Edited version of private ruling

Authorisation Number: 1011626624667

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Ruling

Subject: Roll over relief and retirement exemption of CGT asset

Question 1

Will the goodwill of X's accounting practice retain its pre - CGT status under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when the goodwill to be transferred to an existing unit trust?

Answer

No

Question 2

Is there a roll over relief available when the goodwill to be transferred to the unit trust under Subdivision 152-E of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts

You acquired your accounting practice, before 20 September 1985 (pre-CGT) and operated from various locations during the last 20 years you practiced in one location.

You engage your discretionary trust, (The ABC Investment Trust) to provide services to your practice.

Your trust owns plants and equipments.

For a couple of years you and your child conducted a mortgage broking business and financial planning business via a unit trust..

The private trust has not yet really established any real goodwill value as these two businesses are still running at losses.

You are now proposing to restructure your practice under one entity. You propose to modify the existing unit trust to increase its number of units. These units will be held by yourself and your child..

You mentioned that the goodwill will be transferred to the unit trust at the time of transfer.

You have stated that a majority of the units in the unit trust will be held by your child and yourself and the balance to be held by another the trust and you are the beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 152-40.

Income Ta x Assessment Act 1997 104-60

Income Tax Assessment Act 1997 152-35

Income Tax Assessment Act 1997 152-5

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reason for Decision

Question 1

Issue 1

Question 1

Summary

CGT event E2 under section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happens if you transfer a CGT asset to an existing trust.

The pre-CGT status of the goodwill will not be retained when it will be transferred to a unit trust.

Detailed reasoning

CGT event E2 under section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust.

Sub section 104-60(5) of the ITAA 1997 states that CGT event E2 does not happen if the trust is not a unit trust and the taxpayer is the sole beneficiary absolutely entitled to the asset as against the trustee (ignoring any legal disability), example where the trust acquiring the asset is a bare trust.

CGT event E2 also does not happen if a CGT asset is transferred between two trusts, and the beneficiaries and terms of both trusts are the same.

Your goodwill is a pre CGT asset. Since you are transferring to a unit trust, CGT event E2 will take place. The timing of CGT event E2 is the date on which the CGT asset is transferred.

Under subsection 104-60(3) of the ITAA 1997, you make a capital gain if the capital proceeds from the transfer are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

However, sub section 104-60(6) of the ITAA 1997 states that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

As you acquired the goodwill before 20 September 1985, capital gain or loss that you make from the transfer of goodwill to the unit trust will be disregarded.

The first element of the cost base and reduce cost base of the total number units that you acquire from this transaction will be the market value of the goodwill at the time of the transfer. The goodwill will not retain the pre- CGT status when it's transferred to the unit trust. Any units that you acquire in exchange of the goodwill will be considered as post-CGT asset for capital gain tax purposes under Part 3-1 and 3-3 of the ITAA 1997.

Question 2

Detailed reasoning

Section 152-5 of the ITAA 1997 sets out some basic conditions for Small business relief, If the basic conditions are satisfied, an entity may be able to reduce its capital gains using the small business concessions in this division.

The 3 major basic conditions are:

· the entity must be a small business entity or a partner in a partnership that is a small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000;

· the CGT asset must be an active asset;

· if the asset is a share or interest in a trust, there must be a CGT concession stakeholder just before the CGT event, and the entity claiming the concession must be a CGT concession stakeholder in the company or trust or CGT concession stakeholders in the company or trust must have a small business participation percentage in the entity of at least 90%,

In your case your goodwill is a pre-CGT asset and any capital gain or loss you made from the transfer of the goodwill is disregarded under subsection 104-60(6) of the ITAA 1997.

Accordingly, small business relief under Division 152 of the ITAA 1997 will not apply to your goodwill when you transfer it to the unit trust. Accordingly, roll over relief under Subdivision 152-E also will not apply.

Small business relief under Division 152 of the ITAA 1997 may apply when a CGT event happen to your units in the unit trust.

You are advised to request further advice regarding the small business relief to the units in the unit trust at the time of a CGT event happens to your units.