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Edited version of your written advice

Authorisation Number: 1051463800870

Date of advice: 05 December 2018

Ruling

Subject: Pre-CGT status of goodwill

Question 1

Is the current goodwill of Company A considered to be acquired before 20 September 1985 such that any capital gain or loss made on a disposal of the goodwill is disregarded pursuant to paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If there is a change in the majority underlying ownership in the pre-CGT goodwill of Company A, pursuant to section 149-30 of the ITAA 1997 as a result of the sale of the pre-CGT shares owned by Company B, will it be disregarded for the purposes of calculating a Capital Gains Tax (CGT) event K6 capital gain under section 104-230 when the shares of the remaining pre-CGT shareholders of Company B are sold?

Answer

Yes

This ruling applies for the following period(s)

Year ending 20 June 2019

The scheme commences on

1 July 2018

Relevant facts and circumstances

Company A is a family owned company. It has a number of key divisions.

The business of Company A was established a considerable time before 1985 and is in its fourth generation of family management

The current ownership of Company A is spread among the third and fourth generation via direct shareholding and indirect ownership through family trusts and a company, Company B.

Company A has provided a number of services since the start of its business.

Some parts of the business have increased slightly since 1985 however the core business activities have remained the same.

More than 50% of the shares in Company A were acquired pre 19 September 1985, and are held by Company B and family trusts.

The shareholders of Company A are considering the transition of ownership of the business to the new generation by the sale of the shares owned by Company B.

Relevant legislative provisions

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

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

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

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 section 149-30

Reasons for decision

Question 1

Summary

The current goodwill of Company A is considered to be acquired before 20 September 1985 such that any capital gain or loss made on a disposal of the goodwill is disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

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

When goodwill is disposed of, CGT event A1 occurs pursuant to subsection 104-10(1) of the ITAA 1997.

However, if the taxpayer acquired the goodwill before 20 September 1985, a capital gain or loss arising from the disposal of the goodwill will be disregarded, pursuant to subsection 104-10(5) of the ITAA 1997.

The ATO view on goodwill for the purposes of CGT is explained in Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16), which discusses the implications of the decision of the High Court of Australia in FC of T v. Murry 98 ATC 4585; (1998) 39 ATR 129, (FC of T v Murry). Goodwill in TR 1999/16 is described as follows:

The whole of the goodwill of a business is either pre-CGT goodwill or post-CGT goodwill. 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.

What goodwill means, depends on the character and nature of the business to which is attached.

Goodwill differs in its composition in different trades or industries and in different businesses in the same trade or industry.

A. When was the goodwill acquired?

B. Is the same business being carried on?

Conclusion

The current goodwill of Company A is considered to be acquired before 20 September 1985 such that any capital gain or loss made on a disposal of the goodwill is disregarded pursuant of paragraph 104-10(5)(a) of the ITAA 1997.

Question 2

Summary

If there is a change in the majority underlying ownership in the pre-CGT goodwill of Company A, pursuant to section 149-30 of the ITAA 1997 as a result of the sale of the pre-CGT shares owned by Company B, it will be disregarded for the purposes of calculating a CGT event K6 capital gain under section 104-230 when the shares of the remaining pre-CGT shareholders of Company A are sold.

Detailed reasoning

Section 104-230 of ITAA 1997 states the following:

(1) CGT event K6 happens if:

(2) Just before the other event happened:

(5) The time of CGT event K6 is when the other event happens.

Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT Event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 (TR 2004/18) states at paragraph 14 that the item of property is acquired at the time the ITAA 1936 or ITAA 1997 treats the CGT asset as having been acquired.

However paragraph 15 states the following:

Therefore, for the purposes of calculating a CGT K6 event capital gain after the sale by Company B of the shares that it owned in Company A, any change in majority underlying ownership that resulted from the application of Division 149 of the ITAA 1997 at the time of the disposal by Company B, will be ignored.


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