Edited version of private advice

Authorisation Number: 1052113803053

Date of advice: 10 May 2023

Ruling

Subject: CGT asset - goodwill

Question

Is the Goodwill attached to the Business carried on by the Company taken to have been acquired before 20 September 1985?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Company

1.     The Company carries on a business of selling new and used farm machinery and providing spare parts and related services (the Business).

Early history

2.     The Business was initially founded before 20 September 1985 by the Individual when they acquired the local garage and service station and the first key supplier agreement was entered into.

Corporatisation of the Business

3.     To improve performance and reduce risk, the Business was restructured before 20 September 1985 by corporatizing the ownership structure and operations. This involved transferring the Business into the Company. As part of this restructure, a holding company (Holdings) for the new entity was also incorporated.

Ownership and shareholders of the Company

4.     According to its share register, the Company currently has 100 ordinary shares on issue.

•         99 of these shares are legally and beneficially owned by Holdings and have been since before 20 September 1985.

•         The other share has been held by various entities in a nominee capacity for the benefit of the owner, Holdings.

Ownership and shareholders of Holdings

5.     Holdings currently has 2 ordinary shares on issue which were issued upon its incorporation before 20 September 1985. These shares were originally legally and beneficially owned by the Individual (1 share) and their Spouse (1 share).

6.     Before 20 September 1985, a Family Trust was established. From this time on, the shares in Holdings were legally held by entities as custodian for the trustee of the Family Trust.

The Family Trust

7.     The Family Trust was established by a deed of settlement in 19XX (the Trust Deed).

8.     Since 1985, the Family Trust has only been administered for the benefit of the Individual's family and distributions were only made to the Individual, their Spouse and their children and entities associated with them.

Expansion of the Company's Business

Products and services

9.     The Company's core business has always been selling new and used farm machinery, spare parts and providing related services.

10.  The major type of farm machinery products offered by the Company as at 20 September 1985, and since, has remained constant and includes tractors, seeding and tillage equipment, hay equipment, harvesters, lawn mowers and sprayers. The machinery offered has become more sophisticated overtime due to technological changes but essentially carry out the same means to an end, however, in a much more efficient manner.

11.  Of these products, the Company's sales have predominantly been sourced from the sale of large tractors and harvesters since the inception of the Business.

12.  Since before 20 September 1985, the Company has also provided and continues to provide services which predominately relate to after sales support and servicing machinery to ensure optimal performance during critical times of seeding, spraying and harvest.

13.  Whilst initially starting with a focus on tractors, combine harvesters and a wide range of farming equipment along with supplying parts and servicing of equipment, the Business has expanded over the decades (starting before 20 September 1985) following developments in technology and farming practices into other types of machinery and introduced related services such as financing.

14.  The Business routinely enters into franchise and other agreements with suppliers to ensure that they have the right machinery and services their customers require (i.e., as new competitors enter, new technology emerges etc.,).

Customers

15.  Since 20 September 1985, the Company's customers have primarily been the local farming community.

16.  Historically, farming has been a multi-generational business with farms passed down between generations. The Company's customer base has shrunk in size due to consolidation in the farming community over time into large family holdings - this is a natural part of farming and generally allows for larger farms to be formed and economies of scale established. Despite these changes, the underlying land and farms serviced by the Company remains substantially the same.

Location

17.  The Business has always been centrally located in the community to ensure that it is visible and in close proximity to its customers' farms to ensure accessibility along with speed and mobility to repair a breakdown.

18.  The location of the Business within local farming communities and their customer base has remained relatively the same.

19.  The Company has always operated from the same town - the original site when the Business commenced in 19XX continued until 20XX when it was relocated to a nearby larger site to accommodate the ever-increasing size of farming machinery they stocked.

20.  During 20XX, the Company also began to sell spare parts online. This, however, is a minor contributor to overall sales and was a natural progression for a retail business, given the boom of online sales because of COVID-19 and technological advances.

Suppliers and manufacturers

21.  The Company have focused on ensuring they are aligned with the appropriate manufacturer who has the right products their customers require. Accordingly, the Business is a multi-brand model which is designed to ensure they have the right products, technology and brands their customers require. Since 20 September 1985, the Company has entered, and exited, agreements with suppliers and manufacturers to ensure their product mix is appropriate.

