposes will often, perhaps usually, be identical.25
Nonetheless, they forcefully repudiated the notion of a harmonised understanding of accounting and legal goodwill, pointedly describing the formulation offered by McHugh J26 in Hepples as inaccurate.27 In order to demonstrate the difference between the legal and accounting conceptualisations of goodwill,
14 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605. 15 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 615. 16 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 616. 17 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 615. 18 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 611. 19 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 615. 20 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 615. 21 Nella v Kingia Pty Ltd [1988] FCA 420. 22 Nella v Kingia Pty Ltd [1988] FCA 420, [109]. 23 Hepples v Commissioner of Taxation (Cth) (1992) 173 CLR 492. 24 Hepples v Commissioner of Taxation (Cth) (1992) 173 CLR 492, 542. 25 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 624. 26 An interesting element of this rejection of the views of McHugh J in Hepples v Commissioner of Taxation (Cth) (1992) 173 CLR 492 is his Honour’s participation in the majority reasons in Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605. 27 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614.
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the majority focused on a set of circumstances in which the market value of a business is assessed as being no greater than the sum that would be realised if the individual assets under the control of the business were liquidated piecemeal.
Under those conditions, they argued, such a business would not be regarded as having goodwill in an accounting sense, yet legal goodwill might exist and therefore be subject to the protection of the courts. Whether or not legal goodwill might be thought to exist in such cases was said to turn on the existence of factors within the business associated with the attraction of custom.28 Through this analysis, the majority underscored their sense of the centrality of attraction of custom to the concept of legal goodwill and provided a case study of a circumstance in which divergence between the accounting and legal formulations of goodwill would be evident.
Prima facie, it is difficult to quibble with the thrust of this analysis. Reduced to its skeletal underpinnings it is simply a declaration that at times, the application of a value-based framework may yield a different conclusion to the application of a rights-based framework. The more fundamental matters, not resolved in Murry, are as to the significance of the differences that may arise between accounting and legal goodwill in particular circumstances and the degree to which factors associated with the attraction of custom, or their absence, might be definitive as regards inquiries with regard to the existence and value of goodwill for legal purposes.
The result of these gaps has been the emergence of a strand of goodwill jurisprudence that suffers from fundamental deficiencies, in that it overplays the significance of the notion that attraction of custom is at the core of the legal conceptualisation of goodwill and therefore yields inaccurate conclusions with respect to the significance of differences between goodwill for legal and accounting purposes in a range of fact circumstances likely to be encountered in the modern commercial world.
ATTRACTIVE FORCE AS AN EXCLUSIONARY PHENOMENON The incorporation of references to customers and the attraction of custom has long been an element of the jurisprudence with respect to goodwill. In Cruttwell v Lye,29 Lord Eldon declared that goodwill was “nothing more than the probability that the old customers will resort to the old place”.30
Courts soon espoused the virtues of adopting more expansive approaches, and two formulations in particular have proved particularly resilient to the passage of time and to the revolutionary changes to the economic, institutional and technological landscape of the world that have occurred since their promulgation.
In the United States, the most prominent and frequently cited discussion of goodwill is originally attributed to a treatise on the law of partnership by Joseph Story,31 which states that goodwill is:
the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.32
Though written in the late 19th century, this definition continues to be widely adopted and applied and has over recent years been favourably incorporated into a substantial number of decisions across a variety of jurisdictions within the United States in cases in which aspects of goodwill were at issue.33
28 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614. 29 Cruttwell v Lye (1810) 17 Ves Jun 335. 30 Cruttwell v Lye (1810) 17 Ves Jun 335, 346. 31 J Story, Commentaries on the Law of Partnership as a Branch of Commercial and Maritime Jurisprudence with Occasional Illustrations from the Civil and Foreign Law (Little Brown & Co, 7th ed, 1881). 32 Story, n 31, §99. 33 See, eg, Moore v Johnson, 108 AD 3d 1125 (2013); Lazer Spot Inc v Hiring Partners Inc, 387 SW 3d 40 (2012); Dixon v Crawford, McGilliard, Peterson & Yelish, 163 Wash App 912 (2011).
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Twenty years after Story produced his description, Lord Macnaghten penned his famous dictum with respect to goodwill in Inland Revenue Commissioners v Muller & Co’s Margarine Ltd34 in which he characterised it as, inter alia, “the attractive force that brings in custom”.35 Across the span of the decades that have followed, his words have been recited with evident approval in a very large number of cases throughout the common law world.
