Edited version of your written advice

Authorisation Number: 1013057034775

Date of advice: 28 July 2016

Ruling

Subject: Capital gains tax implications of proposed restructure

Question 1

Is the goodwill of the business owned by Trust A an asset acquired by Trust A prior to 20 September 1985?

Answer

Yes.

Question 2

If yes, is that goodwill or any part of it deemed to have been acquired after that date pursuant to Division 149 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Upon transfer of the goodwill, will any gain arising be included in the net income or assessable income of Trust A?

Answer

No.

Question 4

Upon transfer of the goodwill of the business conducted by Trust A, will CGT event A1 occur?

Answer

Yes.

Question 5

If CGT event A1 occurs, will any gain arising be disregarded pursuant to subsection 104-10(5) of the ITAA 1997?

Answer

Yes.

Question 6

Will any family trust distribution tax be payable by the trustees of Trust A or Trust B in respect of the proposed distribution to the Trust B, taxpayer E or taxpayer J?

Answer

No.

Question 7

Upon receipt of any gain arising from the transfer of goodwill by Trust A or Trust B, will Trust B, taxpayer E and/or taxpayer J have any amounts included in their assessable income under Part 3-1 of the ITAA 1997 or Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period(s)

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on

1 July 2016

Relevant facts and circumstances

Trust A

The Deed for the Trust A was executed prior to capital gains tax commencing (pre-CGT). Trust A is an Australian discretionary trust for income tax purposes.

Trust A has made a Family Trust Election. The specified individual was taxpayer E.

Objects of Trust A

Trust A was created by taxpayer E's parent (the Settlor) for the benefit of the persons described in the Trust Deed as beneficiaries.

In the original deed dated pre-CGT, the beneficiaries listed in the Schedule were the Trustees for the time of the Trust B and Trust C. However, post-CGT Trust D was formerly added in the Trust Deed as a beneficiary.

The children of the Settlor were taxpayer E, taxpayer F, taxpayer G and taxpayer H.

Taxpayer E and their spouse, taxpayer J, are both beneficiaries of the Trust B.

The application for private ruling refers to the abovementioned beneficiaries, together with Trust A and other related family members, as the Family Group, being the children of the settlor and their spouse and related entities.

Additionally post-CGT, three private companies within the control of the Family Group were included as income beneficiaries of Trust A. The shareholding of these three companies was as shown in additional information provided showing it was individuals within the Family Group who were the shareholders of these corporate beneficiaries.

Distributions

Upon settlement, the income of Trust A was originally distributed 50/50 between Trust B and Trust C. At, or around the time of the appointment of Trust D as a beneficiary post-CGT, the income distributed to Trust C reduced to 40% and Trust D receiving 10%.

Over time distributions were changed to now being made exclusively to Trust B.

The current Business

The business has operated a wholesaling business since its establishment pre-CGT. Since its inception, the core operation of the business has been the same.

Organic growth and expansion has occurred in business since inception.

History of the Business

The business growth and expansion is summarised as follows:

Trust A

Pre-CGT, the business was transferred from a corporation to Trust A. During the year, Trust A expanded its premises and its operations which allowed greater quantities and a wider range of products to be processed on newly extended premises. With the increase in production, Trust A expanded its customer base by supplying to larger entities. Specifically, the business has always been a wholesale business and has never undertaken any retail business operations.

The proposed Restructure

The Family Group intends to transfer the business from Trust A to a new corporate group structure (Proposed Restructure). Specifically, the steps will be:

1. The Family Group will establish a new unit trust (NewUnitTrust) within a new corporate group.

2. NewUnitTrust and Trust A will enter into a business sale and purchase agreement (Agreement) for the purchase of the business assets (working capital, trading stock, depreciable assets, shares in other entities, goodwill and any employees/labour hire agreements) - the purchase price will be at market value (the actual transaction value will be based upon an independent valuation to be commissioned by Trust A) and it is intended that the consideration payment be deferred over a period of years. This deferral should be subject to arm's length interest.

