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Edited version of your written advice

Authorisation Number: 1051458683892

Date of advice: 27 November 2018

Ruling

Subject: Pre-CGT assets

Question 1

In applying section 104-230 to the sale of shares in Current Holding Co to New Holding Co, will the goodwill of X Co immediately prior to the sale be taken to have been acquired prior to 20 September 1985 under Division 109 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

For the purposes of the capital gain calculation under section 104-230 of the ITAA 1997, will Current Holding Co’s shares in X Co be taken to have been acquired prior to 20 September 1985, notwithstanding the operation of Division 149 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019.

The scheme commences on:

Year ended 30 June 2019.

Relevant facts and circumstances

Current Holding Co was established prior to 20 September 1985. It holds all the shares in X Co.

X Co was established prior to 20 September 1985. It had, and continues to have, several subsidiaries established prior to 20 September 1985. Together they conducted X business activities.

The relationship between X Co and its subsidiaries was as follows:

X Co is presently the head company of a consolidated group comprising eight active trading entities and nine dormant non-trading entities.

The practical relationship between the entities in the group is currently as follows:

Management and control

Mr X has had ultimate control of X Co and the group since their establishment, and they continue to have this control.

X has been and remains integral to the business.

The day-to-day management and control of the group were, and continue to be, directly undertaken by a sole managing director.

Activities

X Co considers, and has always considered, the business it conducts to include those specifically carried out by its subsidiaries. That is, X Co considers its business to be the business of the group, inclusive of all the services and activities in which the group as a whole is engaged.

The group both prior to and after 20 September 1985 was solely engaged in X activities. It also continues today to be engaged solely in the conduct of these activities.

The group’s customers

The group is focussed on capturing large service contracts with large organisations. It has been able to build long term relationships with its customers.

The majority of the group’s total revenue continues to be generated from its clients to which it had provided services prior to 20 September 1985.

The group’s sales income continues to be generated from the same industries it serviced prior to 20 September 1985.

Banking, finance and accounting

X Co’s core financial service provider has, from the period prior to 20 September 1985 to the date of the ruling application, been Bank X.

Bank X views the group as a whole, inclusive of X Co’s subsidiaries, for the purposes of addressing the satisfaction of its lending covenants and ongoing arrangements.

The subsidiaries transfer their retained profits on an annual basis to X Co. Loss-making entities and contracts within the group are funded by the group as a whole through profitable operations and subsidiaries.

Funds are lent to each subsidiary within the group as required, subject to the lending entity’s working capital needs, and a secured interest is registered over these funds. No interest is charged on these loans.

Intercompany charges are raised from X Co to its subsidiaries for the use of assets within the group, management oversight of the group and the administrative services provided to the group.

Use of trading names

The trading name is and has been used consistently by the business.

Plant and equipment

The group has always required plant and equipment, inventory, working capital and people as its key resources, necessary to enable it to perform its services to its clients. The plant and equipment used by the group has changed over the years as newer and more efficient equipment became available. As the group expanded in scale and diversified within its market and industry sectors, it continued to acquire plant and equipment to meet the expanding needs of its customer base.

Proposal

Mr X will sell his shares in Current Holding Co to New Holding Co.

Relevant legislative provisions

Section 104-230 of the ITAA 1997

Division 109 of the ITAA 1997

Division 149 of the ITAA 1997

Reasons for decision

Question 1

Summary

In applying section 104-230 to the sale of shares in Current Holding Co to New Holding Co, the goodwill of X Co immediately prior to the sale will be taken to have been acquired prior to 20 September 1985 under Division 109 of the ITAA 1997.

Detailed reasoning

The application of section 104-230 depends on the determination and calculation of the market value of property of the company or trust, or the market value of interests the company or trust owned though interposed companies or trusts, in property that was acquired on or after 20 September 1985. Under subsection 104-230(2) the market value of such property or interests must be at least 75% of the net value of the company or trust in order that CGT event K6 happens.

The specific question for which the present ruling is sought is whether the interest in goodwill of the business of X Co was acquired prior to 20 September 1985.

