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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012473302699

Ruling

Subject: Capital gains and consolidation - goodwill - sale of a business

Question 1

Will the pre rules, as set out in Part 1 of Schedule 3 of the Tax Laws Amendment (2012 Measures No. 2) Act 2012 apply to the underlying assets of Company B on joining the Company A consolidated group?

Answer

Yes.

Question 2

If the answer to question 1 is YES, is the Y customer service agreement of Company B an asset that is treated as forming part of goodwill under subsection 701-63(3) of the pre rules?

Answer

Yes.

Question 3

To the extent that the answer to question 2 is YES, when Company A (as head company of the consolidated group) disposes of all of the rights and obligations associated with the sale of the Y customer service business, will Company A be entitled to include the goodwill deemed under subsection 701-63(3) of the pre rules in the cost base of the goodwill of that business for the purposes of working out the capital gain or loss pursuant to subsection 104-10(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

Year ended 30 June 2010

Relevant facts and circumstances

Company A is the head company of a consolidated group.

Company A acquired all the shares in Company B and joined the consolidated group before 12 May 2010.

The assets of Company A include the Y customer service agreement.

During the year ended 30 June 20XX, Company B entered into a Service Business Sale Contract with Company Z, an unrelated third party, to sell the Y customer service business.

In addition to the assignment of the Y customer service agreement, the sale of the Y customer service business consisted of the transfer of all computer software utilised in the business, service agreements, plant and equipment, registered business names and domain names.

Following the sale of the Y customer service business, no business activities are being undertaken by Company B.

Relevant legislative provisions

Income Tax Assessment Act 1997 (Tax Laws Amendment (2010 Measures No 1) Act 2010)

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, subsection 104-10(4)

Income Tax Assessment Act 1997, section 108-5

Income Tax Assessment Act 1997, subsection 108-5(2)

Income Tax Assessment Act 1997, paragraph 108-5(2)(b)

Income Tax Assessment Act 1997, paragraph 110-25(2)(a)

Income Tax Assessment Act 1997, paragraph 110-25(2)(b)

Income Tax Assessment Act 1997, section 701-10

Income Tax Assessment Act 1997 subsection 701-55(5) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997 section 701-63 of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997 subsection 701-63(2) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997 paragraph 701-63(3)(c) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997 subsection 701-63(4) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997, subsection 701-63(5)

Income Tax Assessment Act 1997 subsection 701-63(6) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997, section 705-35

Income Tax Assessment Act 1997 subitem 50(1) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (Application Part 4 in Schedule 3)

Income Tax Assessment Act 1997 subitem 50(2) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (Application Part 4 in Schedule 3)

Income Tax Assessment Act 1997 subitem 50(3) of Tax Laws Amendment (2012 Measures No 2) Act 2012 (Application Part 4 in Schedule 3)

Income Tax Assessment Act 1997, subsection 995-1(1)

Reasons for decision

All legislative references in this Ruling are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

The pre rules, as set out in Part 1 of Schedule 3 of the Tax Laws Amendment (2012 Measures No. 2) Act 2012 will apply to the underlying assets of Company B on joining the Company A consolidated group.

Detailed reasoning

The application rules in TLAA 2012 No.2 are relevant in ascertaining which rules apply to the head company of a consolidated group in respect of an entity that becomes a member of that group at a particular time.

Subitem 50(1) provides that:

Subitem 50(2) provides that:

Subitem 50(3) provides for an exception to the pre rules, allowing the interim rules to apply, for the income year in respect of the joining entity, if:

Subitem 50(5) also provides for an exception from the pre rules applying. It states:

On the basis of the facts, the exceptions contained in subitems 50(3) and 50(5) do not apply to Company A.

Therefore, in accordance with subitem 50(2)(a), the pre rules apply to Company A on the basis that Company B joined the Company A consolidated group before 12 May 2010.

Question 2

Summary

The Y customer service agreement of Company B is an asset that is treated as forming part of goodwill under subsection 701-63(3) of the pre rules.

Detailed reasoning

The consolidation provisions in Part 3-90 apply to an entity that becomes a member of a consolidated group. Under the pre rules, certain assets are treated as forming part of goodwill. Subsection 701-63(3) of the pre rules provides that:

An asset forming part of goodwill means any of the following:

Relevant to this ruling is whether the rights under the Y customer service agreement are non-deductible rights to future income that are subject to paragraph 701-63(3)(c).

