Commissioner of Taxes (Qld) v Ford Motor Company of Australia Pty Ltd [1942] HCA 16; (1942) 66 CLR 261 (6 August 1942)

HIGH COURT OF AUSTRALIA

The Commissioner of Taxes (Queensland) Respondent, Appellant; and Ford Motor Company of Australia Proprietary Limited Appellant, Respondent.

H C of A

On appeal from the Supreme Court of Queensland.

6 August 1942

Latham C.J., Rich and McTiernan JJ.

P. L. Hart (with him Fahey), for the appellant.

Real (with him Stanley), for the respondent.

P. L. Hart, in reply.

The following written judgments were delivered:—

Aug. 6

Latham C.J. and

Rich J.

This is an appeal from a decision of the Full Court of the Supreme Court of Queensland upon a special case stated by E. A. Douglas J., who was sitting as a Court of Review under the provisions of the Queensland Income Tax Assessment Act of 1936.

The rate of income tax payable by a company under the Act is determined by the percentage which the profits of the company bear to the capital of the company invested in assets which were used during the year of income in production of assessable income (sec. 34 (1)). If that percentage is high the rate of tax is high. If it is low the rate of tax is low—see Sixth Schedule to the Income Tax Act of 1936. It is therefore to the interest of a taxpaying company to claim that it has as large a capital as possible. The capital of the company for the purposes of the Act is to be ascertained (sec. 34 (3)) "by adding the amounts averaged over a full year of income of the capital and reserves of the company as set out hereunder, namely:—(a) the capital paid up in cash or value on all shares actually issued by the company; (b) reserves and parts of reserves (including in such reserves amounts standing to the credit of profit and loss account) invested in the business, and which have been created out of profits liable to tax or exempt from tax under this Act or under any previous income tax law of the State, except profits derived during the year of income or profits on which additional tax would be chargeable on distribution under sub-section two of section thirty-five of this Act, and deducting therefrom the amount of any item specified in sub-section four of this section."

Evidently in order to prevent inflation of capital for the purpose of reducing the rate of tax, the legislature has provided in sec. 34 (4) (c) that there shall be deducted from the capital of a company, inter alia, "so much of the amount of any goodwill, franchise issued under The Tolls on Privately Constructed Road Traffic Facilities Act of 1931, Order in Council, copyright, patent right or undertaking appearing as an asset in the company's accounts as in the opinion of the Commissioner should reasonably be deducted." The questions in this case relate to a deduction made by the Commissioner from the capital of the company in respect of goodwill.

The respondent company carries on business throughout Australia. It made a return of income derived in the calendar year 1935. In the company's accounts for that year there appears under the heading "Capital Accounts" and the sub-heading "Patents, Trade Marks, &c., Goodwill" an amount of £400,000. (This entry was not observed in the proceedings before the case reached this Court.) Of this amount of £400,000 the Commissioner estimated an amount of £73,622 as representing the proportion of the capital (as ascertained for the purposes of the Act) which represented "Queensland goodwill." Purporting to act under sec. 34 (4) (c) he deducted the whole of this amount from the capital of the company. The case has been argued by both parties upon the basis that, though the proportion of the sum of £400,000 attributed in the company's accounts to the Queensland business was £75,429, the Commissioner in deducting £73,622 has deducted the whole of the amount of the Queensland goodwill. The calculation of the Commissioner reaching this result appears in Exhibit 3 to the special case—letter dated 18th May 1939. E. A. Douglas J. held and the Full Court upon a case stated agreed by a majority (Macrossan S.P.J. and Philp J., Webb C.J. dissenting) that in fact this amount did not represent goodwill and that the Commissioner was not entitled to make any deduction under the provisions mentioned. It was further held that, even if the section was applicable the Commissioner could not reasonably have thought that the goodwill was valueless, and that accordingly he had not exercised the discretion entrusted to him by the Act. The Commissioner has appealed to this Court.

The special case states that on 26th June 1925 a Canadian company, Ford Motor Co. of Canada Ltd., sold to the respondent, Ford Motor Co. of Australia Pty. Ltd., by an agreement under seal, (a) the exclusive right to use in the Commonwealth of Australia the names "Ford" and "Ford Motor" in connection with motor cars &c. and parts; (b) the right to use those names as part of the name of the Australian company; and (c) all present and future trade marks registered in Australia in the name of the Canadian company in connection with Ford products and parts "and the goodwill attached thereto." The consideration for the sale was £400,000, which was duly paid. The Canadian company also agreed to supply during a period of ten years Ford products exclusively to the Australian company and to determine agency agreements under which other persons had been selling Ford products in Australia. A recital stated that "a substantial and valuable goodwill is attached to the trade names of Ford and Ford Motor in the said Commonwealth and to trade" in Ford cars, parts, &c.

