Edited version of private ruling

Authorisation Number: 1011573586712

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Ruling

Subject: Goodwill - owner, sole trader

Do you personally own the goodwill of your sole trader professional practice such that upon any future disposal of the business a capital gains tax (CGT) event under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) will happen to you?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You began operating a sole trader professional practice.

Some time later, you also began concurrently operating another professional practice through a company.

You have continued to operate both businesses until now.

You intend to sell the sole trader accounting practice.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-10.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

According to Taxation Ruling TR 1999/16 at paragraph 59:

If a sole practitioner disposes of their business, the part of the goodwill of the business that emanates from their personality, reputation, skills or attributes is not transferable.

As a sole trader you are personally the owner of the goodwill of your sole trader accounting business.

TR 1999/16 deals with the CGT issues related to the goodwill of a business. This may provide some assistance in considering the CGT implications of disposing of your sole trader business.

The following excerpts from TR 1999/16 may provide some guidance.

Cost base of goodwill

53. The cost base of goodwill purchased in an arm's length transaction includes money paid or required to be paid in respect of acquiring the goodwill and the market value of any other property given or required to be given in respect of its acquisition.

54. The cost base of internally generated goodwill does not include any expenditure incurred in the course of carrying on a business which has the essential character of a working expense of the business or a cost of the trading operations of the business. In any event, expenditure that you have deducted or can deduct might not form part of the cost base of your goodwill or your interest in goodwill.

55. The cost base of goodwill is separate and distinct from, and does not include, the cost base of other assets of a business - even business assets which are sources of goodwill.

56. If a taxpayer commences a business, or internally generates goodwill in an existing business, the cost base of the goodwill does not include any figure for the taxpayer's (that is, sole trader's or partner's) own effort in building up the goodwill. The value of services performed by an individual taxpayer personally are not included in the cost base of an asset.

57. The cost base of goodwill includes capital expenditure to the extent it is incurred to increase the value of the goodwill and is reflected in the state or nature of the goodwill when a CGT event happens (subsection 110-25(5)). It also includes capital expenditure to the extent it is incurred to establish, preserve or defend the taxpayer's title to, or right over, the goodwill (subsection 110-25(6)).

58. Costs incurred in acquiring knowledge or information - e.g., know-how, mining, quarrying or prospecting information, trade secrets and secret formulae - do not form part of the cost base of goodwill. Similarly, costs incurred in establishing and maintaining the get-up of a business and in developing work in progress do not form part of the cost base of goodwill.

Whether there is a disposal of goodwill on a disposal of one of several businesses or on a disposal of something less than a business

70. If a business owner (whether a sole trader or practitioner, a company, a trustee of a trust estate) disposes of their entire business, goodwill may be transferred with that business. CGT event A1 in section 104-10 (about disposals of CGT assets) happens to the goodwill of the business. Section 118-250 applies to any capital gain attributable to the goodwill.

71. A change in the ownership of a part of a business can occur if it is a discrete part of the business, either geographically or by reference to the products or services of the business or in some other way.

72. If a business owner is carrying on a business at one or at several locations or countries and part of the business is sold questions arise whether:

(a) several businesses are carried on; or

(b) one business is carried on; and whether what is sold is:

(c) an entire, self-contained business that a purchaser could conduct; or

(d) something less than a discrete business.

73. If a business owner is carrying on more than one business, each business has its own separate goodwill and each business may be disposed of along with the goodwill attaching to it. Section 118-250 applies (subject to the business exemption threshold being met) to any capital gain attributable to the goodwill.

74. If a business owner is carrying on one business and disposes of some part of the business, it is a question of fact whether the owner has disposed of a discrete business that a purchaser could conduct or has merely disposed of a business asset or a collection of business assets. This question is determined having regard to all of the circumstances (and not solely from the purchaser's perspective) including whether sufficient relevant assets are sold to enable the purchaser to carry on the business the vendor had carried on, whether the assets sold are accompanied or carry with them the legal right, privilege or entitlement to conduct the business and whether what is sold is sold as a self contained business. If a business owner disposes of part of their business, an important consideration is whether the effect of the transaction is to put the purchaser in possession of a going concern the activities of which the purchaser could carry on without interruption: see Full Supreme Court of Tasmania decision in Zeekap (No 56) Pty Ltd v C of SD (Tas) 99 ATC 4745 at 4747-8; (1999) 42 ATR 295 at 297-8.

75. Many factors are relevant to this question though few are conclusive in themselves. If a purchaser assumes the conduct of a vendor's business and continues to carry it on, this points to a business having been transferred rather than a transfer of a business asset or a collection of business assets. The converse is not, however, necessarily true because a transfer of a business may be complete even though the purchaser does not choose to avail themself of all the rights they acquire. For example, a purchaser might decide to subsume the discrete business within their larger existing business. Alternatively, a purchaser might decide not to run the business at all, having acquired it to eliminate a competitor. An express assignment of goodwill is strong evidence of a transfer of the business to which it is attached but the absence of an express assignment of goodwill does not conclusively mean that there has been no disposal of a business. The absence of an assignment of business premises, trading stock or outstanding contracts is likewise not conclusive. Nor is it a conclusive factor whether the vendor continues to carry on business at other locations. However, a disposal of business activities conducted at one geographical location separate from those conducted at other locations is a relevant factor in determining whether what was sold was a discrete business in its own right.

76. If a purchaser has to add different, though similar, management functions or activities to the part of the business they acquire, this does not necessarily mean that they have not acquired a discrete business. It is just one aspect of the total circumstances of each case which have to be taken into consideration.

77. If the part of the business sold constitutes a discrete business and it is sold as a business, the sale includes a disposal of goodwill. There must be a sale of sufficient assets including goodwill to enable a purchaser to carry on the business the vendor did previously without interruption. Section 118-250 applies to any capital gain attributable to goodwill. The unsold portion of the vendor's business is regarded as the same business as that previously conducted by the vendor.

78. A disposal of a business operation (that is, a disposal of part of a business) that does not constitute a discrete business in its own right is merely a disposal of an asset or a collection of assets of a business without goodwill. It does not satisfy the requirements of section 118-250. Even if the business operation disposed of is a severable part of the business (but not a discrete business) this does not involve a disposal of any part of the goodwill of the business. The sale of an asset or a series of assets separate from the business itself does not involve any disposal of the goodwill of the business or a disposal of any part of the goodwill. For goodwill to be disposed of, there must be a business disposed of to which the goodwill attaches.

79. If one or more (identifiable) assets of a business are disposed of, and not a discrete business, and the sale proceeds exceed the market value of the separate assets, the extra receipt is not for goodwill (there being no business disposed of). The extra receipt increases the capital proceeds received by the vendor for the assets and increases the acquisition cost of the assets to the purchaser. It is to be apportioned on a reasonable basis over the assets.

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