In accordance with subsection 701-63(4), a non-deductible right to future income is a *right to future income that is not an *unbilled income asset.

Subsection 701-63(5) defines a right to future income as:

Under subsection 701-63(6) an asset that is a *right to future income is an unbilled income asset if:

Whilst the Y customer service agreement can be viewed as a right to future income asset on the basis that it represents a valuable right held by Company B as a result of entering into a contract for the provision of work or services, it cannot be said to be an unbilled income asset as it is not in respect of services that have been provided but rather in respect of services that will be provided in the future.

Therefore, the asset (represented by the rights under the Y customer service agreement) that is a right to future income is a non-deductible right to future income that forms part of the goodwill asset of Company B's Y customer service business.

For the purposes of Part 3-90, the goodwill asset of Company B's Y customer service business is treated as a single asset.

Relevantly, subsection 701-63(2) provides:

For the purposes of this Part (other than this section):

The Explanatory Memorandum to Tax Laws Amendment (2012 Measures No.2) Bill 2012 (the EM) at paragraph 3.53 clarifies that the assets which are treated as part of the goodwill of a business may include:

Section 701-10 requires a head company to set the tax costs of each asset that would be an asset of the entity at the time it becomes a subsidiary member of the consolidated group.

For the purposes of this tax setting process, the assets that are treated as forming part of goodwill under subsection 701-63(3) of the pre rules will not be separately recognised. Instead, they will be treated as forming part of the goodwill asset of a business of the joining entity which will have its tax cost set at the joining time in accordance with section 701-10.

Therefore, the goodwill asset of Company B's Y customer service business (which includes the non-deductible right to future income) will have its tax cost set at the joining time in accordance with section 701-10.

Question 3

Summary

A consequence of deeming the goodwill of the business to include the non-deductible right to future income is that this asset will be reflected in the cost base/reduced cost base of the goodwill of that business for the purposes of working out the capital gain or loss pursuant to subsection 104-10(4) of the ITAA 1997.

Detailed reasoning

Taxation Ruling TR 1999/16 explains how the CGT provisions apply to goodwill assets. One consequence of applying that ruling is that the tax costs allocated to a goodwill asset (through the asset tax cost setting process in Part 3-90) will be recognised when the goodwill asset is sold.

In relation to TR 1999/16 the EM at paragraph 3.61 states:

The Taxation Ruling also states that the goodwill of a business is a single CGT asset (paragraph 16). However, the Taxation Ruling also discusses the issue as to whether there is a disposal of goodwill on a disposal of one of several businesses or on the disposal of something less than a business (paragraphs 70 to 79).

'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.' (Paragraph 73 of Taxation Ruling TR 1999/16)

Relevant to Company A's disposal of the Y customer service business is paragraph 77 of TR 1999/16 which states:

The disposal of a business or even part of a business may result in the transfer of goodwill. Paragraph 143 in the explanations section of TR 1999/16 states:

The Y customer service business is a discrete business that has been disposed of, which in essence was part of the Company A's wider business. The business disposed of was an entire, self-contained business that the purchaser can conduct without interruption.

Consequently, goodwill that attaches to this business has also been disposed of as part of the sale of the business. That goodwill asset includes assets that have been treated as forming part of goodwill under subsection 701-63(3).

Capital gains tax and cost base of goodwill

Paragraph 108-5(2)(b) specifically lists goodwill or an interest in it as a CGT asset.

As goodwill is a CGT asset, subsection 701-55(5) will apply to specify how the reset tax cost of goodwill is used in Part 3-1 or 3-3 (the CGT provisions).

Subsection 701-55(5) provides:

The CGT provisions apply such that the asset's cost base or reduced cost base at the joining time is equal to the asset's tax cost setting amount.

The tax cost setting amount of the goodwill asset will reflect the inclusion of the non-deductible right to future income because of the operation of section 701-63 of the pre rules.

Therefore, for the purposes of calculating the capital gain on disposal of the assets of the business pursuant to subsection 104-10(4), the first element of the cost base of the goodwill asset of the Y customer service business will include the Y customer service agreement asset that is treated as an asset forming part of goodwill under subsection 701-63(3) of the pre rules.


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