Private ruling: Pre and post capital gains tax assets
Date of advice: 17 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did you have a pre-CGT asset consisting of an interest of the pre-CGT assets of the partnership, including goodwill? | A1: Yes. It is accepted that when you became a partner in the partnership you acquired a pre-CGT asset consisting of an interest in the pre-CGT assets, including goodwill, of the partnership. | Q2: Did the pre-CGT goodwill of the partnership become post-CGT prior to the rollover of the business to Company A? | A2: No. It is accepted that your original 1/3 rd interest in the partnership retained its pre-CGT classification. This was not disturbed by you gaining the 50% share of Partner A’s 1/3 rd interest in the partnership upon their retirement. | Q3: Were any of the shares in Company A pre-CGT following the rollover of the partnership business? | A3: Yes. Pursuant to the rollover provisions provided in subdivision 122-B of the Income Tax Assessment Act 1997 (ITAA 1997), it is accepted that the pre-CGT interest of the partnership was converted to the taxpayer’s shares in Company A also being pre-CGT to the same extent. | Q4: Were any of the shares you disposed of in Company A pre-CGT assets? | A4: Yes. It is accepted that upon disposal of your shares, some of those shares, the extent to which is dependent on the value and proportion of the underlying pre-CGT and post-CGT assets, were pre-CGT.

Relevant facts and circumstances: Person X founded a business , Practice A , in the 1920s. The business operated under a variety of business names for XX years. In the 1950s the business was registered as Person X and Co. In the same year the business also commenced a secondary practice , Practice B, in another field. Person X was the sole proprietor until the 1970s when their child, Partner A assumed ownership of the business as the sole proprietor. A partnership was formed four years later between Partner A and Partner B. No written partnership was executed. However, the registered business name was updated to refer to “Partner B”. Previously Partner B had been a salaried employee but as from this date he was entitled to a share of the profits from the business as a non-equity partner. A loan/drawings account was also created for Partner B at this time. In the 1980s, you joined the partnership as Partner C. The registered business name was updated to refer to “Partner C”. Previously you had been a salaried employee for a number of years but as from this date you were entitled to a share of the profits from the business as a non-equity partner. A loan/drawings account was created for you at this time. Two years later, the partners (Partner A, Partner B and you) entered into an oral agreement to change the partnership to one in which the three partners shared equally in the equity (1/3 rd each). The key characteristics of the partnership were: ● Profits of the partnership were shared equally between the three partners; ● A partner leaving the practice would not be compensated for goodwill; ● If the partnership decided to dispose of the business, each partner would share equally the sale proceeds of the goodwill; ● Partner A would continue to fund any capital outlaid for plant and equipment and debtors with interest to be paid on the balance outstanding at the end of each month. The partners however could also contribute on the same terms; ● You and Partner B signed the bank guarantee in relation to an existing overdraft facility of the partnership (previously this had been provided to Partner A when he had been operating as a sole proprietor). A further one year later the partnership leased premises a related party. The premises consisted of two levels within an office building. Two years later, the partnership purchased Business X. The acquisition price was funded by a bank loan for which you, Partner A and Partner B were liable. Three years later Partner A informed you and Partner B of their intended retirement on 30 June of that year. On Partner A’s retirement, you and Partner B paid $XXX,000 for Partner A’s 1/3 rd interest in the partnership. Upon retirement Partner A was removed as a bank signatory in relation to the partnership and also removed as a guarantor for the loan that had funded the acquisition of Business X. Following Partner A’s retirement there were no further equity partners that either joined or left the partnership. However, there were three directors for various periods. These directors were paid salaries and bonuses but were not entitled to share in the profits of the partnership. Also following Partner A’s retirement, in relation to Practice B, a company, Company B, was incorporated to act as a nominee company for the purposes of the business of Practice B. Until 199X the partnership continued with no change in employees or location of business. Both Practice A and Practice remained the same until that time. In 199X the business of the partnership was transferred to a company, Company A, in consideration for shares in that company. Roll-over relief under subdivision 122-B of the ITAA 1997 was available and utilised. Following the roll-over of the business of the partnership you and Partner B each held 103,500 ordinary shares, equal to a 50% interest each in Company A. Following the roll-over of the business of the partnership to Company A, Practice B was transferred to a company, Company C. This occurred as follows: ● Company C was originally owned by Partner B (9 shares) and you (11 shares). You and Partner B transferred all of your shares in XY to Company A. ● Company C then issued another 49,980 shares to Company A for consideration. ● Company C was a wholly-owned subsidiary of Company A. This was necessitated due to a series of state and federal legislative initiatives. In 200X Company A applied for a private binding ruling to demerge the two businesses under division 125 to the ultimate shareholders and disregard any capital gain under section 125-55 of the ITAA 1997 roll-over relief. The Commissioner accepted it was a genuine demerger and confirmed: ● No capital gains would arise from the disposal by Company A of all the shares it held in Company C in the demerger arrangement; ● The shareholders of Company A were entitled to choose demerger roll-over pursuant to section 125-55 of the ITAA 1997; ● Pursuant to division 115 of the ITAA 1997 shareholders who choose roll-over relief will be taken to have acquired the XY shares they received under the restructure on the same date as they acquired their corresponding shares in Company A. In 201X you and Partner B each sold 20% of your shares in Company A respectively to Person Y. In the year ended 30 June 201Y you sold your shares in Company A. Partner B also sold their shares on this date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-25 | Income Tax Assessment Act 1997 section 104-230 | Income Tax Assessment Act 1997 section 106-5 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 subdivision 122-B | Income Tax Assessment Act 1997 section 122-30 | Income Tax Assessment Act 1997 section 122-125 | Income Tax Assessment Act 1997 section 122-160 | Income Tax Assessment Act 1997 section 122-185 | Income Tax Assessment Act 1997 section 122-190 | Income Tax Assessment Act 1997 division 125 | Income Tax Assessment Act 1997 subsection 126-50(5) | Income Tax Assessment Act 1997 section 126-55 | Income Tax Assessment Act 1997 division 149 | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 section 995-1