ATO ID 2006/181: Disposal of Goodwill: tainted asset
Date of decision: 20 July 2006
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Is goodwill a tainted asset for the purposes of Part X of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. Goodwill is not a tainted asset for the purposes of Part X of the ITAA 1936.

Facts
An Australian resident company is an attributable taxpayer in relation to two controlled foreign companies (CFC). One of the CFCs disposes of goodwill to the other CFC.

Reasons for decision
Summary: Section 317 of the ITAA 1936 contains an exhaustive definition of the term 'tainted asset'. Paragraph (c) of that definition excludes assets that are 'used solely in carrying on a business'. The term 'used solely in carrying on a business' is not defined for the purposes of section 317 of the ITAA 1936. Accordingly, the ordinary meaning applies. The word 'sole' is defined in the Macquarie Concise Dictionary to mean 'only'. Therefore, to come within paragraph 317(3)(c) of the ITAA 1936, goodwill must be used only in carrying on a business. In FC of T v. Murry 98 ATC 4,585; (1998) 39 ATR 129 the majority of the Full High Court held that goodwill 'is a right or privilege that is inseparable from the conduct of the business' (ATR at 137; ATC at 4,591). Isaacs J in Bacchus Marsh Concentrated Milk Co Ltd (in liq) v. Joseph Nathan & Co Ltd (1919) 26 CLR 410 also stated: Goodwill is property but, as such, is inseparable from a particular "business" in the sense of a particular going concern. It is an asset of that business, and enhances its value. Goodwill is inseparable from a business and cannot be used other than in connection with a business. In terms of the section 317 of the ITAA 1936, goodwill is used solely in carrying on a business and is not therefore a tainted asset.

Legislative references: Income Tax Assessment Act 1936 section 317
Case references: FC of T v. Murry 98 ATC 4585 (1998) 39 ATR 129
Subject references: Controlled foreign companies International tax