Edited version of private advice

Authorisation Number: 1051740660390

Date of advice: 18 August 2020

Ruling

Subject: Capital gains tax - disposal - goodwill

Question 1:

Is the goodwill of the Company a pre-capital gains tax asset?

Answer:

Yes. Based on the information provided the goodwill was acquired when the Company was incorporated. While the Company had purchased a retail furniture store and a franchise in a furniture store, the essential nature and character of the existing business had continued, being changed over of time to attract different types of clients.

Therefore, it is viewed that the goodwill is a pre-capital gains tax asset.

Question 2:

Can any capital gain made on the disposal of the goodwill be disregarded?

Answer:

Yes. As the goodwill is viewed as being a pre-capital gains tax asset, any capital gain made on its disposal will be disregarded.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX.

Persons A and B commenced a business in a partnership offering a specified service to the public.

A company (the Company) was incorporated prior to 20 September 1985 to continue the business operations (the Business).

Persons A and B are the sole shareholders of the Company who:

·         have held their shares since the Company was incorporated

·         each have a XX%; and

·         have voting rights and are entitled to distributions from the Company in accordance with their shareholdings.

The Company expanded its activities after 20 September 1985, and acquired a retail store and franchise, operating each of them for several years while continuing to grow the Business with the retail activities providing additional networks for the Business.

The Company experienced financial difficulties which resulted in the appointment of an administrator, being fully released from administration after several years. The Company continued to operate the Business during this period.

The Company expanded its business activities to service additional classes of clients.

Person A and B's child, Person X, works for the Business and it anticipated that he will transition into owning the Business. As a result, Persons A and B are considering restructuring the Business to provide:

·         a suitable structure for the transition of the ownership of the Business to Person X; and

·         ensuring that Persons A, B and X are protected for asset protection purposes.

Additionally, the restructuring of the Business is being considered to enable a long-term employee of the Business to acquire a part ownership in the Business.

It is proposed that the restructure of the Business will be undertaken as follows:

·         Persons A and B will establish a trust (the Trust) with themselves, and their children and grandchildren, as the principal beneficiaries

·         the Trust will be the sole shareholder of a newly created company (New Company)

·         the establishing of the New Company is consistent with Person A and B's succession planning to provide more asset protection for Person X. Additionally, it is anticipated that the New Company will be a more attractive structure for an external purchaser

·         the Company will sell all of its business assets, including all elements that make up the goodwill of the Company, such as the business name, customer list, supplier references, to the New Company at market value

·         the Company will provide vendor finance in relation to the sale of the goodwill and its other assets to the New Company

·         New Company will own all assets and goodwill of the Company necessary for the operation of the Business on completion of the restructure; and

·         Persons A and B will retire from the Business and will eventually liquidate the Company.

It is anticipated that a capital gain will be made as a result of the restructuring of the Business as outlined above and the disposal of the goodwill.

Persons A and B are both over the age of 55 years of age and the proposed restructure of the Business is in preparation for their retirement and their activities will be significantly reduced after the Business is transferred to the New Company.

The maximum net assets of the Company, any entities connected with it, and any affiliates of the Company or entities connected with the entities connected with the Company, are less than $6,000,000 and the maximum net asset value test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) has been met.

The Company will make payment of the capital gain to Persons A and B within two years after the disposal of the goodwill occurred.

Assumptions:

For the purpose of this ruling the following will occur during the period covered by this ruling:

·         the restructuring of the Business will occur as outlined above, and

·         the sale of the goodwill will occur.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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