The general meaning of ‘goodwill’ as used in the context of the CGT provisions is explained in Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16). It is derived from general law. Under the decision of the High Court in FCT v Murry 98 ATC 4585, it has 3 aspects: property, sources and value.

Paragraph 12 of TR 1999/16 provides as follows:

The business was established in 1961. The goodwill attached to it is also taken to have commenced at that time, being the time at which ‘work that resulted in the creation started’: item 1, section 109-10 of the ITAA 1997.

Goodwill is a single CGT asset for the purposes of Part 3-1 of the ITAA 1997: paragraph 16 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 provided that the same business continues to be carried on. The goodwill of a business ceases if the business changes to the extent that it can no longer be regarded as the same business. In such a case, the old business (and its associated goodwill) ceases and a new business commences: paragraphs 17 and 18 of TR 1999/16.

The question is whether the goodwill of the business conducted by X Co as it existed prior to 20 September 1985 is the same goodwill that exists at the date of this ruling; or whether the business had at some point after 20 September 1985 changed to the extent that it became a different business (resulting in the cessation of the goodwill associated with the original business).

In reaching a view on this issue:

The approach taken above is aimed at ascertaining whether X Co has at all times from 20 September 1985 conducted the same business that existed just before that date, and consequently whether the same goodwill exists. In particular, consideration is given to the growth of the business over this period; and whether such growth may be regarded as an expansion of the existing goodwill of the business (and therefore an accretion to the pre-CGT goodwill) or as a result of the introduction of new and separate businesses in their own right.

In this regard, paragraph 62 of TR 1999/16 provides that:

Having regard to the abovementioned factors, it is the Commissioner’s view that the goodwill of X Co immediately prior to the sale is taken to have been acquired prior to 20 September 1985 under Division 109 of the ITAA 1997.

Each of these factors is considered in further detail below.

Management and control

It is accepted that the day-to-day management and control of X Co and its subsidiaries were, and continue to be, directly undertaken by a sole managing director.

X Co’s growth since its establishment involved the setting up and the acquisition of subsidiary companies. These companies currently form the consolidated group of which it is a head company.

It is noted that:

This structure existed as at 20 September 1985 and continues to exist at the date of this ruling.

Nature of business operation or activity

The Commissioner is of the view that the nature of the business and the activities in which X Co is involved are fundamentally the same as those which were conducted prior to 20 September 1985.

Each of the current subsidiary entities is involved in, and carry out the primary activities of, the group which were conducted prior to 20 September 1985. That is, these activities continue to be undertaken as part of the group’s business from 20 September 1985, and they remain the primary activities in which the group is engaged.

The types of customers that the business operation or activity attracts

The types of customers that the business attracts are the same as those that the business had attracted prior to 20 September 1985. In particular it is noted that:

Banking, finance and accounting

While the business took the shape of a consolidated group after 1985, it is accepted that the group as a whole has been generally treated as an extension of X Co rather than as separate businesses comprising those of each individual subsidiary.

This view is based on the following considerations:

Use of trading names

It is accepted that the trading name is and has been used consistently by all the entities in the group.

Interdependence between entities

The entities within the group are interdependent in the following respects:

Other factors

It is acknowledged that:

QUESTION 2

Summary

For the purposes of the capital gain calculation under section 104-230 of the ITAA 1997, Current Holding Co’s shares in X Co will be taken to have been acquired prior to 20 September 1985, notwithstanding the operation of Division 149 of the ITAA 1997.

Detailed reasoning

Paragraph 64 of TR 2004/18 provides:

The reason for this approach is explained further in the ruling:

Following this approach, it is the Commissioner’s view that Current Holding Co’s shares in X Co will attract the operation of Division 149.

However, while these assets are by virtue of the application Division 149 treated as having been acquired post-CGT, they are treated as having been acquired pre-CGT for the purpose of CGT event K6 in section 104-230 of the ITAA 1997. This approach is taken pursuant to the view taken in TR 2004/18.


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