22.  A key change to the Company's suppliers occurred after 20 September 1985 when one of the Company's major suppliers (the Old Supplier) was replaced with products from another supplier (the New Supplier). This change was a natural progression to ensure the right products and technology were available to its customers. This change of a key supplier was not unfamiliar to the Business and the industry as they have changed suppliers and product mixes over the decades in line with changing technology and brands. As part of this transition, changes such as site signage and advertising materials were replaced and upgraded. The Company retained all existing stock of the Old Supplier and continued to sell this onto existing customers. The Company also continued servicing customers who held machinery of the Old Supplier. This allowed the Business to retain their customers and transition them to products from the New Supplier (or other suppliers) over the next 10 years when it was time for customers to upgrade or replace their existing equipment.

Management Services

23.  After 20 September 1985, a 'Group Support Centre' was established to avoid duplication and inefficiencies being created by businesses carried on by the Company and other related entities undertaking similar back-end tasks that were more suited to being conducted centrally in order to maximise efficiencies. The support services relate to those administrative aspects which customers do not see and are commonly outsourced or centralised in most businesses. Such services include invoicing, bookkeeping, IT, payroll and accounts payable etc., which have always been undertaken by the Company since it was established.

24.  The Company is charged a service fee proportionally based on revenue for these services to be undertaken by a related entity.

Revenue and Assets

25.  Since September 1985, the Business has experienced significant growth in terms of revenue and other business attributes.

26.  Since September 1985, the Business has also increased its asset base. Although the asset base of the Business has increased significantly, generally the nature of the assets held has remained consistent with property held including trading stock, trade debtors, plant and equipment, cash, and loans to and receivables owing from related entities.

Management

27.  The Individual and his family have held key management roles throughout all operations since commencement of the Business.

28.  Members of the Individual's family have been the sole directors of the Company since its incorporation.

Future dealings with the assets of the Company

29.  The Company is seeking to clarify the tax status of the assets associated with the Business (including the Goodwill). The tax status will be important to allow them to understand the implications of any future dealings with the Business' assets such as whether any capital gain or capital loss made on a disposal of the Goodwill may be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that it was acquired before 20 September 1985.

Assumptions

30.  Since 20 September 1985, the Family Trust has only been administered for the benefit of the Individual's family.

31.  Since 20 September 1985, there has been no change in the majority underlying ownership, as described in Division 149 of the ITAA 1997, of any pre-CGT assets of the Business.

Other Issues

32.  This Ruling does not consider whether Division 149 of the ITAA 1997 may have application to the Goodwill of the Business such that it may become a post-CGT asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

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

Income Tax Assessment Act 1997 section 108-5

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

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

1.    The Goodwill attached to the Business carried on by the Company was acquired before 20 September 1985.

Detailed reasoning

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

3.    CGT even A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

4.    Paragraph 104-10(5)(a) 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.

5.    In the current circumstances, the Company is seeking to clarify the tax status of the Goodwill associated with its Business. This will assist them to understand the potential tax implications of any future dealings with the Business' assets including whether any capital gain or capital loss made on a disposal of the Goodwill may be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 on the basis that it was acquired before 20 September 1985.

6.    It is noted that this Ruling does not consider whether Division 149 of the ITAA 1997 may apply which can cause the pre-CGT status of a CGT asset owned by a company to be lost if the 'majority underlying interests' in the CGT asset are not held by the same 'ultimate owners' who held the majority underlying interests in the CGT asset immediately before 20 September 1985 (subsection 149-30(1)).

7.    Taxation Ruling TR 1999/16 Income Tax: capital gains: goodwill of a business (TR 1999/16) deals with CGT issues relating to the goodwill of a business. TR 1999/16 reflects the decision of the High Court of Australia in FC of T v Murry 98 ATC 4585; (1998) 39 ATR 129 (the Murry case).