In one late 20th-century United Kingdom case it was said that: No one, judge or jurist has yet improved on Lord Macnaghten’s description of goodwill as the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force that brings in custom.36
Unsurprisingly, references to Lord Macnaghten’s dictum in Muller featured in the reasons of both the majority and in Kirby J’s dissenting reasons in Murry and have continued to emerge in more recent decisions of the High Court.37
Yet the discussion of the meaning of goodwill in Murry did not begin and end with a formulaic recitation of Lord Macnaghten’s words. It was wide ranging, giving equal if not greater prominence to descriptions of goodwill not anchored on notions of patronage or the attraction of custom. These included the “every positive advantage” approach adopted by Wood V-C in Churton v Douglas38 and Lord Lindley’s “whatever adds value to a business” in Muller.39 The latter formulation, while mentioning customers and customer relationships can hardly be regarded as having notions of patronage or forces attracting custom at its core.
Further, the majority in Murry appeared to accept that the state of the jurisprudence with respect to goodwill had moved to the point where patronage had been rejected as the touchstone of goodwill in favour of an “added value” approach.40 Nonetheless, by declaring that the attraction of custom remains central to the legal concept of goodwill, the majority created an analytical conundrum.
In particular, it raised unanswered questions as to whether the notion of centrality is to be taken to mean primacy, or importance along with other factors. Put another way, a close reading of the text of the majority’s reasons in Murry leaves room for doubt as to whether they intended to solidify in law the proposition that attraction of custom is the central element or a central element of legal goodwill.
It was into this lacuna that the Court ventured in Alcan, a case involving the acquisition of a profitable and longstanding alumina refinery and bauxite mining operation in which it became necessary to unravel questions with respect to the existence and value of goodwill in order to resolve the question of whether or not a taxation assessment levied on the acquirer was appropriate.41
In Alcan, the appellant asserted the existence of material goodwill flowing from a range of sources including the value of the operational methods used within the mine and refinery, the know-how that allowed the business to operate and a range of potential expansion and optimisation opportunities that would have further enhanced the value of the enterprise.42 By contrast, the respondent rejected these
34 Inland Revenue Commissioner v Muller & Co’s Margarine Ltd [1901] AC 217. 35 Inland Revenue Commissioner v Muller & Co’s Margarine Ltd [1901] AC 217, 223. 36 Scandecor Development AB v Scandecor Marketing AB, [1998] All ER (D) 370. 37 See: JT International SA v Commonwealth (2012) 250 CLR 1; [2012] HCA 43, [106]. 38 Churton v Douglas (1859) 70 ER 385; Johns 174, 188. 39 Inland Revenue Commissioner v Muller & Co’s Margarine Ltd [1901] AC 217, 235. 40 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614. 41 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9 falls into a category of cases that revolve around the application of “land-rich” provisions embedded in the taxation statutes of the States and Territories. The intention of these provisions is essentially to create a circumstance in which the assessment of stamp duty on the conveyance of shares in a landholding corporation achieves the same result as would have been the case had the land itself been conveyed. The provisions only take force in circumstances where the value of land within a company exceeds a defined threshold. It is for this reason that questions with respect to the existence and valuation of goodwill have often arisen in “land-rich” cases, since a finding that material goodwill exists will increase the likelihood that the value of land held as a proportion of all assets does not exceed the relevant statutory threshold for the application of duty. 42 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [115].
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submissions arguing that no goodwill existed and that land substantially dominated the asset base, with the result that substantial duty was payable.
In adjudicating the dispute, Mildren J invoked Murry as authority for the proposition that goodwill is the attractive force which brings in custom.43 For him, the issue to be determined was whether there was any evidence that the business of the refinery and mine had an attractive force that brought in custom and added value to the business.44 On this approach, the apparent tension between value added and attraction of custom or patronage-based approaches to goodwill was resolved by making all other considerations subsidiary to the existence of the attraction of custom. Through this lens, value-adding factors can be regarded as relevant to the existence of legal goodwill only when directly associated with the attraction of custom.
