Private ruling: Capital Gains Tax - Goodwill
Date of advice: 13 May 2016
Published: June 2016
Ruling period: 1 July 2015 to 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the goodwill of the business considered to have been acquired before 20 September 1985 such that any capital gain made on the disposal of goodwill is disregarded under section 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the goodwill of the business considered to have been acquired before 20 September 1985 for the purposes of section 104-230(2) of the ITAA 1997 in determining whether CGT even K6 will arise on the disposal of the shares in the company? | A2: Yes

Relevant facts and circumstances: Business History The company was incorporated prior to 20 September 1985. The operations of the company consist of the sale of new and used vehicles, repairs and servicing, spare parts, workshop and finance divisions. The company's operations have at all times, since its incorporation, been operated from the same premises. The company over the course of its history (both pre and post 1985) has acquired and disposed of sales licences of different vehicle manufacturers. Each change in dealer licence required the company to recruit additional mechanics, retrain existing mechanics and provide additional branded signage on premises. However the change did not require significant capital investment by the company or the establishment of new financing facilities. The underlying business functions and key management personnel across each division remained consistent. Furthermore, the change in dealer licences did not require new skills, expertise or additional human capital/investment to be introduced at the Director/key management level of the business. Other than through retirement or promotion from within the company, the Directors and key management personnel of the company have remained consistent through the period 198X to date. Advertising and marketing is predominantly handled on a national basis by the manufacturer. The change in dealer licence did not require any substantial change to the company's local advertisement/marketing functions. Other than the above, no other significant transactions have occurred since the company's incorporation. The company's directors and key management personnel have remained consistent through the period 198X to date - other than through retirement or promotion from within the company. The company's operations have, at all times, been operated from the same business premises. The shareholders of the company have remained consistent since incorporation. The company's capital and financing structure has remained consistent since commencing its operations.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 subsection 104-230(2) | Income Tax Assessment Act 1997 paragraph 108-5(2)(b) | Income Tax Assessment Act 1997 Division 149

Reasons for decision: Summary: It is considered that the goodwill generated by the company qualifies as a pre-CGT asset. The goodwill of the business is considered to have been acquired before 20 September 1985 and therefore any capital gain made on the disposal of goodwill is disregarded under paragraph 104-10(5)(a) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Goodwill, or an interest in it, is a capital gains tax (CGT) asset under paragraph 108-5(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 104-10(1) of the ITAA 1997 provides the disposal of a CGT asset means CGT even A1 happens. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss you make from CGT event A1 is disregarded if you acquired the asset before 20 September 1985. Goodwill according to Taxation Ruling TR 1996/16 Income Tax: capital gains: goodwill of a business (TR 1999/16) has the legal definition which was established by the High Court in Federal Commissioner of Taxation v. Murry 98 ATC 4585. Paragraph 12 of TR 1999/16 states: ….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. Based on the above definition, the company established goodwill when it commenced business operations prior to 1985 with its business of a vehicle dealership, providing new and used vehicles and providing repairs, spare parts and workshop services. The issue under consideration is whether the goodwill remains the same single pre-CGT asset. | Detailed Reasoning - Goodwill remains a single CGT asset if the same business continues: Paragraph 17 of TR 1999/16 provides guidance in whether goodwill remains a single CGT asset if the same business continues; 17. 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. 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. Therefore regardless of fluctuations in goodwill or having varying sources of goodwill throughout the life of a business, the goodwill can still remain a single pre-CGT asset. Division 149 of the ITAA 1997 provides that the pre-CGT status of assets (including goodwill) owned by a company or trust can be lost if there is a change in the majority of underlying owners of the company or trust. As the majority of shareholders of the company have not changed, then Division 149 will not affect the pre-CGT status of assets of the company. Can a business change to such an extent that is no longer the same business so that the goodwill of the old business ceases and goodwill of a new business is acquired? A business or the sources of its goodwill may change to such an extent that is no longer the same business which would result in the goodwill of the old business ceasing when the goodwill of the new business is established. Paragraph 21 of TR 1999/16 provides guidance on the growth of a business; The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. A business owner 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 of itself cause it to be a new business provided the business retains its essential nature or character. Further to the above paragraph 23 of TR 1999/16 provides that where the types of customers a business attracts change as the business evolves over the years, this will not necessarily mean that the business is no longer the same business that was originally carried on. Paragraph 24 of