Private ruling: CGT - assets
Date of advice: 20 December 2024
Published: 17 February 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July XXXX

Ruling: Q1: Will any capital gain or loss arising as a result of capital gain tax (CGT) event A1 happening in relation to the sale of the shares in the Company by the shareholders Individual A and Individual B be disregarded under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, however you can still make a capital gain under CGT event K6 in section 104-230 of the ITAA 1997 if the requirements of that provision are satisfied. | Q2: Should the whole of the business goodwill owned by the Company be considered an asset that were acquired before 20 September 1985 for the purposes of CGT event K6 in section 104-230 of the ITAA 1997? | A2: Yes | Q3: Should the Company trade mark owned by the Company be considered property that was acquired before 20 September 1985 for the purposes of CGT event K6 in section 104-230? | A3: Yes

Relevant facts and circumstances: 1. The Company is a family-owned and operated company incorporated before 20 September 1985 (Pre-CGT). 2. Individual A and Individual B are Spouses. 3. From DDMMYYYY until DDMMYYYY, the Company had 1 A class share on issue held by Individual A and 1 B Class share on issue held by Individual B. 4. The A and B class shares carried equal voting rights. 5. There were no preferences or differences between the A and the B class shares. 6. After 20 September 1985 (post-CGT) a share split was undertaken. Both the A Class and B Class shares were split 1:100 resulting in Individual A owning 100 A Class shares and Individual B owning 100 B Class shares. 7. The conversion took place in accordance with section 254H of the Corporations Law resulting in the following: a. The original shares were not cancelled or redeemed b. There was no change to the total amount allocated to the share capital of the Company; and c. The proportion of equity owned by the Individual A and the Individual B in the share capital account was maintained. 8. On DDMMYYYY, shares were transferred as follows: a. Individual A transferred10 A Class shares to the corporate trustee of the a family trust (Trust). b. Individual B transferred 10 B Class shares to Child B and child A (held jointly). 9. On DDMMYYYY shares were transferred as follows: a. Individual A transferred a further 10 A Class shares to Trust. b. Individual B transferred a further 10 B Class shares to child B and Child A. 10. These share transfers were implemented to assist with succession planning for family members. 11. The Trust was established post-CGT. The beneficiaries are the child A of Individual A and Individual B and the Child A's spouse. 12. Child A is the other daughter of Individual A and Individual B. child B is her husband. History of business operation 13. The business was started by Individual A pre-CGT. 14. A Company was incorporated the business was transferred to the Company and has been operated by the Company ever since. 15. The core business of the Company is the manufacturing and packing products. 16. The Company is the only one in Australia that undertakes this activity. 17. The Company has always manufactured its own products for sale under the Company's brand. 18. Since its inception the Company has undertaken contract manufacturing for 3rd party customers. 19. Historically the split of activities has remained consistent. 20. All revenue is generated from commercial and business to business relationships with no retail customers. Business names and trade marks 21. The Company has had the same registered business name since pre-CGT. 22. The Company owns a registered trade mark. 23. The trademark was registered post- CGT, however, at all times the Company has been using the same brand name whether registered or unregistered. Premises 24. The Company has always operated through leased premises. Employee history 25. The Company was founded by Individual A who worked in the business until their retirement post-CGT due to a serious medical illness. 26. Individual A and Individual B have been majority shareholders since incorporation. 27. The business is currently run by child B and child A. Child A has worked in the business since leaving school and child B has been involved for more than 30 years. 28. The control and management of the Company has remained with the Individual A, Individual B and family since incorporation to the date of sale. 29. There are a number of employees that have been with the business for a long period of time. The Company has XX employees who have more than XX years of service with the Company. 30. Employee numbers have remained relatively steady over the lifecycle of the business. Currently the Company has XX permanent employees and pre-CGT there were XX employees. Sale process 31. Under an agreement dated DDMMYYYY all the shares in the Company were sold to a company with completion occurring on DDMMYYYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 paragraph 104-230 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Division 109 | Income Tax Assessment Act 1997 section 109-5 | Income Tax Assessment Act 1997 section 109-10 | Income Tax Assessment Act 1997 Division 149