On 13th May 1939 the Canadian company purported to assign by a document under seal to three assignees certain trade marks "together with the goodwill of the business concerned in the particular goods in respect of which the said trade marks have been respectively registered in so far as the goodwill relates to the Commonwealth of Australia." The assignees were a manufacturing company (Ford Manufacturing Co. of Australia Pty. Ltd.), the respondent company, which is a marketing company, and the assignor itself—the Canadian company. This agreement contained a recital to the effect that as the Canadian company had for many years carried on business in Canada in manufacturing, exporting, shipping and dealing in motor cars, &c. and had "in addition caused the said products to be marketed in the Commonwealth of Australia and" (had) "thereby acquired in the Commonwealth of Australia a substantial and valuable goodwill relating to the manufacture and marketing of such products."

On 4th June 1935, by an agreement under seal made between the Canadian company and the Australian company, the covenants in the agreement of 1925 were extended for a further period of ten years. This agreement recited that by the 1925 agreement the Canadian company had sold goodwill to the Australian company.

These various recitals, striving to establish by strong assertion the existence of a goodwill in Australia belonging to the Canadian company, are relied upon by the Commissioner to show that goodwill was assigned to the respondent company by the Canadian company. The company, which made the agreements containing these recitals, now contends that no goodwill was assigned by the agreements. The Commissioner was not a party to the agreements and cannot rely upon the recitals by way of estoppel. They can be used against the company as admissions, but they are not conclusive against the company. The company is at liberty to show, if it can, that in fact the Canadian company did not own any goodwill in Australia and that accordingly the agreements were ineffective to assign any such goodwill. Verbal evidence for this purpose was admitted and, in our opinion, rightly admitted.

That evidence showed that the Canadian company did not at any time carry on business in Australia. It follows that that company had no goodwill to transfer to the respondent and accordingly did not transfer any goodwill to the respondent. All the learned Justices of the Supreme Court agreed in this view, and it is not necessary to restate at length the reasons which support it. We refer only to what Lord Macnaghten said in Commissioners of Inland Revenue v. Muller & Co.'s Margarine Ltd.[1]: "Goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business." The Australian company acquired by the agreements valuable selling rights and rights to exclusive supply in relation to commercial products of high reputation—but these contractual rights did not constitute goodwill.

We agree with Webb C.J., however, that this conclusion is not decisive in this case. The questions before this Court relate to the income year 1935. The fact that the company acquired or did not acquire an asset of a particular kind at a particular date does not in itself show whether or not it owned an asset of that kind at a later date. An asset previously acquired may have disappeared, or the company may have become possessed of an asset otherwise than by means of assignment from another person. The company has been carrying on a large business in Australia since 1925. It has the valuable and exclusive right to market Ford products. In 1935 the profits in Queensland as returned by the company for income-tax purposes amounted to £51,483. There must be a real goodwill attaching to such a business.

As already stated, an item £400,000 for "Patents, Trade Marks &c.—Goodwill" appears in the company's accounts for the relevant year. We agree that it would be open to the company to show that in fact it possessed no goodwill if it could do so. But the company does not by showing that it did not acquire a goodwill by assignments in 1925 and 1929 also show that it had no goodwill in 1935. The accounts for 1935 refer to the assets of the company existing in that year. The company in its correspondence with the Commissioner rightly contends (though for another purpose) that in sec. 34 (4) (c) "Accounts obviously means the accounts relating to the period in question since in the course of trade one item may increase in value and another diminish, and a similar amount may from time to time represent different assets."

As an amount for goodwill appears as an asset in the company's accounts for the relevant year the Commissioner is entitled to make a deduction under sec. 34 (4) (c) of so much of the amount of the goodwill as in his opinion should reasonably be deducted. If the company in fact has a goodwill there can be no doubt that this section is applicable. If in fact the company had no goodwill, whatever may appear in its accounts, this provision would appear not to be applicable; but it is not necessary to decide this question in the present case.

An amount appears in the accounts as an amount of goodwill under a heading "Patents, Trade Marks, &c." The company owns no patents. There was no assignment of trade marks in 1925, but only an agreement to assign. The "assignment" of trade marks in 1929 purported to be an actual assignment of certain registered trade marks. Sec. 58 of the Trade Marks Act 1905-1936 (Commonwealth) provides: "A trade mark when registered may be assigned and transmitted only in connexion with the goodwill of the business concerned in the particular goods or class of goods in respect of which it has been registered and shall be determinable with that goodwill." A registered trade mark, the existence and transferability of which depend entirely upon the statute, can be assigned only if the statutory requirement is satisfied. The Canadian company purported in 1929 to assign registered trade marks "together with the goodwill of the business concerned in the particular goods" in respect of which the trade marks had been registered. But the company did not carry on any business in Australia and it did not own the goodwill of any business in Australia. Accordingly the "assignment" was ineffectual to transfer any trade marks (Lacteosote Ltd. v. Alberman[2]).

