Edited version of your private ruling

Authorisation Number: 1012121536970

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax

Question:

1. Is the practice buy-back (PBB) payment received from your former employer on capital account?

Answer: No.

2. If so, are you entitled to the general discount?

Answer: Not applicable.

3. If so, are you entitled to the small business concessions?

Answer: Not applicable.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2008

Relevant facts

You signed an employment contract with your former employer in 2008.

The employment contract provides that, in certain circumstances relating to the termination of the contract, the employer will pay an employee an amount based on the commissions received by the employer in the prior 12 months from services provided by the employee.

The payment will be paid by instalments commencing from the date of termination of the contract.

Alternatively, you could establish your own business when you leave your employer and take the clients with you.

Your employment finished in 2011.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5.

Income Tax Assessment Act 1997 - Section 100-20.

Income Tax Assessment Act 1997 - Section 102-5.

Income Tax Assessment Act 1997 - Division 104.

Income Tax Assessment Act 1997 - Section 104-10.

Income Tax Assessment Act 1997 - Section 108-5.

Income Tax Assessment Act 1997 - Paragraph 108(2)(b).

Reasons for decision

Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in assessable income any 'net capital gain' made by the taxpayer in an income year. Section 100-20 of the ITAA 1997 states that a taxpayer makes a capital gain (or loss) only if a 'CGT event' happens.

Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss. Under section 104-10 of the ITAA 1997, CGT event A1 happens, in relation to a taxpayer, if the taxpayer disposes of a 'CGT asset'.

Whether an asset is a 'CGT asset' is determined by reference to section 108-5 of the ITAA 1997. Goodwill or any interest in goodwill is included within the meaning of CGT asset via paragraph 108-5(2)(b) of the ITAA 1997. The term 'goodwill' is not defined, however, either in the CGT provisions or in the ITAA 1997 generally. 

Taxation Ruling TR 1999/16 discusses how the capital gains tax provisions apply to a taxpayer who conducts a business with goodwill and who makes a capital gain or loss if a CGT event happens to goodwill, or an interest in goodwill of a business.

Paragraph 12 of TR 1999/16 states that: 

… 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. 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' (emphasis added).

 Paragraphs142 and 143 of TR 1999/16 further state:

A business owner cannot dispose of goodwill separately from the business to which it attaches.

If a business owner (whether a sole trader or practitioner, a company, a trustee of a trust estate) disposes of: 

(a) their entire business; 

(b) a part of their business (in the sense of a particular business operation or activity) that is a discrete business in its own right; or

(c) an interest in their business (e.g., by admitting a partner) goodwill may be transferred with that disposal.

The vendor and the purchaser of the business need to determine how much of the capital proceeds are properly attributable to, and be able to be allocated to, the goodwill of a business. Goodwill is not an asset of an employee of a business to dispose of. It is the asset of the vendor. The vendor owns the goodwill of the business and is entitled to dispose of it. As goodwill is not severable from the business to which it attaches, it cannot be sold by anyone other than the owner of the business.

In your case, you were an employee and there is no indication that you were carrying on a business. This is supported by the employment contract provided. The owner of any goodwill in this case will be your employer, as the entity carrying on the business, and any capital gain or capital loss from the disposal of the goodwill will be made by the employer.

As you have not disposed of a 'CGT asset', there is no CGT event which would apply in relation to the PBB payment and no capital gain or capital loss will be made. Therefore, the CGT provisions will not apply and the CGT discount and small business concessions will not apply to the payment.

Other issues to consider

Ordinary income

Section 6-5 of the ITAA 1997 deals with receipts of ordinary income. It does not operate to include amounts of a capital nature in a taxpayer's assessable income.

Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

 A compensation amount generally bears the character of that which it is designed to replace. If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income. However, if the compensation receipt substitutes for income then the courts have held that it be considered income under ordinary concepts.

In your case, the payment received has replaced trail commissions that you would have otherwise been entitled to in the course of your employment. As such, these amounts are considered to be assessable under section 6-5 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).