TR 1999/16 emphasises that the same essential nature or character of the business is to be carried on; 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. Paragraph 91 of TR 1999/16 provides various factors to consider in determining whether the same business is being carried on. These 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 - whether the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, diversions or undertakings • The way in which the business is structured, carried on, managed and controlled. In addressing the above factors, the company contends that the following features of its business show that whilst the business has evolved over time, the essential nature and character of the business has remained the same since incorporation; • The nature of the company's business has been at all times the operating of a vehicle dealership providing new & used vehicle sales, repairs & servicing, spare parts, workshop and finance services to its customers. • Change in new vehicle dealer licences occurs in the ordinary course of undertaking a vehicle dealership. • A change in new dealer licence represents a change in the company's product offering and not the commencement of a new business. • The change in dealer licences, were due to circumstances with the manufacturers and were largely outside the control of the company. • The acquisition or termination of the new vehicle licences were treated as a continuation of the company's existing business operations in the company's annual audited financial statements. • The company's directors and key management personnel have remained consistent through the period 198X to date - other than through retirement or promotion within the company. • The company's operations have, at all times, been operated from the same business premises. • The company's business has, at all times, been conducted under the same brand/trading name • The shareholders of the company have remained consistent since incorporation. • The company's capital and financing structure has remained consistent since commencing its operations. | Detailed Reasoning - Relationship between goodwill and other assets of the business: In Murry the High Court established that a licence is a separate identifiable asset from goodwill. Paragraph 98 provides the following discussion from the High Court decision; As to licences, goodwill is separate from them whether they are exclusive licences or non-exclusive licences. In the Murry case the High Court majority distinguished between exclusive licences and non-exclusive licences in that they said that all licences are not necessarily a source of the goodwill of a business. Their Honours stated that 'it may be that an exclusive licence not merely enhances the value of the goodwill of a business but should also be regarded as being a source of custom of the business' (98 ATC at 4598; 39 ATR at 147) but that 'a non-exclusive licence, even a licence in an industry where the issue of licences is limited, is no more than a right to enter a market' (98 ATC at 4598; 39 ATR at 147). Even though exclusive licences therefore might be a source of goodwill but non-exclusive licences might not, in both cases the licences are separate CGT assets in their own right. No part of the capital proceeds of a disposal of a licence (whether it is an exclusive licence or a non-exclusive licence) is in respect of a disposal of goodwill. From this discussion it can be seen that a licence to sell a particular brand of a vehicle is a separate asset from the goodwill. The licence may, or may not, be a source of goodwill for the business dependant on the circumstances, however the licence, itself, is not goodwill. | Detailed Reasoning - Applying the above factors of TR 1999/16 to the company: Applying the above factors to the situation of the company it is determined that the goodwill generated by the company qualifies as a pre-CGT asset. The goodwill of the business is considered to have been acquired before 20 September 1985 and therefore any capital gain made on the disposal of goodwill is disregarded under section 104-10(5)(a) of the ITAA 1997. The acquisition and disposal of licences to distribute and provide repairs for various brands of cars is seen to be organic growth and within the scope of normal operation in the vehicle dealership industry and does not change the nature of the business. The licence to sell different brands of vehicles is merely sources of goodwill, so whilst the source of goodwill may change over time, this does not affect the nature of the goodwill itself. The business since incorporation has always been the supply of new and used vehicles and ancillary services. The business has naturally grown since incorporation and part of the growth is the sale of different brands of vehicles. The sale of these different brands of vehicles does not affect the essential nature and character of the business, rather attracts and services different custom. There have been no major changes to the business since incorporation, other than its natural growth. The company continues to sell new and used vehicles and provides servicing/workshop/finance services. The company has continued to operate from the same premises since incorporation due to its commitment to provide a service to customers within that area. The business has always been operated by the company. The company has maintained the same personnel and the company's shareholders have remained consistent. Based on these facts, the same business and ownership structure has been in place since the commencement of operations. Therefore the goodwill of the business remains a single pre-CGT asset. | Summary: The goodwill of the business is considered to have been acquired before 20 September 1985 for the purposes of section 104-230(2) of the ITAA 1997 in determining whether CGT event K6 will arise on the disposal of the shares in the company. | Detailed Reasoning - Detailed reasoning: As stated above at Question 1, the goodwill of the business is considered to have been acquired before 20 September 1985 for the purposes of section 104-230(2) of the ITAA 1997.