Edited version of your written advice

Authorisation Number: 1051388128173

Date of advice: 21 June 2018

Ruling

Subject: Pre-CGT status of business sold

Question

Was the sale of the business a sale of a pre-CGT asset for the purpose of the Taxpayer’s tax return for the income year ending on 30 June 201Z?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 201Z

The scheme commences on:

201Z

Relevant facts and circumstances

Company A (Current Trustee) is a trustee of Trust A (the Taxpayer).

Trust A was established in mid-198X by Taxpayer A as founder and Company B as trustee.

Company B was registered in mid-198X and acted as the trustee of Trust A until around 199Y, when the trustee of Trust A was changed to the Current Trustee.

From 198X until it was sold the Taxpayer operated a business that provided infrastructure and marketing to support transport drivers in providing transportation services to individuals and small groups of individuals (the Business).The various elements of the Business included:

● Ownership of licensed vehicles;

● Leasing licenses to operators of vehicles;

● Leasing licenses to operators of vehicles;

● Courier services; and

● Providing services of installation bays, spare parts sales and workshops and panel shops to transport drivers

This Business was sold to a third party in early 201Z (sale completion date)

Since 198X to the sale completion date, Trust A has implemented new tools to enhance the Business in light of technological advancements and invested in technologies to improve the business’ operations. It also made acquisitions of other small business operators during its existence, where the operations of those operators have been absorbed into the core of the Business.

The extracts from the application provide evidence toward the nature of these business acquisitions. They state that:

The Taxpayer had several sources of revenue connected to its Business; they were all related to the essential nature of the Business. For example: Income from vehicle vouchers’ commissions arises only because of the method of payment allowed to be used in the vehicles, and without vehicles there is no income from vehicle vouchers’ commissions;

Income from the sale of spare parts to other operators of vehicles in the fleet arises because the Taxpayer sources parts to use in its own vehicles. The only customers for these spare parts are the relevant vehicle operators assisted by the Taxpayer; and

The taxpayer acquires vehicles and fits them out for sale as relevant vehicles. This supports the business in being able to assist other operators to acquire suitable vehicles and become part of the overall Business. The sale operation would serve no purpose unless it was part of the Business.

While each division of the Business has the necessary tools to perform what is required to support vehicle operators in providing transportation service, none of the divisions have their own infrastructure to support the operators as a separate stand-alone or discrete business. All the divisions of the Business, such as the above, operate to support the core business – support to vehicle operators – or are in adjunct to, or consequence of, the operation of the core business. They are not self-contained, nor are they going concerns in themselves.

These acquisitions were done to improve the operations and infrastructure of the business and were an extension of its earlier activities.

There was no significant change in the majority underlying ownership of relevant trusts from 199A to the present.

Assumptions

From September 198B to 199A, no significant changes in beneficiaries have occurred in the relevant trusts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 149

Reasons for decision

Summary

We are satisfied that the goodwill of the business has stayed consistent since its pre-CGT operations and that no significant change in the business’ nature has occurred. Because of this consistency the sale of the business will constitute a sale of a pre-CGT asset for the income year ending 30 June 201Z and will be able to disregard CGT event A1 as per Subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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, this would be considered to be a sale of a pre-CGT asset. In the current case we must determine the pre-CGT status of the asset (the Business), which is dependent on whether or not there has been a significant change in goodwill.

Goodwill is a CGT asset, pursuant to paragraph 108-5(2)(b) of the ITAA 1997.

According to Taxation Ruling TR 1999/16 Income Tax: capital gains: goodwill of a business (TR 1999/16) has the legal definition of goodwill which was established by the High Court in Federal Commissioner of Taxation v. Murry 98 ATC 4585; (1998) 39 ATR 129 (Murry Case).

Paragraph 12 of TR 1999/16 states in part that:

…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 a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources that it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an individual 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 a business. It cannot be dealt with separately from the business with which it is associated.

Paragraph 89 of TR 1999/16 provides guidance on the consequences of goodwill of a business being one CGT asset. It states that:

The goodwill of a business that commenced before 20 September 1985 remains a pre-CGT asset provided the same business continues to be carried on. As the majority justices of the High Court said in the Murry Case, ‘as long as the business remains the “same business” (cf Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97), the good will 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'. For a business that commenced before 20 September 1985, any accretion of its goodwill since 20 September 1985 is not a post-CGT asset.