3. Trust A will exercise its discretion to make beneficiaries presently entitled to the income of the trust estate (including capital gains and disregarded capital gains from step 2). For the purposes of this application, it is contemplated the beneficiary will be Trust B, whom will exercise discretion to make taxpayer E and taxpayer J presently entitled to the income of the Trust.

Trust A Trust Deed

The Primary Beneficiaries of Trust A immediately prior to 20 September 1985 were listed as Trust B and Trust C. Trust D was subsequently added as a beneficiary post-CGT. The Trust Deeds of those trusts have the following listed beneficiaries within their schedule attached to each Deed.

Trust B Lists taxpayer E and J, their children, siblings, children, grandchildren and other issue of such siblings, and taxpayer E's parents and their siblings, children and grandchildren and other issue, as beneficiaries.

Trust C Lists the children, grandchildren and other issue of Taxpayer F and their spouse, the brother and sister of taxpayer F and their spouse, the children, grandchildren and other issue of such siblings, the parents of their spouse, their siblings, children and other issue, as beneficiaries.

Trust D Lists the children, grandchildren and other issue of Taxpayer G and their spouse, the siblings of taxpayer G and their spouse, the children, grandchildren and other issue of such siblings, the parents of taxpayer G, their siblings, children and other issue, as beneficiaries.

All three trusts were amended post-CGT to add additional clauses outlining what constituted income of the Trusts and including corporations and superannuation funds of the primary beneficiaries as additional primary beneficiaries of those Trusts. Principals of the Trust Funds were amended.

Trust B has made a Family Trust Election. The specified individual was taxpayer E.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 Division 271 of Schedule 2F

Income Tax Assessment Act 1936 section 272-75 of Schedule 2F

Income Tax Assessment Act 1936 section 272-80 of Schedule 2F

Income Tax Assessment Act 1936 section 272-90 of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-90(1) of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-90(3) of Schedule 2F

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 108-5

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

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Reasons for decision

Question 1

Summary

The goodwill of the business owned by Trust A is an asset acquired by the Trust prior to 20 September 1985. Nevertheless, Division 149 of the ITAA 1997 will need to be considered to determine if Division 149 deems the goodwill to be a post-CGT asset.

Detailed reasoning

Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) provides that goodwill is a CGT asset as per section 108-5 of the ITAA 1997. Goodwill is legally distinct from the sources from which it emanates. It is something that attached to a business and is inseparable from the conduct of a business.

Paragraph 17 of TR 1999/16 states:

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 ...) 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.

TR 1999/16 also recognises that a business or the sources of its goodwill may change so much that it can no longer be said to be the same business (paragraph 18).

TR 1999/16 further states at paragraphs 20-24:

20. Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case. The test to use for whether the same business is being carried on is not the same test as that described in paragraphs 9 and 10 of Taxation Ruling TR 95/31 for continuity of business in applying the tax loss provisions in subsection 165-210(1).

21. 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.

22. Nor would it be a different business if all that happens is that portions of the operations of a business are discarded in an ordinary commercial way but the business retains its essential nature or character.

23. If the types of customers a business attracts change as the business evolves over the years, this does not necessarily mean the business is no longer the same business as was originally carried on.

24. It is not sufficient, however, if just a similar kind of business is carried on. It must be a business of the same essential nature or character that is 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.

Additionally, TR 1999/16 states that the goodwill is a composite asset. That is, the whole of the goodwill of a business will either be a pre-CGT goodwill or post-CGT goodwill. It cannot be split into a pre-CGT and a post-CGT portion (TR 1999/16 paragraph 25).

Paragraphs 60 to 62 of TR 1999/16 discuss whether new goodwill is acquired when an existing business either expands, or commences a new business. Where a new business operation is merely the expansion of an existing business, any goodwill built up will be an expansion of the existing goodwill of the business. On the other hand, if the new business activity is a new business, the goodwill attaching to that business activity will be a new separate asset to the goodwill of the existing business.