Having regard to the evidence before him, Mildren J found that the end product of the mine and refinery business was “basically indistinguishable for practical purposes from the alumina product of the same grade of other producers” and that in consequence “there was no reason for customers to stay loyal to a specific alumina producer”.45 The result of this conclusion was, in his Honour’s opinion, that there was no evidence of an attractive force of custom which added value to the business46 and thus no goodwill.
In so finding, it appears that Mildren J was not unaware of the apparent difficulty raised by the dictum in Murry that in a profitable business, there will often if not usually be a coincidence between accounting and legal goodwill. In addressing this, he observed that:
this does not mean that their Honours intended to depart in any way from the point that it is the attraction of custom which is fundamental to that concept.47
Thus, the expert evidence before him that pointed to the existence of goodwill, at least from an “accounting” standpoint was not persuasive as to the existence of goodwill for legal purposes because:
the attraction of custom still remains central to the legal concept of goodwill whereas from an accounting point of view it is not necessarily related to the attraction of custom at all.48
In the reasons of the majority in Murry, there was scant focus on the attractive force that brings in custom in the context of considering the relationship between legal and accounting goodwill in the case of businesses producing a profit and expected to continue to do so.49 It was considered, sensibly, that in such circumstances there would likely be goodwill from both perspectives and that its value for accounting and legal purposes would most likely coincide.
It was in contemplating the case of distressed businesses in or approaching distress that the majority used particular reference to the attractive force that brings in custom as a device to underscore a hypothetical divergence between the value of accounting and legal goodwill.50
In Alcan, by contrast, the approach taken by the Court was to focus on the attraction of custom as the core concern, even in the context of a highly profitable business in which there was nothing other than a reasonable expectation of continued profitability. Thus a doctrine drawn upon in Murry as a basis in particular for delineating the likely relationship between accounting and legal goodwill in the context of distressed or serially underperforming businesses transmutated in Alcan into a device for defying the general expectation of the relationship between accounting and legal goodwill in profitable enterprises espoused in Murry.
43 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [103]. 44 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [106]. 45 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [106]. 46 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [106]. 47 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [108]. 48 Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (2007) 19 NTLR 153; [2007] NTSC 9, [105]. 49 See, eg, Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 624. 50 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 614.
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Arguably, this was precisely the kind of result that Kirby J had at the front of his mind when he said in his dissenting judgment in Murry that:
when, in revenue law, judges reach results that are out of harmony with economic analysis and accounting expertise, it is time for them to reconsider their preconceptions.51
This was an important admonition, supported with much intuitive appeal. Yet if it is the case that it is good law that the attraction of custom enjoys the primacy accorded to it by Mildren J in Alcan, the result in that case and the reasoning process that generated it must be acknowledged as entirely logical. Painted onto a broader canvas, the consequence of the consistent application of his Honour’s approach would be to enlarge the perceived and actual gap between accounting and legal goodwill and to increase the number of fact scenarios in which goodwill is regarded as having value in one domain but not in the other.
A BROADER APPROACH While essentially identical reasoning processes to those espoused by Mildren J in Alcan have appeared in numerous other cases,52 the narrow, exclusionary approach to goodwill cannot yet be regarded to have achieved the status of settled law. There exist two principle strands of jurisprudence subsequent to Alcan that make this so.
The first emerged in the appeal that followed on from the decision at first instance in Alcan. In that case, Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd,53 Martin CJ concurred with Mildren J’s approach with respect to the centrality of the attraction of custom to goodwill and with his finding that on the facts in Alcan that there was no evidence of attraction of custom and hence goodwill. Responding to criticisms of the analysis that led to the outcome in Alcan, Martin CJ stated that in his opinion, Mildren J’s “approach was not inappropriately constrained by an unduly narrow view of goodwill in the legal sense”.54
However, for varying reasons, both Angel and Southwood JJ determined that material goodwill did exist. Both were clearly troubled by the stark inconsistency between what they perceived as the ordinary received wisdom with respect to the correspondence between accounting and legal goodwill in the context of profitable enterprises and the conclusion that Mildren J had reached on that question in Alcan.
