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Edited version of your written advice

Authorisation Number: 1013015124081

Date of advice: 13 May 2016

Ruling

Subject: Capital Gains Tax - Goodwill

Question 1

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)?

Answer

Yes

Question 2

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?

Answer

Yes

This ruling applies for the following periods:

1 July 2015 to 30 June 2017

The scheme commences on:

1 July 2015

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

Question 1

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

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:

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.

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;

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;

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;

Paragraph 91 of TR 1999/16 provides various factors to consider in determining whether the same business is being carried on. These include;

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;

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;

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.

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.

Question 2

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

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.


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