Whether or not there is an expansion of an existing business or the introduction of a new business activity will be a question of fact dependent on the circumstances of each particular case. Paragraph 62 of TR 1999/16 provides the following factors that should be taken into account in determining whether there is merely an expansion of an existing activity or there is a new business activity commenced:

• nature of the new business operation or activity,

• types of customers that the business operation or activity attracts

• extent to which the business operation or activity:

• is subject to the same integrated management and control as the existing business

• is treated for banking and accounting purposes as an extension of the existing business or as a separate business

• uses one or more different trading names

• is related to or dependent on the exiting business in a practical, economic or commercial sense.

Furthermore, paragraph 93 of TR 1999/16 gives the example of a business of a printer that may change over time due to the purchase of new equipment and as a result it may now attract a different type of clientele. Paragraph 93 explains that it is not a different business and the goodwill remains the same CGT asset.

Paragraph 94 of TR 1996/16 provides that a change in the nature of the clients of a business does not of itself mean the business is a new business with new goodwill. Paragraph 94 further states that 'Many businesses naturally evolve by serving different clients or clients in different markets and offering improved products or services'.

In the current case, for the Trust A business, the nature and character of the business has been as a wholesaler since its inception. Changes since inception are such things as relocation, expansion, capital asset investment, changes to customer base and changes to product mix. All these changes are considered to be a product of the business' organic growth. It is considered that the essential character of the Trust A business has not changed.

It is therefore our view based upon the facts presented that the goodwill of the business owned by Trust A is an asset acquired by the Trust prior to 20 September 1985. Nevertheless, Division 149 of the ITAA 1997 will need to be considered to determine if Division 149 deems the goodwill to be a post-CGT asset.

Question 2

Summary

Goodwill of the Trust A business or any part of it will not be deemed to have been acquired on or after 20 September 1985 pursuant to Division 149 of the ITAA 1997.

Detailed reasoning

Division 149 of the ITAA 1997 sets out the circumstances when an asset is a pre-CGT asset. Section 149-10 states:

149-10 A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

A CGT asset acquired before 20 September 1985 remains a pre-CGT asset if the majority underlying interests in the asset have not changed since before 20 September 1985. Where a change in majority underlying interests occurs after 20 September 1985, the CGT asset is deemed to be acquired on the date the change occurred, either under former Division 20 of the Income Tax Assessment Act 1936 ('ITAA 1936') (pre 1998-99 income years) or Division 149 of the ITAA 1997.

Under subsection 149-30(1) of the ITAA 1997 an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not had by ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-30(2) of the ITAA 1997 provides discretion in that if the Commissioner is satisfied or thinks it reasonable to assume that at all times on and after 20 September 1985, and before a particular time, majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case.

'Majority underlying interests' is defined in subsection 149-15(1) of the ITAA 1997 as:

(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

An 'ultimate owner' is defined to include an individual (see subsection 149-15(3) of the ITAA 1997). Accordingly, it is necessary to trace the underlying beneficial interests in the relevant assets back to natural persons.

The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. At general law a shareholder does not have any legal or equitable interest in the assets of a company. Similarly, beneficiaries in a discretionary trust do not have an interest, either individually or collectively, in the assets or the income of a trust. This situation is addressed in ATO Interpretive Decision 2003/778:

Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997.

Taxation Ruling IT 2340 reflects on an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997, is reflected in Taxation Ruling IT 2340. Among other issues, IT 2340 deals with questions regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.

….

Taxation Ruling IT 2340 correctly reflects the position that section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS of the ITAA 1936 as having a beneficial interest in the company's assets.'