Paragraph 90 of the TR 1999/16 outlines the requirement of consistent majority underlying ownership since pre-CGT date of an asset to maintain its pre-CGT status. It states that:

If an entity started business before 20 September 1985, with its goodwill being acquired on commencement of the business, Division 149 (about when an asset stops being a pre-CGT asset) of the 1997 Act needs to be considered in respect of that pre-CGT goodwill. Although the entity may have disposed of all of its other pre-CGT assets, if the pre-CGT goodwill no longer has the same majority underlying ownership it is treated by Division 149 as being post-CGT goodwill.

With the assumptions taken into consideration we are satisfied in the consistency of the majority underlying ownership of the asset and so, with regards to the paragraph stated above, it would retain its pre-CGT status,

Paragraph 60 and 64 to 66 of TR1999/16 outlines the goodwill of introductions to new practices and operations within pre-CGT businesses and their treatment in relation to the original business’s pre-CGT status. These paragraphs state:

60. If a new business operation or activity introduced by a taxpayer is an expansion of an existing business (whether it commenced before or after 20 September 1985), any goodwill built up in conducting the expanded business is merely an expansion of the existing goodwill of the business. If a business which commenced before 20 September 1985 (a 'pre-CGT business') is expanded, goodwill generated in conducting the expanded business is merely an accretion to the pre-CGT goodwill.

64. If a pre-CGT business is combined with another business acquired post-CGT and they are conducted as one business without the pre-CGT business losing its essential nature or character, the goodwill of the post-CGT business is subsumed into the goodwill of the pre-CGT business and all of the goodwill of the business is taken to have been acquired before 20 September 1985. The goodwill of each of the businesses coalesces without any disposal of the goodwill of the post-CGT business. The pre-CGT business must not lose its essential nature or character in the sense that it must remain the same business and not be overwhelmed by the post-CGT business in such a way that it has become a different business. The purchase of the post-CGT business must involve merely organic growth of the pre-CGT business or an expansion or accretion to it in reasonable proportions or it gives rise to a new, different business and its goodwill is a new asset.

65. If a taxpayer operating a pre-CGT supermarket acquired a bakery outlet after 19 September 1985 and - as a matter of fact - integrated it into the supermarket in one consolidated business and later sold the consolidated business, the whole of the amount received for the goodwill of the integrated business is taken to have been acquired before 20 September 1985 (subject to Division 149 - about when an asset stops being a pre-CGT asset - see paragraph 90). Paragraphs 2 to 6 of Taxation Ruling IT 2328 are withdrawn.

66. If, on the other hand, the two businesses (for example, the supermarket and the bakery outlet) are - as a matter of fact - separate and distinct businesses, the goodwill attached to the additional business is acquired after 19 September 1985.

The acquisitions of the business post-CGT did not significantly change the underlying goodwill of the business, the main goal and effect of these new business operations was to simply improve the existing operations. The facts of the case mirror the example outlined in paragraph 65 above with the business acquisitions being integrated into one whole consolidated business and treated as one entity with the same ongoing goodwill as the original pre-CGT business. Since there has been no change in the essential character of the pre-CGT business the goodwill of the post-CGT business acquired will be subsumed and is taken to have been acquired before 20 September 1985.

The entirety of a business’ goodwill must be either pre-CGT or post-CGT with no apportionment being applicable (see paragraph 96 of TR 1999/16). 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 of ITAA 1997- about when an asset stops being a pre-CGT asset) provided the same business continues to be carried on.

Based on the facts presented, it is clear that the core operations of the Business pre-CGT were to ensure that the transportation services provided by vehicle operators are supported by necessary infrastructure. From our view, the additions to the company post-CGT did not change the underlying goodwill of the company. The implementation of new tools was to enhance the business in light of technological advancement and did not change the nature and essence of the business. This consistency in the goodwill of the business means that its disposal would be a sale of a pre-CGT asset for the purpose for the year ending on 30 June 201Z.

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