However, although invited to reverse the findings at first instance by rejecting the proposition that goodwill is centred on the attraction of custom rather than on a broader value-added footing, they chose to adhere to the attraction of custom doctrine. Consequently their capacity to find that goodwill existed rested on a reversal of Mildren J’s conclusion in Alcan that there was no relevant attractive force that brought in custom. Angel J accomplished this with somewhat brute force, noting the presence of long- term sales contracts and asserting that “the attraction of custom includes the maintenance of existing custom”.55
By contrast, Southwood J expended substantial energy in mounting a case that a range of factors evident within the business that might broadly be described as value-adding attributes evidenced the existence of the attractive force that brings in custom, supporting the conclusion that goodwill existed.56
While both approaches have the effect of demonstrating the existence of doubt as to the soundness of a narrow conceptualisation of legal goodwill, neither represents a firm foundation for the confident construction of a principled alternative.
51 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 637. 52 Origin Energy Power Ltd v Commissioner of State Revenue (2007) 70 ATR 64; [2007] WASAT 302; Placer Dome Inc v Commissioner of State Revenue (WA) [2015] WASAT 142. See also the reasons of Martin CJ in Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 24 NTLR 33; [2008] NTCA 14. 53 Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 24 NTLR 33; [2008] NTCA 14. 54 Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 24 NTLR 33; [2008] NTCA 14, [85]. 55 Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 24 NTLR 33; [2008] NTCA 14, [117]. 56 Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 24 NTLR 33; [2008] NTCA 14, [140]–[143].
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Angel J accomplished the outcome he regarded as best fitting the facts by changing the definitional framework for the legal analysis of goodwill from an “attraction” to a “maintenance” of custom basis. Meanwhile, the application of Southwood J’s approach could arguably only be sustained through a willingness to engage in the intellectual contortion of ascertaining links between value-adding factors and the attraction of custom in circumstances where no particular or direct relationship might reasonably be regarded as evident. Both approaches suffer from inherent fragility and neither would likely survive even relatively mild testing.
This first of faltering strand of jurisprudence directed towards the establishment of a broader conceptual framework for legal goodwill might be described in a lighthearted manner, as the repudiation of the attraction of custom doctrine you have when you are not repudiating the doctrine of the attraction of custom. By contrast, a second emergent strand of jurisprudence avoids the difficulties of the first, as described above, by focusing on the achievement of clarity with respect to the question of the primacy of the attraction of custom as regards the existence and value of goodwill for legal purposes.
In Placer Dome Inc v Commissioner of State Revenue57 a dispute arose in relation to the liability for stamp duty on the part of the purchaser of a business. The fact circumstances of this case were closely analogous to those in Alcan, and just as had been so in that case, it was determined in Placer that no material legal goodwill existed. On appeal,58 this conclusion was emphatically and unanimously reversed.
While the articulation of the basis for this reversal comprised a series of elements, the unifying analytical proposition was no more complex than the notion that the attraction of custom is not the defining font of all goodwill for legal purposes. Though invited by the respondent to approach the analysis of legal goodwill through that constrictive lens, the Court declined to do so. In so declining, Martin CJ, with whom Buss P agreed, said:59
as I have already noted, the Commissioner’s contention takes an inappropriately narrow view of the nature of goodwill. Goodwill can be manifest in revenues derived from operations but it can also be found in anything which adds value to an ongoing business enterprise, including value that can be realised at the time of the sale of that enterprise.
In a separate, concurring set of reasons dominated by a discussion of goodwill, Murphy JA held that:60
Goodwill is not confined to the attraction of custom. It includes all those considerations which add to the value of the business, including those which tend to give it a competitive edge in the industry in which it operates.
This approach does no violence to the long accepted notion that the attraction of custom is central to goodwill and avoids the need to strain to find goodwill through contrived analysis of the correspondence between identified sources of value and the attraction of custom. It conforms to longstanding and frequently recited descriptions of goodwill as being all that adds value.
Its particular elegance is that it removes the risk that a jarring and counterintuitive void between legal and accounting goodwill may arise simply because of a reasonable and understandable reticence on the part of a judge to engage in the intellectually questionable exercise of attributing causal linkage between disparate potential sources of value and the attraction of custom where no theoretical or empirical basis for the formation of such a connection exists.