Under this approach the Commissioner can 'look through' an entity to determine who are the natural persons who hold beneficial interests in assets, as stated in paragraph 2 of Taxation Ruling No. IT 2340 INCOME TAX : CAPITAL GAINS : DEEMED ACQUISITION OF ASSETS BY A TAXPAYER AFTER 19 SEPTEMBER 1985 WHERE A CHANGE OCCURS IN THE UNDERLYING OWNERSHIP OF ASSETS ACQUIRED BY THE TAXPAYER ON OR BEFORE THAT DATE:

2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

IT 2340 sets out the Commissioner's approach in respect of 'looking through' discretionary family trusts to determine whether majority underlying interests have been maintained in the assets of the trust, as follows:

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

However, if the trustee of a family discretionary trust appoints new beneficiaries who are not members of the particular family, the Commissioner may consider that the underlying interests in the trust assets has changed. Paragraph 8 of IT 2340 states:

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

Trust A is a discretionary trust. The natural persons who are the ultimate owners with majority underlying interests in the pre-CGT assets of the trust are the principal beneficiaries named in the Schedule of Trust A's Deed as that clause existed immediately before 20 September 1985. This Schedule specified Trust B and Trust C as principal beneficiaries. Trust D was subsequently added as a beneficiary post-CGT. The Trust Deeds of those trusts have the following listed beneficiaries within their schedules attached to each Deed.

Trust B Lists taxpayer E and J, their children, siblings, children, grandchildren and other issue of such siblings, and taxpayer E's parents and their siblings, children and grandchildren and other issue, as beneficiaries.

Trust C Lists the children, grandchildren and other issue of Taxpayer F and their spouse, the brother and sister of taxpayer F and their spouse, the children, grandchildren and other issue of such siblings, the parents of their spouse, their siblings, children and other issue, as beneficiaries..

Trust D Lists the children, grandchildren and other issue of Taxpayer G and their spouse, the siblings of taxpayer G and their spouse, the children, grandchildren and other issue of such siblings, the parents of taxpayer G, their siblings, children and other issue, as beneficiaries.

Three Corporate Beneficiaries

The ultimate beneficiaries of the company's assets have always been members of the Family Group, being specifically, taxpayer E and taxpayer J, Taxpayer F and their spouse and taxpayer G and their spouse and their immediate families.

The issue arises as to whether the exercise of the discretionary powers of the trustee of Trust A to appoint an additional Family Trust and corporate beneficiaries is in practical effect a change of 50% or more in the ultimate owners with majority underlying interests in the trust assets. To this end, the Family Trust, being Trust D, and the corporate beneficiaries, are 'looked though' to determine the natural persons who hold the beneficial interests.

Based upon a thorough examination of how the discretionary powers of the Trustee of Trust A have been exercised and applying the "look through "approach to determine the ultimate beneficiaries, it can be seen, that since 20 September 1985, discretionary distributions of income and capital have been made to individuals and entities where the natural person or ultimate owner is a member of the Family Group.

This Family Group includes taxpayer E and J, children, grandchildren or other issue of taxpayers E and J. The siblings of taxpayers' E and J and the children, grandchildren and other issue of such siblings. The parents of taxpayer E and their siblings, children and grandchildren and other issue

It also includes the children, grandchildren or other issue of taxpayer F's spouse, their spouse and siblings of taxpayer F's spouse and taxpayer F. The children, grandchildren and other issue of such siblings and the parents of taxpayer F's spouse and their siblings, children and other issue.

We consider the Trustee has consistently administered the trust over time for the benefit of the same family as outlined in IT 2340. We consider no members of a new family have been substituted as recipients of trust distributions as outlined within IT 2340.

It is considered reasonable to assume that at all times on or after 20 September 1985 up until 30 June 20XX that majority underlying interests in the trust assets have not changed. All distributions of income and capital of Trust A are now being made 100% to Trust B. Therefore, it is considered major underlying interests have not changed. The Commissioner will exercise his discretion under subsection 149-30(2) of the ITAA 1997 to treat the goodwill of the business to be sold as a pre-CGT asset.

Questions 3, 4 and 5

Summary

No gain will be included in the net income or assessable income of Trust A upon transfer of goodwill of the business conducted by Trust A. Any capital gain resulting from CGT event A1 occurring will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

The goodwill of the Trust A business is a pre-CGT asset as it is considered to be carrying on the same business since its inception and the majority underlying interest in Trust A's assets have not changed.

