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Edited version of your written advice
Authorisation Number: 1051387658258
Date of advice: 21 June 2018
Ruling
Subject: Capital gains tax – market value substitution
Question
Does the market value substitution rule in subsection 116-30(1) of the ITAA 1997 apply to the disposal of goodwill in the Partnership?
Answer
Yes. The Commissioner accepts that the Partners can rely on a market value in the range specified in the valuation report.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
1. The Partnership carries on business.
2. When partners are admitted to the Partnership, they are not required to pay any amount that reflects a value for the acquisition of an interest in any goodwill.
3. When partners exit the Partnership, they are not entitled to receive any payment which reflects a value for the disposal of an interest in any goodwill. They are also not bound by any restraint of trade covenant.
4. The Partnership wishes to restructure the business to a corporate structure and propose the following changes to occur:
a. A new Australian resident proprietary limited company will be incorporated (NewCo) which will be owned/controlled by the Partners.
b. The Partners will effect the transfer of the business of the Partnership to NewCo such that NewCo may commence carrying on the business.
c. The depreciating assets used by the Partnership will be transferred to NewCo for no consideration.
d. The former employees of the Partnership will be offered employment by NewCo on the same or substantially similar terms as their previous employment.
e. NewCo will generate and bill its own work in progress as and from the day on which the arrangement begins as agreed on by the Partners.
f. The Partnership will, over time, bill and collect its existing work in progress generated before this day.
g. Once the above is complete, the Partnership will be dissolved.
5. The Partnership has provided a valuation report for their business to the Commissioner.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 116-30
Income Tax Assessment Act 1997 Subsection 108-5(2)
Reasons for decision
Summary
1. The market value substitution rule in subsection 116-30(1) of the ITAA 1997 applies to the disposal of goodwill in the Partnership.
2. The Commissioner accepts that the Partners can rely on a market value in the range specified in the valuation report.
Detailed reasoning
3. Under the proposed arrangement, the Partners will dispose of their interest in the CGT assets of the Partnership for nil consideration. The relevant CGT event in relation to this disposal is CGT event A1.
4. Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. An interest in an asset of a partnership is recognised as a CGT asset in accordance with subsection 108-5(2). This includes the interest in goodwill each partner holds.
5. As no consideration will be received for this disposal, the market value substitution rule in subsection 116-30(1) deems each Partner to receive capital proceeds equal to their share of the market value of the CGT assets of the Partnership the subject of the disposal, which would include any goodwill.
6. The Commissioner has been provided with a valuation report on the goodwill of the Partnership. The Commissioner has not identified any material errors in the valuation. Thus the valuation is considered appropriate for the purposes of the market value substitution rule in this arrangement.
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