CONCLUSION In instances in which there are questions as to the existence and value of goodwill for legal purposes, it will often be the case that material substantiating the existence and value of goodwill for accounting purposes will be available. This may be in the form of management accounts, audited financial statements, various
57 Placer Dome Inc v Commissioner of State Revenue (WA) [2015] WASAT 141. 58 Placer Dome Inc v Commissioner of State Revenue (WA) (2017) 106 ATR 511; [2017] WASCA 165. 59 Placer Dome Inc v Commissioner of State Revenue (WA) (2017) 106 ATR 511, [182]; [2017] WASCA 165. 60 Placer Dome Inc v Commissioner of State Revenue (WA) (2017) 106 ATR 511, [246]; [2017] WASCA 246.
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forms of documentation associated with the raising of capital or other sources, including independent valuation reports.
While it is not the contention of this article that a perfect unification of the legal and accounting concepts of goodwill is possible, or even desirable, it nonetheless seems important that there be a capacity in legal contexts to make confident use of this material for the purposes of deriving sound conclusions.
Prior to Murry, the apparent trajectory in Australia was as to a closer and closer harmony between answers to questions with respect to the existence and value of goodwill framed through the accounting and legal lenses respectively. In Murry, however, as has been seen, this trend was reversed with the consequence that there has subsequently been a greater degree of focus on the differences between the two domains, as regards goodwill.
More than this, the assertion by the majority in Murry of a difference between legal and accounting goodwill has been misinterpreted in several courts as signalling a greater schism between the two domains than can be understood to exist upon a proper analysis of the authorities and the conceptual underpinnings of legal and accounting goodwill.
If there is a key concept to be grasped from Murry as regards the correspondence between accounting and goodwill it is that they are frequently fellow travellers whose trajectories often mirror each other, but sometimes diverge. To understand both, then, is to understand the point or points of divergence, and the basis for divergence where it occurs.
Arguably, a useful analytical device for accomplishing this is to imagine a continuum that encompasses all business enterprises, beginning at the left with complete failure, proceeding at the middle point to sustained breakeven and beyond, further and further to the right, to greater and greater levels of sustained excess returns.
If a line were drawn above this continuum from right to left to demonstrate how far across the spectrum we might regularly encounter goodwill for accounting purposes, it would be possible to be confident that the line would extend at least to the breakeven point. Arguably, Murry tells us that an attempt to replicate this task with respect to legal goodwill would also result in a line to the breakeven point.
Here, the majority reasons in Murry would suggest the need to continue extending the line representing the existence of legal goodwill further towards the left, into the domain of underperformance and distress. But it seems contrary to good sense that the line could be continued too far in that direction. This appears to be acknowledged by the majority in Murry, who, when reflecting on the existence of legal goodwill in businesses whose financial performance and conditions do not support the existence of accounting goodwill said:
The value of such goodwill may be difficult to assess. Having regard to the likely future of the business, often it may have only nominal value.61
While value and existence are different constructs in theory, the significance of this must surely becomes nugatory at a certain point. This points to the inevitable consequence that in practice, the presence of goodwill in the accounting domain will most often coincide with its presence in the legal domain and, save for a relatively small element of the total business continuum, the absence of goodwill for accounting purposes will most often coincide with an absence of legal goodwill for any practical or remedial purposes.
This is why there is such danger in the application of narrow formulations of legal goodwill reliant on application of the doctrine of the attraction of custom in a way unsympathetic to the long tradition of jurisprudence that emphasises the expansiveness of the sources of goodwill and strikingly at odds with the commercial and accounting perspective.
By contrast, the application of a value-added approach can comfortably incorporate reference to attraction of custom in appropriate circumstances. This preserves the capacity to delineate between the legal and accounting domains where necessary, but avoids the glaringly incongruous conclusions as to
61 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605, 625.
Carlin
354 (2018) 46 ABLR 345
the relationship between the two domains that seem to be an inevitable by-product of adherence to the narrow, attraction of custom approach.
If there was a central theme to Kirby J’s dissent in Murry, it could perhaps be characterised as being to the effect that there is substantial danger in the application of legal doctrines to the resolution of commercial problems in a manner which yields answers that are difficult to understand or even inexplicable through a commercial lens.
A review of the Australian cases with respect to goodwill in the two decades since Murry reveals the continued emergence of instances in which this principle is offended and despite the emergence of alternative doctrines that avoid such outcomes, there is no clarity with respect to their authority. Given the enormous financial materiality of goodwill in the context of a wide variety of enterprises, this is an unfortunate state of affairs indeed and it is to be hoped that it is one to which definitive attention will be given in the near future.