Private ruling: CGT status of goodwill in business that commenced before 20 September 1985
Date of advice: 6 May 2016
Published: June 2016
Ruling period: 1 July 2015 to 30 June 2017

Ruling: Q1: Is the goodwill of the business a pre-CGT asset? | A1: No

Relevant facts and circumstances: The taxpayer carries on a business in an City A. The taxpayer commenced the business in 19XX in conjunction with their spouse as a partnership. In 19YY, the taxpayer's spouse left the partnership and the taxpayer commenced as a sole trader. Since then the business has grown organically and also through purchase of other strata corporation businesses. From time to time other business operators in the same industry would offer to sell their businesses. The taxpayer would purchase these businesses provided they fitted within the business structure. The new business being purchased was integrated into the existing structure. The expanded business traced under the same business name, used the same management and systems and the same banking arrangements. The expansion merely merged into the existing business. The only business purchased that was not integrated into the existing business premises and staff structure was one in an Australia state. Whilst the business traded under the same business name and used the same business systems the staff involved were located in separate offices in City B. The different location of the staff was the only differing feature. The taxpayer is now looking to retire and sell the business. The business is not a small business entity as its turnover is greater than $2 million and the value of the business is greater than $6 million so the taxpayer cannot rely on the asset test to access any of the small business CGT concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149

Reasons for decision: Summary: A business is a collection of assets put together towards profitable use (trying to remember the correct terminology). The sale of the business may therefore have income tax and/or CGT implications for particular assets constituting the structure of the business, including for example goodwill of a business. Taxation Ruling TR 1999/16 outlines how the CGT provisions apply to goodwill of a business. This Ruling is relevant in considering the status of the goodwill of the business, which commenced before 20 September 1985. Paragraph 17 of Taxation Ruling TR 1999/16 states that "The whole of the goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset (subject to Division 149 - about when an asset stops being a pre-CGT asset - see paragraph 90) provided the same business continues to be carried on". Paragraph 90 of Taxation Ruling TR 1999/16 states: "If an entity started business before 20 September 1985, with its goodwill being acquired on commencement of the business, Division 149 (about when an asset stops being a pre-CGT asset) of the 1997 Act needs to be considered in respect of that pre-CGT goodwill. Although the entity may have disposed of all of its other pre-CGT assets, if the pre-CGT goodwill no longer has the same majority underlying ownership it is treated by Division 149 as being post-CGT goodwill." In your circumstances, the taxpayer commenced the business in 19XX in partnership with their spouse. It appears then at that the whole of the goodwill of the business that commenced before 20 September 1985 remains the same single pre-CGT asset as the same business continues to be carried on. However, this position is subject to Division 149 - about when an asset stops being a pre-CGT asset, which therefore needs to be considered in the present case. | Detailed Reasoning - Division 149: Section 149-10 provides that an asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date. The tax provisions which may cause a pre-CGT asset to be treated as a post-CGT asset are: • Former s 160ZZS(1) of the ITAA 1936 or Subdivision C of Division 20 of Pt IIIA of the ITAA 1936 (i.e. for pre 1998/1999 income years); or • Division 149 of the ITAA 1997. Division 149 contains provisions which govern when an asset of an entity stops being a pre-CGT asset and is treated as having been acquired after that date. Entities affected by Division 149 include partnerships and individuals, as per the definition of entity in section 995-1 (which states that entity has the meaning in section 960-100), which is relevant for the present circumstances. Under subsection 149-30(1), an asset of a non-public entity stops being a pre-CGT asset when majority underlying interests in the asset were not held by the same ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. In that case, the CGT provisions apply to the asset as if: • The entity had acquired it at the time when the continuity of majority underlying interests ceased; and • The first element of the cost base and reduced cost base of the asset is its market value at that time (subsection 149-30(1) and section 149-35). The "majority underlying interests" in a CGT asset consist of: a. more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and b. more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset (subsection 149-15(1)). An "ultimate owner" includes an individual (subsection 149-15(3)). In your case, the taxpayer commenced the business in 19XX, initially in partnership with their spouse, with each holding a 50% interest in the partnership, including the partnership assets such as goodwill. However, in 19YY, the taxpayer's spouse left the partnership and the taxpayer commenced as a sole trader. In these circumstances, the goodwill of the business stops being a pre-CGT asset in 1994 as at that point in time the majority underlying interests in the goodwill were not held by the same ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. In 19YY, the continuity of majority underlying interests ceased when the taxpayer commenced as sole trader in the business with a 100% interest in the assets of the business after their spouse left the old partnership (where each partner formerly held a 50% interest in the assets of the partnership). In this case, the CGT provisions apply to the goodwill as a post-CGT asset as if: • The taxpayer had acquired it in 199YYat the time when the continuity of majority underlying interests ceased; and • The first element of the cost base and reduced cost base of the asset is its market value at that time (subsection 149-30(1) and section 149-35).