Private ruling: CGT asset - Goodwill
Date of advice: 12 May 2017
Published: September 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the proposal to licence the sources of goodwill of the Trust to Licensee Company give rise to CGT event A1 in relation to the disposal of the Trust's goodwill to Licensee Company? | A1: No. | Q2: In the event that the Commissioner determines that CGT event A1 does not happen, will the proposal result in a capital gain arising in relation to the Trust's goodwill as a result of CGT events B1, C1, C2, D1 or H2 happening in relation to the goodwill? | A2: No.

Relevant facts and circumstances: The Trust conducts a business. Assets Company owns plant and equipment, which it makes available to the Trust to conduct the business. It also holds a number of registered trademarks which it licences to the Trust. Company Pty Ltd, as trustee for the Trust, and Assets Company will enter into an agreement to licence the business to Licensee Company (Licence Agreement). The Licence Agreement Parties to the Licence Agreement are Assets Company and Company Pty Ltd as trustee for the Trust (together the Licensor) and Licensee Company (as the Licensee). The Licence Agreement is a valid licence for the use of the Trust's business by Licensee Company. Relevant terms: ● Licensee Company will only use assets licenced to it under the agreement for the conduct of the business. ● The current business assets including trademarks, plant and equipment will be available for use by Licensee Company. ● Licensee Company will be responsible for the maintenance and repairs of the plant and equipment. ● The Licensor will be responsible for all costs associated with capital improvements of plant and equipment. ● Subject to the terms of the Licence Agreement, the Licensor will have unrestricted access to the business assets during the term of the agreement. ● All existing work contracts will be novated to Licensee Company. ● All employees are to be offered positions with Licensee Company. ● The Licensor is to provide all confidential information required by Licensee Company to conduct the business.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 102-25(3), | Income Tax Assessment Act 1997 section 104-10; section 104-15; | Income Tax Assessment Act 1997 section 104-20; section 104-25; | Income Tax Assessment Act 1997 section 104-35, section 104-155, | Income Tax Assessment Act 1997 section 108-5, subsection 116-20(1) and subsection 116-30(1).

