ATO ID 2010/208: Capital gains tax: goodwill of acquired business - time of coalescence
Date of decision: 12 November 2010
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
Does the contract timing rule in subsection 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) have the effect that the goodwill of a new business acquired by an entity under a contract; which coalesces with the goodwill of the existing business already conducted by that entity to form a single CGT asset; is for the purposes of Part 3-1 taken to have become a single CGT asset from the date of the contract under which the new business was acquired?

Decision
No, the contract timing rule does not have the effect of treating the acquired goodwill of a business as coalescing with the existing goodwill from the time when the contract to acquire the new business has been entered into.

Facts
The assets of a business (the old business) conducted by non-public entity Company X include goodwill acquired before 20 September 1985. Company X enters into a contract to acquire the assets of a business (the acquired business), including goodwill. The assets of the acquired business are transferred to the company at settlement. At that time, the acquired business is as a matter of fact subsumed into and forms a part of the old business. At some time between the contract date and the settlement date there is a change in the majority underlying interests for Company X so that the pre-CGT assets of the company are taken to have been acquired on the date of the change and have a cost base equal to their market values worked out as at that time (that is, as an effect of the operation of subsections 149-30(1A) and 149-35(2) of the ITAA 1997).

Reasons for decision
Summary: When a business acquired by an entity is in fact subsumed into and forms a part of a business already conducted by that entity, the goodwill of the businesses coalesce and the cost base of the goodwill of the acquired business becomes part of the cost base of the goodwill of the entire business. If the goodwill of the business already conducted has an acquisition date before 20 September 1985, all of the coalesced goodwill will be taken to have been acquired before that date: paragraphs 63 and 64 of Taxation Ruling TR 1999/16. The consequences for the cost base and acquisition date of goodwill are worked out as at the time when the goodwill assets coalesce. The contract timing rule for acquisitions in subsection 109-5(2) of the ITAA 1997 applies to nominate when a CGT asset is 'acquired' for any purposes where that concept is relevant (such as the CGT discount). That rule, as applied to the assets of the acquired business, does not have the further effect of treating the goodwill assets as having coalesced at any time earlier than when the acquired business is in fact subsumed into the business that is already being conducted. This means that where there is a change in the majority underlying interests of a company at a time when the contract for the acquisition of the assets of a new business has not been completed, the acquisition date and cost base consequences referred to in subsections 149-30(1A) and 149-35(2) of the ITAA 1997 will be applied to the goodwill of the business then conducted by the company. When the acquired business is later subsumed, the coalesced goodwill assets will have an acquisition date after 20 September 1985.

Legislative references: Income Tax Assessment Act 1997 Part 3-1 subsection 109-5(2) subsection 149-30(1A) subsection 149-35(2)
Related public rulings and determinations: Taxation Ruling TR 94/29 | Taxation Ruling TR 1999/16
Subject references: CGT assets Pre-CGT assets Acquisition of CGT assets