Reasons for decision: Summary: The converted shares have the same date of acquisition as the original shares to which they relate and are treated as being acquired before 20 September 1985 when the original shares were acquired for the purposes of section 104-10(5). Any capital gain arising from CGT event A1 happening in relation to the sale of the shares by Individual A and Individual B will be disregarded under section 104-10(5). However, the Individuals can still make a capital gain on the disposal of their pre-CGT shares under a separate CGT event K6 in section 104-230, if the requirements of that provision are satisfied. | Detailed Reasoning - Pre-CGT shares: Capital gains tax (CGT) event A1 occurs if you dispose of a CGT asset. A CGT asset is defined to be any kind of property or a legal or equitable right that is not property under section 108-5. The disposal of a CGT asset is a CGT event under CGT event A1 if a change of ownership occurs from you to another entity. The proposed sale of shares in the Company will give rise to CGT event A1 for the shareholders. A capital gain or loss is disregarded under subsection 104-10(5) if the asset in question was acquired prior to 20 September 1985 when CGT was introduced. Note 1 to subsection 104-10(5) indicates that a separate CGT event K6 can result in a capital gain if you dispose of shares in a company you acquired before 20 September 1985. The converting of the shares into a larger number will not trigger a CGT event as there is no disposal of shares by either of the shareholders and no change to the beneficial ownership of the shares. >Taxation Determination TD 2000/10 Income tax: capital gains: what are the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares? (TD 2000/10) provides guidance on the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares and confirms that no CGT event occurs. It states at paragraph 1 and 2 that: 1. If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporations Law ('C Law') in that: (a) the original shares are not cancelled or redeemed in terms of the C Law; (b) there is no change in the total amount allocated to the share capital account of the company; and (c) the proportion of equity owned by each shareholder in the share capital account is maintained; no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership. The issue of roll-over relief under section 124-240 of the Income Tax Assessment Act 1997 ('the 1997 Act') does not arise because no CGT event happens to the shares. 2. The converted shares have the same date of acquisition as the original shares to which they relate. For example, if the original shares were acquired before 20 September 1985 (pre-CGT shares), the converted shares have the same acquisition date. | Detailed Reasoning - Application to your circumstances: In your case, Individual A acquired 1 A Class share and Individual B acquired 1 B Class share before the introduction of CGT. After the introduction of CGT a share split was undertaken by the Company and as a result Individual A became the holder of XXX A Class shares and Individual B became the holder of XXX B Class shares. The acquisition of the shareholding arose from the splitting of the shares into a larger number. It did not trigger a CGT event as there was no disposal of shares by either of the shareholders and no change to the beneficial ownership of the shares. As such, the converted shares have the same date of acquisition as the original shares to which they relate and are treated as being acquired before 20 September 1985 when the original shares were acquired for the purposes of subsection 104-10(5). As the shares are pre-CGT assets any capital gain arising from CGT event A1 happening in relation to the sale of the shares by Individual A and Individual B will be disregarded under section 104-10(5). The Individuals can still make a capital gain on the disposal of their pre-CGT shares under a separate CGT event, K6 in section 104-230, if the requirements of that provision are satisfied. | Detailed Reasoning - Conclusion: Any capital gain arising from CGT event A1 happening in relation to the sale of the pre-CGT shares by Individual A and Individual B will be disregarded under section 104-10(5). However, the Individuals can still make a capital gain on the disposal of their pre-CGT shares under the separate CGT event, K6 in section 104-230, if the requirements of that provision are satisfied. | Summary: The goodwill of the business operated by the Company is considered to be CGT property acquired before 20 September 1985 for the purposes of section 104-230. | Detailed Reasoning - CGT event K6: CGT event K6 (K6) in section 104-230 is a relevant consideration where shares in a private company acquired before 20 September 1985 (pre-CGT) are disposed of after 20 September 1985 (post-CGT). It can result in a capital gain if certain CGT events including CGT event A1 happens. At the time of disposal, K6 compares the market value of post-CGT property to the net asset value of the company. Where the market value of its property acquired after 20 September 1985 (post-CGT) is at least 75% of its net value it will trigger K6 (subsection 104-230(2)). The amount of the capital gain for CGT event K6 is calculated by taking into account that part of the capital proceeds from the shares that is reasonably attributable to the unrealised capital gain on the post- CGT property. That is, the amount by which the market value of the post-CGT property (referred to in subsection 104-230(2)) of the company is more than the sum of the cost bases of that property (subsection 104-230(6)). Subsection 104-230(1) contains the tests that determine whether CGT event K6 has application. The subsection provides: CGT event K6 happens if: a) you own shares in a company or an interest in a trust you acquired before 20 September 1985; and b) CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares or interest; and c) there is no roll-over for the other CGT event; and d) the applicable requirement in subsection (2) is satisfied. Subsection 104-230(2), which contains the 75% test, states that: Just before the other event happened: (a) the market value of property of the company or trust (that is not its trading stock) that was acquired on or after 20 September 1985; or (b) the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985; must be at least 75% of the net value of the company or trust. Subsection 104-230(5) provides the time of the CGT event K6 is when the A1 event happens. The test in K6 therefore requires property acquired post-CGT be identified, so it can be valued for the purposes of the 75% test in section 104-230. | Detailed Reasoning - Meaning of property: Fundamental to the operation of section 104-230 is the concept of property. The term property is not defined for the purpose of CGT event K6, although trading stock is specifically excluded. Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income tax Assessment Act 1997 (TR 2004/18) provides guidance on the application of CGT event K6. In relation to the definition of property it states: 12. The term 'property' has its ordinary legal meaning. It does not mean 'asset' or 'CGT asset'. ... 52. The Macquarie Dictionary (3rd revised edn) defines property to mean 'that which one owns; the possession or possessions of a particular owner'. The term property in tis context in section 104-230 is property owned by either the company referred to on paragraph 104-230(2)(a) or by lower tier companies. 53. It extends to any kind of property. It covers most CGT assets, including pre-CGT assets, but does not include a CGT asset that is not property. It can include such things as land and buildings, shares in a company, interests in assets and goodwill. Motor vehicles, in relation to which capital gains or capital losses are disregarded for CGT purposes, also constitute 'property'. 54. On the other hand the ordinary meaning of 'property' excludes personal rights such as a contractual right revocable at will by the other party...and possibly, non-assignable rights under an employment contract... TR 2004/18 recognises that the ordinary legal meaning of property does not correspond with the definition of CGT assets which is broader and extends to non-proprietary rights. The use of the term property in the section 104-230 rather than CGT asset, means that a single item of property that constitutes two or more CGT assets under Subdivision 108-D is treated as a single item of property for the purposes of K6 (TR 2004/18 at paragraph 13). Other CGT concepts like acquisition date, are used for K6 purposes, so that the item of property is taken to have been acquired at the time the Income Tax Assessment Act 1936 or ITAA 1997 treats that CGT asset as having been acquired (TR 2004/18 at paragraph 14). Relevantly, one exception to this rule is where the CGT asset is treated as having been acquired post-CGT because of the operation of Division 149. In the case of Division 149 the item of property continues to be treated as having been acquired pre-CGT for the purposes of CGT event K6. The test in K6 therefore requires property (as opposed to CGT assets), acquired post-CGT be identified, so it can be valued for the purposes of the 75% test in section 104-230. | Detailed Reasoning - Goodwill: Goodwill, is both a CGT asset under paragraph 108-5(2)(b) and '...an item of property ...in its own right.' ( FC of T v Murry 98 ATC 4585 at paragraph 23). Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) provides guidance on the taxation treatment of goodwill of a business. It provides the definition of goodwill established by the High Court in Federal Commissioner of Taxation v. Murry 98 ATC 4585; (1998) 39 ATR 129 at paragraph 12 as follows: ...goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated. Paragraph 52 of TR 1999/16 provides that: If a taxpayer commences business and starts to create goodwill, the goodwill of the business is acquired when the taxpayer starts work that results in the creation of the goodwill (subsection 109-10, item 1). When a taxpayer starts the work resulting in the creation of goodwill of a business is a question of fact dependent on the circumstances of each particular case. Paragraph 17 of TR 1999/16 provides guidance in deciding whether goodwill remains a single CGT asset if the same business is continued. It states that: The whole of the goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset provided the same business continues to be carried on. This is so even though: (a) the sources of the goodwill of a business may vary during the life of the business; or (b) there are fluctuations in goodwill during the life of the business. Paragraphs 21 of TR 1999/16 states that: The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business has not changed, the business remains the same business for the purposes of the CGT goodwill provisions. The business 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 constitute a new business as long as the essential character or nature of the business remains unchanged. Paragraph 27 of TR 1999/16 provides that goodwill is one CGT asset separate and distinct from other assets of the business such as '...items of intellectual property (for example, a trade mark, a patent, copyright or registered design.)' Paragraph 60 of TR 1999/16 provides that: If a new business operation or activity introduced by a taxpayer is an expansion of an existing business (whether it commenced before or after 20 September 1985), any goodwill built up in conducting the expanded business is merely an expansion of the existing goodwill of the business. If a business which commenced before 20 September 1985 (a 'pre-CGT business') is expanded, goodwill generated in conducting the expanded business is merely an accretion to the pre-CGT goodwill. Paragraph 64 of TR 1999/16 provides that if a pre-CGT business is combined with another business acquired post-CGT and they are conducted as one business without the pre-CGT business losing its essential nature or character, the goodwill of the post-CGT business is subsumed into the goodwill of the pre-CGT business and all of the goodwill of the business is taken to have been acquired before 20 September 1985. However, paragraphs 18 and 19 of TR 1999/16 set out that a business can change to such an extent that it is no longer the same business so that the goodwill of the old business ceases and goodwill of a new business is acquired. Further, paragraph 24 specifies that: The same business is not carried on if: (a) through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character; or (b) there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale. Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case. As the Company 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) ordinarily needs to be considered in respect of that pre-CGT goodwill. If the pre-CGT goodwill no longer has the same majority underlying ownership it is treated by Division 149 as being post-CGT goodwill. However, for the purposes of CGT event K6 Division 149 has no application, so that the item of property continues to be treated as having been acquired pre-CGT. | Detailed Reasoning - Application to your circumstances: The goodwill of the business has built up since the business commenced pre-CGT. While over the period of ownership of the business, new compatible operations have been adopted, different clients have been serviced and improved products and services have been offered, the essential nature or character of the business has not changed. Since its establishment, the business has retained its business name, family members have been key personnel, and it has provided similar services in the same geographical area to similar types of customers. It is accepted that the essential nature of the business established by the Company prior to 20 September 1985 has not changed either through a planned or systematic process over a period of time, or in a sudden or dramatic way and therefore the business remains the same business for the purposes of the CGT provisions on realtion to goodwill. Further, there is no change in the pre-CGT acquisition date of the goodwill of the business due to the operation of Division 149, as for CGT event K6 purposes Division 149 has no application. | Detailed Reasoning - Conclusion: As the essential nature of the business established by the Company prior to 20 September 1985 has not changed it is accepted that the Company's business remains the same business for the purposes of the CGT provisions in relation to goodwill. Therefore, the goodwill of the Business operated by the Company is considered to be CGT property acquired before 20 September 1985 for the purposes of section 104-230. | Summary: The registration of a trade mark under the Trade Mark Act 1995 (TMA) confers a bundle of rights upon the registered owner, including the right to exclusive use and the right to authorise others to use the mark in relation to the products or services for which it is registered that are not present in the unregistered trade mark. The addition of these rights make the registered trade mark property for the purposes of CGT event K6. When the property becomes a registered trade mark, the registrant already owned the underlying CGT asset when the mark came into existence (through use in the business). Under the CGT acquisition rules the registered trade mark property would be acquired when the trade mark was created. The trade mark was created when the business commenced operating before 20 September 1985. Therefore, under section 109-10 it was acquired before 20 September 1985, for the purpose of section 104-230. | Detailed Reasoning - Detailed Reasoning: As discussed in question 2 above, CGT event K6 (section 104-230) happens if certain CGT events happen to pre-CGT shares in a company or pre-CGT interests in a trust and, just before the time of the event, the market value of the post-CGT property of the company or trust, or of other entities in which the company or trust has a direct or indirect interest, is 75% or more of the net value of the company or trust. The test in K6 requires property (as opposed to CGT assets), acquired post-CGT be identified, so it can be valued for the purposes of the 75% test in section 104-230. Subsection 104-230(5) provides the time of the CGT event K6 is just before the 'other event' happens (in this case when the A1 event happens) This raises the question in relation to characterisation of the Company logo which was used continuously by the Company, initially as an unregistered trade mark pre-CGT and later as a registered trade mark post-CGT. | Detailed Reasoning - Unregistered trade mark is not property: Section 17 of the Trades Mark Act 1995 (Cth) (TMA), defines a trade mark as: A trade mark is a sign used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provide by any other person. It is a clearly established principle that an unregistered trade mark cannot be sold or transferred without also selling or transferring the underlying goodwill ( FCT v Just Jeans Pty Ltd 87 ATC 4373; 18 ATR 775 ). This principle was considered in the recent decision of the Federal Court, in Kraft Foods Group Brands LLC v Bega Cheese Limited [2020] FCAFC 65 (Kraft v Bega) where the Full Federal Court confirmed that