Meaning of goodwill

8.    According to TR 1999/16, goodwill has the legal definition which was established by the High Court in the Murry case. In this regard, paragraph 12 of TR 1999/16 states:

....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 than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible 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.

When is the goodwill of a business acquired for CGT purposes?

9.    Subsection 995-1(1) of the ITAA 1997 provides that you acquire a CGT asset in the circumstances and at the time worked out under Division 109.

10.  In the current circumstances, the Company acquired the assets of the Business (including its Goodwill) from the Individual before 20 September 1985 when the Business was corporatised. Therefore, pursuant to subsection 109-5(2) of the ITAA 1997, as the Goodwill was acquired from CGT event A1 happening (i.e., from the disposal of a CGT asset) it is taken to have been acquired either when the disposal contract was entered into or, if none, when the disposing entity stopped being the asset's owner. Accordingly, on face value, the acquisition date of the Goodwill of the Business by the Company would be prior to 20 September 1985.

Same business test for CGT purposes

11.  For the purposes of Part 3-1 of the ITAA 1997, goodwill acquired before 20 September 1985 remains a single, pre-CGT asset (subject to the operation of Division 149) if the same business continues to be carried on. This is so even though:

(a)  the sources of the goodwill of a business may vary during the life of the business; or

(b)  there are fluctuations in goodwill during the life of the business.

12.  Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case. The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. It is not sufficient, however, if just a similar kind of business is carried on. Factors to consider include the nature or character of the business, its location and size, its customer base, the extent of changes in the assets and resources of the business, the activities of the business whether the activities constitute, or are treated by the business owned, as constituting separate or distinct activities, enterprises, divisions or undertakings and the way in which the business is structured, carried on, managed and controlled (see paragraphs 62 and 91 to 95 of TR 1999/16).

13.  The business owner may expand or contract activities, or change the way in which a business is carried on, without ceasing to carry on the same business, provided the business retains its essential nature or character. Organic growth, expansion or diversification of a business by, for example:

(a)      adopting new compatible operations;

(b)      servicing different clients; or

(c)      offering improved products or services;

does not of itself cause it to be a new business provided the business retains its essential nature or character.

14.  However, as noted paragraph 24 of TR 1999/16, the same business is not carried on if:

(a)  through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character; or

(b)  there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale.

15.  As highlighted in paragraph 18 of TR 1999/16, 'A business or the sources of its goodwill may change so much it can no longer be said to be the same business as that previously conducted. In other words the old business ceases and a new business commences. If this happens the goodwill of the original business ceases to exist and a new CGT asset - being the goodwill of the new business - is acquired'.

Has the same business been carried on by the Company?

16.  Since September 1985, there have been various changes to the Business conducted by the Company and, therefore, it is necessary to consider whether the 'same business' is being carried on such that the Goodwill of the Business retains its pre-CGT status.

17.  As previously noted, TR 1999/16 outlines a number of factors that are considered relevant when assessing whether the business carried on prior to 20 September 1985 is the same as that carried on just prior to that time. These factors are considered below.

(a)  The nature or character of the business

18.  In the current circumstances, the nature of the Business has, from a broad perspective, remained consistent as its core activities have continued to focus on selling new and used farm machinery and providing spare parts and related services.

19.  From a product perspective, the major type of farm machinery products offered by the Company since before 20 September 1985 has remained constant and includes tractors, seeding and tillage equipment, hay equipment, harvesters, lawn mowers and sprayers. It is noted that, since the inception of the Business, the Company's sales have continued to be predominantly sourced from the sale of large tractors and harvesters.

20.  The Products offered by the Company prior to 20 September 1985, and currently, are sourced from a range of manufacturers and suppliers to ensure that the Business has the right machinery and services their customers require. It is noted that many of the currently stocked product brands were supplied by the Business prior to 20 September 1985.

21.  In contrast, however, it is noted that, one of the Business' key product brands, which generated a significant portion of the Company's annual sales prior to 20 September 1985, was replaced and the franchise relinquished after 20 September 1985 with the Business thenceforth predominately providing products from another supplier. As part of the transition to the New Supplier, changes such as site signage and advertising materials were replaced and upgraded.

