Rethinking Goodwill: The Murry Legacy

Journal of Applied Research in Accounting and Finance (JARAF), Vol. 7, No. 2, 2012

32 Pages Posted: 12 Feb 2013

Date Written: February 11, 2013

Abstract

In this article, the author advances a rights-based theory of goodwill which contends that for legal purposes, goodwill is a bundle of rights and privileges enjoyed by the owner of an operating business, central to which is the proprietary right to make use of all that constitutes the attractive force of the business to generate earnings or otherwise create value. This ‘attractive force’ includes everything which adds value to the business and not merely the attributes of the business which can be shown to attract custom. Rather it is all of the assets, advantages and positive attributes of the business working together which bring about the attractive force and result in earnings being generated and value being created.

Moreover, a rights-based legal theory of goodwill is consistent with the reasoning of the majority in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 and importantly, reconciles a number of perceived inconsistencies in the decision concerning the role played by custom. Reconciling these anomalies is critical because their existence has seen two conflicting judicial approaches to goodwill emerge, both of which purport to find their authority in Murry. This has been most observable in the taxation area when courts are regularly called upon to resolve matters involving questions of substantial liability to stamp duty and where the existence and value of goodwill is often a determining factor. This article traces the history of goodwill as a legal concept and identifies the significant findings of the majority in Murry concerning the nature, existence, sources and value of goodwill for legal purposes. It examines the cases which have struggled to apply the decision in the face of residual uncertainty about the inseverable nature of goodwill, the role played by custom, and where the critical distinction between the existence and value of goodwill is not well understood. The article addresses this uncertainty, clarifies the role played by custom, and explains the relationship between the rights-based legal concept of goodwill and the value-based accounting concept. Finally, the author submits that the existence of the bundle of rights and privileges is the reason why an operating business which is generating revenue and is expected to continue to do so, will usually possess excess value in an accounting sense. For this reason, it may be time to distance the modern rights-based doctrine of goodwill from its historical patronage-centred past and rename it ‘operating business value’; because on its proper construction, goodwill which is recognised by law exists whenever a business is operating and generating revenue and there is reason to believe that this will continue.

Keywords: rights-based theory of goodwill, Australia, Murry

JEL Classification: M40, M41

Suggested Citation

Osborn, Debra, Rethinking Goodwill: The Murry Legacy (February 11, 2013). Journal of Applied Research in Accounting and Finance (JARAF), Vol. 7, No. 2, 2012, Available at SSRN: https://ssrn.com/abstract=2215388

Debra Osborn (Contact Author)

King & Wood Mallesons ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
176
Abstract Views
1,031
Rank
307,910
PlumX Metrics