an unregistered trade mark is not property in itself, but forms part of the goodwill of the business. | Detailed Reasoning - Registered trade mark is property: In contrast, the registration of the trade mark under the TMA is property, conferring different rights to those afforded to a trade mark user at common law (see: Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25, Windeyer J). Registration of the trade mark gives rise to a new set of rights that did not previously exist (see: French CJ in the High Court decision in JT International SA v Commonwealth of Australia; British American Tobacco Australasia Ltd v The Commonwealth [2012] HCA 43). The registration of a trade mark under the TMA confers a bundle of exclusive rights upon the registered owner, including the right to exclusive use and the right to authorise others to use the mark in relation to the products or services for which it is registered (section 20 of the TMA). The TMA expressly states that a registered trade mark is personal property in section 21 of the TMA. The registered trade mark constitutes property once registered which is capable of valuation as a distinct and separate item of property from the goodwill that existed prior to registration. As a result the trademark only starts to exist as property distinct from goodwill on registration. The registered trade mark is property for the purposes of section 104-230. | Detailed Reasoning - Time of acquisition for CGT event K6: An item of property is taken to have been acquired at the time the Income Tax Assessment Act 1936 or ITAA 1997, treats that CGT property as having been acquired for the purposes of section 104-230 (TR 2004/18 at paragraph 14). Division 109 contains the CGT acquisition rules. Under the general acquisition rules in section 109-5, you acquire a CGT asset when you become its owner. In circumstances where the property is acquired without a CGT event, the time of acquisition of the CGT asset is determined by the item 1 of the table in section 109-10 which provides: This table sets out some specific rules for the circumstances in which, and the time at which you acquire a CGT asset other wise than as a result of a CGT event happening. Table 1:Acquisition rules (no CGT event) | Detailed Reasoning - You acquire the asset at this time:: 1 You (or your agent) construct or create a CGT asset, and you own it when the construction is finished or the asset is created. when the construction, or work that resulted in the creation, started ... | Detailed Reasoning - Application to your circumstances: The property that is being considered for the purposes of section 104-230(2), is the property of the company at the time of the 'other event', in this case, the A1 event triggered by the disposal of the pre-CGT shares in the 20YY income year. At that time, the property consisted of the registered trade mark as a whole including the underlying CGT asset of the Company logo and the additional bundle of rights conferred by registration. Before registration, the trade mark existed as part of the goodwill that could not be sold or transferred without also selling or transferring the underlying goodwill. It was not a separate item of property based on the principle recently affirmed in Kraft v Bega . When it was registered under the TMA post-CGT, the registration conferred additional rights and it became a distinct item of property (section 21 of the TMA). | Detailed Reasoning - Time of acquisition for CGT event K6: TR 2004/18 at paragraph 14 states property is acquired for the purposes of section 104-230, at the time the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997 treats the CGT asset as having been acquired. Under item 1 in section 109-10 the CGT asset is acquired when the construction that resulted in the creation started. In your case, the creation of the trade mark that is now registered, started pre-CGT when the business first began to operate. The development of the relevant mark has been continually occurring since its first use. For the purposes of CGT event K6, the registration adds the (existing and already owned) trade mark to the register, sees the registrant added to the register as its owner, supplements the existing rights in relation to their ownership of the mark, and gives the registered trade mark the status of personal property. When the property becomes a registered trade mark, the registrant already owned the underlying CGT asset when the mark came into existence (through use in the business). As the registered trade mark has it genesis in the unregistered trade mark, it is acquired for the purposes of the CGT event K6 when the trade mark is first created at the time the Company commenced business prior to 20 September 1985. | Detailed Reasoning - CONCLUSION: The registration of a trade mark under the TMA confers a bundle of rights upon the registered owner that are not present in the unregistered trade mark. These rights are property for the purposes of K6. When the property becomes a registered trade mark, the registrant already owned the underlying CGT asset when the mark came into existence (through use in the business). Under the CGT acquisition rules in section 109-10 this property is acquired when the work that resulted in the creation started. The underlying business and goodwill from where the registered trade mark arises and to which it protects, commenced before 20 September 1985, therefore, the property in the registered trade mark is taken to be acquired before 20 September 1985 for the purpose of section 104-230.

Reasons for decision: Legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.