Private ruling: Terminating value of goodwill from tax consolidated group
Date of advice: 21 May 2020
Published: July 2020
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 20XX

Ruling: Q1: Upon exit from the Entity A income tax consolidated group (ITCG), was the goodwill of the Entity C business operations an asset of Entity A, as head of the ITCG, for the purposes of section 711-20 of the Income tax assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the terminating value of Entity A's goodwill asset upon exit from the Entity A ITCG equal to the cost allocated to the goodwill of Entity C's business at joining time under section 711-20 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: Entity A is the head company of the Entity A ITCG which acquired the Entity B ITCG. Entity B purchased certain assets, which included goodwill, comprising the Entity C business operations. The Entity C business operations were maintained as an independent business capable of autonomously undertaking its activities whilst part of the Entity B ITCG and the Entity A ITCG. The Entity C business operations were disposed of by the Entity A ITCG.

Relevant legislative provisions: Income Tax Assessment Act 1997 section108-5 | Income Tax Assessment Act 1997 section711-20 | Income Tax Assessment Act 1997 section711-30 | Income Tax Assessment Act 1997 section705-30 | Income Tax Assessment Act 1997 section705-35 Question 1 | Summary | The goodwill of the Entity C business operations is an asset of Entity A ITCG, as head of the ITCG, for the purposes of section 711-20 upon exit from the Entity A ITCG.

Reasons for decision: Summary: The terminating value of goodwill, for the purposes of section 711-20 of the ITAA 1997, associated with the Entity C business operations will be determined under section 711-30 of the ITAA 1997 by applying 705-30 of the ITAA 1997 in a corresponding way as it was applied on entry. | Detailed Reasoning - Detailed reasoning: For the purposes of the exit ACA calculations, a terminating value will need to be allocated to the goodwill of the Entity C business operations leaving the Entity A ITCG. Section 711-20 provides the steps for working out the allocable cost amount for the leaving entity. Step 1 of section 711-20 requires the working out of the head company's terminating value of all assets held at leaving time. The "head company's terminating value" for an asset is worked out in accordance with section 711-30. Upon leaving an ITCG, subsection 711-30(2) of the ITAA 1997 provides that the terminating value is worked out by applying 705-30 of the ITAA 1997 in a corresponding way for a joining entity at joining time, the terminating value of a CGT asset of a leaving entity is equal to the asset's cost base just before the leaving time. The goodwill attached to the Entity C business operations is a CGT asset not covered under subsections 705-30(1) to (3B) of the ITAA 1997. Consequently, the application of subsection 705-30(4) of the ITAA 1997 in a corresponding way provides the terminating value of a CGT asset of a leaving entity would be using the cost base of the CGT asset just before the leaving time. As goodwill is a CGT asset, subsection 701-55(5) of the ITAA 1997 provides that the tax cost setting amount became its cost base or reduced cost base. Section 701-60 of the ITAA 1997 provides the relevant provisions to work out the tax costs setting amount. Where the asset's tax cost is set by section 701-10 of the ITAA 1997, the tax cost setting amount will be worked out in accordance with Division 705 of the ITAA 1997 (section 701-60 item 1 of the ITAA 1997). The goodwill of the Entity C business operations was separately identifiable as the business was maintained in a sufficiently discrete manner from the rest of Entity A's operations, Therefore the termination value of the goodwill at leaving time was the tax cost setting amount determined upon to entry to the Entity A ITCG.

Reasons for decision: Subsection 108-5(2) of the ITAA 1997 provides that goodwill is a CGT asset: | (2) 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 an asset of a partnership; | (d) an interest in a partnership that is not covered by paragraph (c). | Taxation Ruling TR 1999/16 Income Tax: capital gains: goodwill of a business refers to Commissioner of Taxation v Murry (1998) 193 CLR 605in defining legal goodwill "for the purposes of 'CGT asset' in section 108-5 of the ITAA 1997 has the meaning it bears under the general law." | TR 1999/16 specifically notes the separation of internally generated goodwill at [61]: | If an introduced business activity is a new business, the goodwill attaching to that business is a new asset separate from the goodwill of the existing business. | and purchased goodwill at [63] | If a taxpayer who founded or purchased a business adds to that business an additional business purchased as a going concern, it is a question of fact dependent on the circumstances of each particular case whether the additional business is subsumed into and forms part of the existing business or whether the two businesses remain as separate businesses. If two post-CGT businesses are subsumed in this way, the goodwill of the businesses coalesce and the cost base of the goodwill of the business purchased as a going concern becomes part of the cost base of the goodwill of the entire business. | The Entity C business operations, which include goodwill, continued to operate the same business independently from the rest of the ITCG subsequent to its acquisition and consolidation into the Entity A ITCG. Consequently, the Entity C business constitutes a discrete business whose goodwill was not subsumed into the goodwill of Entity A's existing business. | Consequently, for the purposes of determining the allocable cost amount of the leaving entity (section 711-20 of the ITAA 1997), the goodwill of the Entity C business is an asset of the leaving entity.