Thus the respondent company owns neither patents nor trade marks, and the amount of £400,000 in the accounts must be regarded as representing only goodwill. If the company made a mistake in including in this amount an estimate of the value of trade marks which it was thought to own, it may make its submissions to the Commissioner.

The Commissioner is entitled to make a deduction from the amount of capital only of so much of the amount of goodwill appearing in the company's accounts as in his opinion should reasonably be deducted. This provision does not subject a taxpayer to an arbitrary, fanciful or capricious decision of the Commissioner (Australasian Scale Co. Ltd. v. Commissioner of Taxes (Q.)[3]).

The Commissioner has in the present case deducted the whole amount of £73,622 attributable to the Queensland share of the Australian goodwill. There is no reason to doubt the honesty of the Commissioner, but it is impossible to regard such a deduction as representing what any reasonable person could regard as an amount reasonably to be deducted. The goodwill of the company must obviously have some real value, and we agree with the learned Justices of the Full Court that the Commissioner should seek to ascertain the real value of the goodwill and make a deduction of what in his opinion is the excess value attributed to it in the accounts of the company.

The questions in the special case should be answered as follows:—Question 1: First part: The Commissioner was entitled to deduct so much only of the said sum of £73,622 as in his opinion should reasonably be deducted. Second part: See answer to first part. Question 2: (a) Yes. (b) and (c) In view of answer to 2 (a), no answer. Question 3: Yes. Question 4: (a): No. (b): No. (c): No. (d): Yes. Question 5: Not necessary to answer. Question 6: Yes. Question 7: Yes. Question 8: The said agreement created contractual rights in the respondent which were of value but did not convey any property to the respondent. Question 9: Yes. Question 10: Yes.

The result is that the appeal should be allowed, but it should be held that the Commissioner was wrong in arbitrarily deducting the whole amount of £73,622 from the capital of the company. The company has throughout contended that the Commissioner was not entitled to make any deduction on account of goodwill. On this part of the case the Commissioner has succeeded. The Commissioner has throughout contended that he was entitled to deduct the whole amount of £73,622 on account of goodwill. On this part of the case the company has succeeded. In the circumstances it will be proper to make no order as to costs in this Court or in the Courts below.

Question 11 should be answered accordingly.

The order of the Full Court upon the special case is set aside and the special case with the answers stated is remitted to E. A. Douglas J. so that he may make an order in conformity with this judgment.

McTiernan J.

I agree that the capital account of the taxpayer company should, for the purposes of fixing the rate of taxation under sec. 34 of the Income Tax Assessment Act of 1936, be made up on the basis that no goodwill of any business of the Ford Motor Co. of Canada passed to the taxpayer and I agree that there should not be left out of consideration in making up such capital account the question whether the taxpayer company had in the year of taxation a valuable goodwill which it acquired since it began to carry on business. So far I agree with the judgment that has been given. But I should like my further concurrence subject to this reservation that the taxpayer should not be precluded from showing, if it can, that it has an interest in any one or more of the trade marks or trade names of the Canadian company and that such interest is included in the conglomerate item, "Patents, Trade Marks, &c.," mentioned in the balance-sheet.

Appeal allowed. Order of Full Court set aside. Special case with following answers remitted to E. A. Douglas J. so that he may make an order in conformity with the judgment of this Court.

Answers to questions in special case:—

Question 1: First part: The Commissioner was entitled to deduct so much only of the sum of £73,622 as in his opinion should reasonably be deducted.

Second part: See answer to first part.

Question 2 (a): Yes. The opinion formed by the appellant was not an opinion which he was authorized to form and give effect to under sec. 34 (4) (c) of the Income Tax Assessment Act.

Question 2 (b) and (c): In view of answer to 2 (a), no answer.

Question 3: Yes.

Question 4:

(a)

: No.

(b)

: No.

(c)

: No.

(d)

: Yes.

Question 5: Not necessary to answer.

Question 6: Yes.

Question 7: Yes.

Question 8: The said agreement created contractual rights in the respondent which were of value but did not convey any property to the respondent.

Question 9: Yes.

Question 10: Yes.

Question 11: There should be no order as to such costs.

No order as to costs of appeal to this Court.

Solicitor for the appellant, W. G. Hamilton, Crown Solicitor for Queensland.

Solicitors for the respondent, Thynne & Macartney.

[1] (1901) A.C. 217, at p. 224.

[2] (1927) 2 Ch. 117, at pp. 127, 128.

[3] [1935] HCA 23; (1935) 53 C.L.R. 534, at pp. 555, 557.