CGT Event A1 will occur on disposal of transfer of the goodwill. CGT event A1 will occur as Trust A will have disposed of a CGT asset to another entity.

However, as the goodwill is considered to be a pre-CGT asset, any capital gain or loss on disposal of the goodwill will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

Question 6

Summary

The trustee of Trust A or the trustee of Trust B will not be liable to pay family trust distribution tax under Division 271 of Schedule 2F to the ITAA 1936 on the amount that they respectively distribute.

Detailed reasoning

Under the scheme that is the subject of this Ruling, it is proposed that the Trustee of Trust A will distribute an amount equal to the income of the estate as a result of the proposed sale of Trust A's business from Trust A to NewUnitTrust. It is the trustee's intention to distribute to the Trust B, who in turn will exercise its trustee discretion to make taxpayers E and J presently entitled to the income of the trust.

The Trustee of Trust A has made a 'family trust election' in relation to Trust A under section 272-80 of Schedule 2F to the ITAA 1936. The Trustee of Trust A will not revoke the family trust election before the payment of the distribution to Trust B, which in turn will be distributed to taxpayers E and J.

As a result, Trust A is a 'family trust' as defined in section 272-75 of Schedule 2F to the ITAA 1936.

The family trust election made by the Trustee of Trust A specified taxpayer E as the individual whose 'family group' (defined in section 272-90 of Schedule 2F to the ITAA 1936) is to be taken into account in relation to the election.

Trust B, the intended recipient of the distribution from the Trustee of Trust A, is a member of the 'family group' of taxpayer E in relation to the distribution. This is because, under subsection 272-90(3) of Schedule 2F to the ITAA 1936:

• Trust B is a trust; and

• when the distribution is made to Trust B

(a) Taxpayer E (being the 'primary individual' under subsection 272-90(1) of Schedule 2F to the ITAA 1936); and

(b) the Trustee of Trust B (being a 'family trust' for which the primary individual, taxpayer E, is specified in the family trust election), have, through their beneficial interest in Trust A, a conferral of a present entitlement to, or a distribution of, income or capital of Trust A.

Therefore, the Trustee of Trust A will not be liable to pay family trust distribution tax under Division 271 of Schedule 2F to the ITAA 1936 on the amount that it will distribute to Trust B.

For the same reasons, as the trustee of Trust B has also made a family trust election specifying Taxpayer E as the individual whose 'family group' (defined in section 272-90 of Schedule 2F to the ITAA 1936) is to be taken into account in relation to the election, no family trust distribution tax will be payable on distribution to the family group members, taxpayer E and taxpayer J.

Question 7

Summary

It is considered that as the capital gain from the sale of the pre-CGT goodwill will be disregarded under subsection 104-10(5) of the ITAA 1997, subsection 99B(2) of the ITAA 1936 will apply to exclude the amount from the assessable income of the beneficiaries of the Trusts.

Detailed reasoning

We have already considered if any amount would be assessable as a result of the transfer of the goodwill under Part 3-1 of the ITAA 1997. As stated previously, it is considered that CGT event A1 will occur but any capital gain will be disregarded pursuant to subsection 104-10(5) of the ITAA 1997.

Division 6 of the ITAA 1936 generally has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate.

Subsection 99B(1) of the ITAA 1936 includes in the assessable income of a beneficiary an amount, being property of a trust estate, that is paid or applied for the benefit of a resident beneficiary. To the extent that any amount arising from the transfer of the goodwill is included in the assessable income of a resident beneficiary under subsection 99B(1) of the ITAA 1936, that amount will be excluded by reason of subsection 99B(2) of the ITAA 1936.

It is considered that as the capital gain from the sale of the pre-CGT goodwill will be disregarded under subsection 104-10(5) of the ITAA 1997 and not included in assessable income if derived by a resident taxpayer, then subsection 99B(2) of the ITAA 1936 applies to exclude it from the assessable income of the beneficiaries of the Trusts.

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