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Edited version of your written advice
Authorisation Number: 1051252405869
Date of advice: 27 July 2017
Ruling
Subject
Capital Gains Tax – Small Business Concessions – When did goodwill come into existence
Question 1
Did the goodwill come into existence when the business name was registered?
Answer
Yes.
Question 2
Did the same business entity continue from the date the goodwill came into existence?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2017.
The scheme commences on
1 July 2016.
Relevant facts and circumstances
After 19 September 1985 A and B (you) purchased a retail shop in partnership with C and D, with the objective of starting a retail franchise business (the partnership).
The partnership ran the retail shop under the original name.
The partnership was then advised to change this name before franchising, as the original name was licensed to a separate company and it would be a significant business risk to use this name when franchising when you did not own the name.
Less than 12 months after the purchase of the retail business the partnership registered the business name Company A Pty Ltd (Company A).
Approximately 6 months after registering the business name Company A, Company A was established as trustee of two family trusts to run the business as a partnership. The partnership consisted of the Trust X set up for you and Trust Z set up for C and D.
The licence agreements were prepared and trademarks were registered for Company A.
In the first 12 months of ownership the partnership went on to establish X additional retail shops. Once they were up and running and a viable business in their own right the partnership commenced selling them off as a franchise of the original retail shop.
Two years after registering the business name Company A, Company A was replaced as trustee by Company X Pty Ltd and Company Z Pty Ltd.
Unit Trust AB (UTAB) was created by the partnership to act as master franchisor for the partnership.
Company AB Pty Ltd was created by the partnership and established as trustee for UTAB.
Approximately 18 months after registering the business name Company A the licence agreements where transferred from Company A to the UTAB and the Master franchise agreement was completed.
At this stage there are currently over 20 active franchises throughout Australia with another X in negotiations.
You intend to sell your share in the business entities Company A Pty Ltd and UTAB.
Relevant legislative provisions
Income Tax Assessment Act 1997 Paragraph 104-10 (1)
Income Tax Assessment Act 1997 Paragraph 108-5(2) (b)
Reasons for decision
Summary
The goodwill of the business commenced when you first registered the business name Company A. From this date on, although you changed the underlying business structure that controlled the business, the essential nature and character of Company A has not changed. This being so the goodwill that was created on a particular date has continued through to the present day.
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.
The Commissioner’s views on the meaning of goodwill are set out in Taxation Ruling TR 1999/16 (TR 1999/16), which reflects the decision of the High Court in Federal Commissioner of Taxation v Murry 89 ATC 4585 ('Murry case’).
Paragraph 12 of TR 1999/16 defines the goodwill of a business:
…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. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of the business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. 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 the business. It cannot be dealt with separately from the business with which it is associated.
Paragraph 26 of TR 1999/16 states that an interest in goodwill, unlike goodwill itself, is not a composite asset
The consequence of the goodwill of a business being one CGT asset is that the whole of the goodwill of a business remains the same single CGT asset, provided the same business continues to be carried on.
Paragraph 17 of TR 1999/16 provides guidance in whether goodwill remains a single CGT asset if the same business continues; 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.
According to the decision in the Murry case, as long as the business remains the same business, the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise transferred.
In this case you purchased a retail shop in partnership with C and D (your partners) for the purpose of building it into a franchise business (the partnership).
The partnership changed and registered the business name to Company A Pty Ltd on a particular date. From this point on you developed license agreements, you registered trademarks, produced procedure manuals and developed a Master Franchise agreement.
In the first 12 months of ownership you went on to established X retail shops around Australia. Once they were up and running and a viable business in their own right you commenced selling them of as a franchise of the original retail shop.
The partnership changed the underlying business structure that controlled the business to a situation which best suited the needs of you and your partners. This change in business structure did not change the essential nature and character of the business being presented to the public. This being so the goodwill that was created on a particular date has continued through to the present day as one asset.
From the information provided it is the opinion of the Commissioner that goodwill began on the date the business name was registered and has continued through to the present day as one asset.
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