22.  Although the change from the Old Supplier to the New Supplier was a significant change in the Business' product offerings, it is considered that it does not alter the overall nature of character of the Business in selling new and used farm machinery. The Business, both before and after 20 September 1985 has stocked a range of different branded products and has on numerous occasions entered into and exited agreements with various manufacturers and suppliers to ensure that the Business has the right machinery and services their customers require. This further suggests that this is an organic change in a business of this type rather than a change affecting the overall nature of the Business.

23.  The Business has also, since before 20 September 1985, continued to provide services which are predominately related to after sales support and servicing machinery.

(b)  Customers

24.  The Company has, since before 20 September 1985, continued to provide its products and services primarily to local, farming businesses. Many of its customers prior to 20 September 1985 are still customers today (whilst noting that the particular entity linked to the farming operations may have changed during this period due to changes linked to family succession planning and business changes).

25.  It is also noted that the Business has in recent times, primarily prompted by the COVID-19 pandemic, began to sell spare parts online, however, this new market is a minor contributor to overall sales and is considered to be a natural progression for a retail-type business.

(c)  location and size

Location

26.  The Business has always been centrally located within the local farming to ensure that it is visible and in close proximity to its customers' farms.

27.  The Company has always operated from a location in the same town.

28.  Prior to 20 September 1985 and up until 20XX, the Company operated its Business from the original site that the Business commenced at prior to 20 September 1985. In 20XX, the Business was relocated to a nearby, larger site to accommodate the ever-increasing size of farming machinery they stocked.

Size

29.  Since September 1985, the Business has experienced significant growth in terms of revenue and other business attributes.

(d) The extent of changes in assets and resources of the business

30.  Since September 1985, the Business has significantly increased its asset base. Although the asset base of the Business has increased significantly, generally the nature of the assets held has remained consistent with property held including trading stock, trade debtors, plant and equipment, cash, and loans to and receivables owing from related entities.

(e) The activities of the business

31.  Since September 1985, the core activities of the Business have remained unchanged primarily focussing selling new and used farm machinery and providing spare parts and related services.

32.  It is noted that since 20XX, the Company has outsourced various administrative duties (such as invoicing, bookkeeping, IT, payroll and accounts payable) to a related entity. The related entity charges the Company a service fee proportionally based on revenue for these services.

(f) Do the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, divisions or undertakings.

33.  There does not appear to be any change in the operation of the Business over the relevant period from the perspective of the business owners.

(g) The way in which the business is structured, carried on, managed and controlled.

34.  Since 20 September 1985, the underlying ownership of the Business and the Company has remained with the Family Trust (and the Individual's family).

35.  Members of the Individual's family have also worked in the Business and held key management roles since the commencement of the Business and currently. Notably, members of the Individual's family have been the sole directors of the Company since its incorporation.

Conclusion

36.  Based on the information provided, it is evident that the Business has developed and expanded since 20 September 1985 as it has:

•         significantly increased its sales revenue and business asset base;

•         increased the range of products offered;

•         varied the brands of products offered by entering into and exiting franchise agreements and in this regard undertook a fairly significant change after 20 September 1985 with the replacement of products from the Old Supplier with products from the New Supplier;

•         changed its location to accommodate its expansion;

•         outsourced various administrative duties (such as invoicing, bookkeeping, IT, payroll and accounts payable) to a related entity; and

•         began selling spare parts online.

37.  It is, however, considered that these changes represent organic growth and expansion of the Business because none of the above activities change the essential nature or character of this business which continues to revolve around selling new and used farm machinery, spare parts and providing related services.

38.  Accordingly it is considered that the Business carried on now is the same business as that carried on prior to 20 September 1985. This is reflected in the fact that the Business has:

•         maintained its focus on the sale of new and used farm machinery;

•         continued to service similar clients i.e., the local farming community;

•         has continuously maintained its Business operations in the same location;

•         held assets of a similar nature including trading stock, trade debtors, plant and equipment, cash, and loans to and receivables owing from related entities; and

•         been operated by, and remains under the control of, members of the Individual's family.

39.  Consequently the Goodwill of the Business is taken to have been acquired before 20 September 1985.

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