Reasons for decision: Detailed Reasoning - Question 1 and Question 2: As both questions are related and depend on determining whether the arrangement is a valid licence arrangement they have been dealt with together. | Detailed Reasoning - Reasoning: Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business sets out the Commissioner's view of the operation of the capital gains tax provisions in relation to the goodwill of a business. Goodwill is a CGT asset for the purposes of Division 108 of the Income Tax Assessment Act 1997 (ITAA 1997) (refer to paragraph 108-5(2)(b) of the ITAA 1997). While goodwill is a composite asset derived from combining and using tangible, intangible and human assets it is a single asset which attaches to the business that uses the assets, knowledge or information (refer to paragraph 97 of TR 1999/16). The assets employed by the Trust in the business are the trading name, business assets, business premises, current contracts, employees and confidential information. The goodwill attaches to the transport business and the ownership of that business resides with the Trust. Under the Licence Agreement, the Trust will provide its trading name, business assets, business premises, current contracts, employees and confidential information to Licensee Company to commence carrying on the business. The Licence Agreement makes it clear that all the assets from which the goodwill of the business is derived are licensed to Licensee Company and that these assets, including goodwill, are able to be applied in the conduct of the business by Licensee Company. The Licence Agreement specifically and generally throughout the agreement shows that the intention of the parties is that no ownership interest is created or passes to Licensee Company as a result of the execution of the Licence Agreement. As a result, the asset goodwill remains that of the Trust. Further, if the Trust's business is the same business to be conducted under the Licence Agreement by Licensee Company the goodwill will also be licensed to Licensee Company under the Licence Agreement (refer to paragraph 30 of TR 1999/16). 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. The business does not need to be identical. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. It is not sufficient that just a similar kind of business is carried on. Factors to consider include the nature and character of the business, its location and size, the extent of changes in the assets and resources of the business, the activities of the business and whether the activities constitute, or are treated by the business, as constituting separate or distinct activities, enterprise, division or undertakings and the way in which the business is structured, carried on, managed and controlled. In this case, all the business assets and resources of the Trust's business are to be employed by Licensee Company in conducting the business pursuant to the Licence Agreement. The business will be conducted under the supervision of the Licensor. Consequently, the goodwill asset associated with the Trust's business will also be licensed to Licensee Company under the Licence Agreement. CGT consequences of the business goodwill being licensed to Licensee Company | Detailed Reasoning - CGT event A1: Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. However paragraph 104-10(2)(a) of the ITAA 1997 states that a change of ownership does not occur if you stop being the asset's legal owner but continue to be its beneficial owner. In this case, the goodwill asset will be licensed to Licensee Company to conduct the business. As the Licence Agreement will not provide an interest in the goodwill to Licensee Company there will be no change in ownership of the goodwill. Therefore, CGT event A1 in section 104-10 of the ITAA 1997 will not happen in relation to the goodwill. The question then becomes whether CGT events B1, C1, C2, D1 or H2 will happen in relation to the Trust's goodwill (or will a capital gain arise in relation to the goodwill from any of these events)? | Detailed Reasoning - CGT event B1: Subsection 104-15(1) of ITAA 1997 provides that CGT event B1 happens if you enter into an agreement with another entity under which: (a) the right to the use and enjoyment of a CGT asset you own passes to the other entity; and (b) title in the asset will or may pass to the other entity at or before the end of the agreement. CGT event B1 will not happen in this case. While the first limb of subsection 104-15(1) of the ITAA 1997 will be satisfied, as the use and enjoyment of the goodwill will pass to Licensee Company in accordance with the Licence Agreement, title in the asset will not pass to Licensee Company before the end of the licence agreement. | Detailed Reasoning - CGT event C1: Subsection 104-20(1) of the ITAA 1997 provides that CGT event C1 happens if a CGT asset you own is lost or destroyed. In this case, the goodwill of the business is not lost or destroyed as a result of the licensing agreement. The goodwill is attached to the business owned by the Trust, which will be licensed to Licensee Company as a result of the Licence Agreement. It therefore will remain an asset of the trust. Therefore, CGT event C1 in section 104-20 of the ITAA 1997 will not happen in relation to the goodwill. | Detailed Reasoning - CGT event C2: Paragraph 104-25(1)(b) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible asset ends by the asset: (g) being redeemed or cancelled; or (h) being released, discharged or satisfied; or (i) expiring; or (j) being abandoned, surrendered or forfeited; or (k) if the asset is an option — being exercised; or (l) if the asset is a *convertible interest — being converted. On the facts of this case, the intangible asset, goodwill, will not end within the meaning of that term as set out in items (a) to (f). Therefore, CGT event C2 in section 104-25 of the ITAA 1997 will not happen in relation to the goodwill. | Detailed Reasoning - CGT events D1 and H2: CGT events D1 and H2 will be considered together as, on the facts of this case, the outcome for both of these events will be the same. Section 104-35(1) of the ITAA 1997 provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. In the present case, CGT event D1 will happen when the Licensor enters into the Licence Agreement with Licensee Company. The Licensor will create a right to use the business in Licensee Company. A capital gain will arise on CGT event D1 happening if the capital proceeds from creating the right are more than the incidental costs the taxpayer incurred that relate to the event. The taxpayer can make a capital loss if those capital proceeds are less (subsection 104-35(3) of the ITAA 1997). Similarly, section 104-155 of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset owned by an entity, and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. In the present case, an act, transaction or event will occur in relation to a CGT asset, the Trust's business goodwill, in the form of the Licence Agreement. The execution of the Licence Agreement will not result in any adjustment to the cost base of the goodwill. None of the exceptions listed in subsection 104-155(5) of the ITAA 1997 to CGT event H2 happening have application. Therefore, the execution of the Licence Agreement will be a CGT event H2. Hence a capital gain under CGT event H2 will arise if the capital proceeds because of this event are more than the incidental costs incurred in relation to it (section 104-155 of the ITAA 1997). However, subsection 102-25(3) of the ITAA 1997 provides that event H2 does not apply if any other CGT event applies. In this case, it has been established that CGT event D1 will apply and therefore H2 would have no application. Nevertheless, we provide an explanation of how CGT event H2 would operate in the discussion below. | Detailed Reasoning - Capital proceeds: Generally, the capital proceeds from a CGT event are the total of: ● the money you have received, or are entitled to receive, in respect of the event happening; and ● the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (subsection 116-20(1) of the ITAA 1997). Under the Licence Agreement, the Licensor, does not receive, nor is it entitled to receive, any money as a result of CGT event D1 or H2 happening. As a result of granting Licensee Company the right to use the business, the Licensor is entitled to future income (the Licence Fee) for the term of the agreement. A right to income is generally assignable, and is therefore 'property' for the purposes of paragraph 116-20(1)(b) of the ITAA 1997. However, even though the right to payment is property, the issue in this case is whether this property is received in respect of the D1 or H2 CGT event happening. It is considered in the circumstances of this case that it is reasonable to conclude that Licensee Company's undertaking to pay relates to the use of the business, rather than the grant of the licence. Licensee Company does not pay a premium for entering into the Licence Agreement, and the Licence Fee does not contain an embedded premium. Therefore, whilst the right to the Licence Fee is 'property' for the purposes of paragraph 116-20(1)(b) of the ITAA 1997, it is not property received 'in respect of the CGT event D1 happening', and is therefore not capital proceeds in accordance with subsection 116-20(1) of the ITAA 1997. If the CGT event D1 did not happen, the same conclusion would be drawn in regard to CGT event H2. In a number of CGT events where no capital proceeds are received, subsection 116-30(1) operates to treat the capital proceeds from the CGT event to be equal to the market value of the asset. However, where CGT event D1 happens and there is no capital proceeds, subsection 116-30(3) of the ITAA 1997 provides that the market value substitution rule does not apply. The general rules in section 116-25 exclude the market value substitution rule from applying to CGT event H2. Therefore, no capital gain can result in the absence of capital proceeds.

Subject: CGT asset - Goodwill: This ruling applies to the beneficiaries of the trust and to the trustee and to any future trustees, for as long as the ruling remains current.