Private ruling: CGT and Goodwill
Published: January 2015
Ruling period: From 1 July 20YY to 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: 1. Does CGT event C1 apply to the goodwill upon the cessation of the operation of the business in accordance with section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) ? | A3: 

Relevant facts and circumstances: In September 20XX, the applicant purchased the business located in a shopping centre in NSW for a purchase price which included goodwill. In July 20YY, the shopping centre closed to carry out repairs, and the applicant terminated the lease of his/her shop and closed the business. From July 20YY to December 20YY the applicant had a new shop in the same shopping centre fitted out as a business of the same kind and entered into a franchise agreement on 12 December 20YY. She/he underwent the relevant training to operate the franchise and opened for business in December 20YY. The applicant has confirmed that no logos or trademarks were attached to the former business, and therefore the goodwill was not inclusive of them. At the point of closure the former business had sales of approximately $23,000 per week. The current business generates approximately $75,000 per week. An increase in customer numbers is evidenced by the higher turnover of the current business. Many previous customers of the former business frequently return due to the close proximity of the new and previous shop locations, and enhanced range of items offered. Some of the current customers did previously shop at the former business; There are several new customers, given the increase in the turnover of the current business (compared to the former business). The applicant considers that the closure of the former shop represents a cessation of business, and therefore the voluntary destruction of goodwill which constitutes a CGT Event C1 under section 104-20 of Income Tax Assessment Act 1997 (ITAA 97) and the acquisition of the current franchise to be a new business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 108-5(2)(b) | Subsection 104-20(1) | Subsection 104-25(1)

Reasons for decision: Summary: The Goodwill of your former business is an intangible CGT asset which is recognised under paragraph 108-5(2)(b) of the ITAA 1997 as follows: To avoid doubt, these are CGT assets: a) part of, or an interest in, an asset referred to in subsection(1); b) goodwill or an interest in it; c) an interest in …….. (emphasis added) When the shopping centre closed for renovations in July 20YY, you closed your business at shop X. From July 20YY to December 20YY you set about fitting up shop Y within close proximity, in the same shopping centre, to be a franchised operation, which opened for business in December 20YY. 1.) Does CGT event C1 apply with respect to the goodwill upon the cessation of the operation of the business in accordance with section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) ? Subsection 104-20(1) of the ITAA 1997 states that a CGT event C1 happens if a CGT asset you own is lost or destroyed. Whereas the word 'lost' in subsection 104-20(1) does not contemplate voluntary actions (see paragraph 2 of Taxation Determination TD 1999/79), the word 'destroyed' in subsection 104-20(1) contemplates both voluntary and involuntary actions. The Macquarie Dictionary , 3 rd ed, defines the word 'destroy' as '1. To reduce to pieces or to a useless form; ruin, spoil; demolish. to put an end to; extinguish'. Closing the former business is a voluntary action. In this context 'destroyed' does not contemplate an economic loss of a CGT Asset (paragraph 5 of TD 1999/79). Further, A CGT Asset must be wholly lost or destroyed - not just damaged - for the circumstances to be covered by CGT Event C1.In closing the former business in July 20YY, you did not lose or destroy the goodwill you owned in it. Instead, you carried the goodwill with you, to your present business by proceeding to set up the new shop in July 20YY, by fitting it, stocking and undergoing training to operate the franchise and opening for business in December 20YY. We consider that a temporary closure or relocation does not itself constitute a permanent cessation of business. The ATO view on capital gains and losses attributable to the goodwill of a business is explained in Taxation Ruling TR1999/16 (TR1999/16). At paragraph 69 of TR1999/16 it is specifically stated that: a temporary closure of business or a move in location of a business does not constitute a permanent cessation of business and neither CGT event C1 nor CGT event C2 in section 104-25 of ITAA 1997 happens to the goodwill. Paragraph 138 of TR1999/16 states that: a closure of a business for a finite period of time (eg: an owner closes their shop due to ill health or to take holidays but with the intention of resuming business) does not constitute a cessation of business giving rise to a disposal of goodwill. Paragraph 139 of TR1999/16 further specifies that: closure of a shop and a move to new premises do not of themselves constitute a cessation of business. It also states that if a business owner moves the location of the shop and continues carrying on the same activities, serving at least some of its customers from the former trading location, the business has not ceased. In view of these examples, we consider that the transfer of your business operations is analogous to the situations cited in the TR 1999/16. It is therefore concluded that a CGT event C1 under section 104-20(1) of the ITAA 1997 has not happened to your CGT asset of goodwill of your former business. 2.) If CGT event C1 does not apply in accordance with question 1, does CGT event C2 happen in respect of the goodwill upon the cessation of the operation of your former business in accordance with section 104-25 of the ITAA 1997? Section 104-25(1) of the ITAA 1997 states that a CGT event C2 happens if ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, surrendered or is subject to similar endings. In closing down your former business in July 20YY, you did not redeem, cancel, surrender or end your contract in a manner described under this section of the ITAA 1997. Instead, you decided to move on to a bigger operation by entering into a franchised operation in the same field. Therefore, your CGT asset did not end and a CGT event C2 as specified under section 104-25(1) of the ITAA 1997 did not happen to the Goodwill of the former business. Paragraph 21 of TR1999/16 provides that: a business owner may expand or contract activities, or change the way in which a business is carried on, without ceasing to carry on the same business provided the business retains its essential nature or character. Organic growth, expansion or diversification of a business by for example: a) adopting new compatible operations; b) servicing different clients; or c) offering improved products or services does not itself cause it to be a new business provided the business retains its essential nature or character. As detailed in paragraph 69 of TR 1999/16 which explicitly states that: a temporary closure of business or a move in location of a business does not constitute a permanent cessation of business and neither CGT event C1 nor CGT event C2 in section 104-25 of ITAA 1997 happens to the goodwill. In view of these examples, we consider that the transfer of your business operations are analogous to the situations cited in TR1999/16. It is therefore concluded that a CGT event C2 under section 104-20 of the ITAA 1997 has not happened to your CGT asset of goodwill of your former business. The following factors have been decisive in our concluding that your new operation is a continuation of the former business albeit on a larger scale: • Although you have moved your business to a nearby location in the same shopping centre, you continue to serve several clients of your former business. • You will continue to serve clients with similar stock and services albeit from a larger operation and different premises. • Although your customer base will change, it will only be larger than that of the previous business. • Your business will be subject to the same management and control as before. • No material changes have resulted from the transition, in the nature and character of the business. 3.) If either CGT event C1 or C2 happen in respect of the above transaction, what is the amount of the capital gain or capital loss in respect the relevant CGT event? There is no capital gain or capital loss, as neither a CGT event C1 nor CGT event C2 has happened to the Goodwill of the former business as explained above.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | 2. If CGT event C1 does not apply in accordance with question 1, does CGT event C2 happen in respect of the goodwill upon the cessation of the operation of the business in accordance with section 104-25 of the ITAA 1997? | Answer: Not applicable, as CGT events C1 & C2 do not happen to your CGT asset.