Edited version of private ruling

Authorisation Number: 1011850100107

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Ruling

Subject: Active asset test - goodwill

Question 1

Will the goodwill in relation to your business satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) if you sell your business in the year ended 30 June 2012?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

Relevant facts and circumstances

You began operating your business greater than 15 years ago.

Recently, you suffered a disability and ceased operating out of your business premises.

Since becoming temporarily disabled you have received payments under a disability insurance policy. The policy protected you against loss of business income and enabled you to pay the ongoing business expenses.

You have recently received a medical clearance and intend to resume your normal business activities prior to disposing of the business (including goodwill) in the year ended 30 June 2012. You intend to continue in the new business as an employee.

Relevant legislative provisions

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

Income Tax Assessment Act 1997, section 152-35

Income Tax Assessment Act 1997, section 152-40

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, go to our website www.ato.gov.au 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.

Reasons for decision

Note that all subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Meaning of active asset under section 152-40

Section 152-40 provides, in part that a capital gains tax (CGT) intangible asset is an active asset at a time if, at that time, you own it and it is inherently connected with a business that is carried on by you.

Paragraph 108-5(2)(b) confirms that goodwill is considered a CGT asset, and Note 3 of section 152-40 states that an 'example of an asset that is inherently connected with a business is goodwill…'

Active asset test under section 152-35

Where a CGT asset has been owned by you for more than 15 years, section 152-35 provides, in part that it satisfies the active asset test if it was 'an active asset of yours for a total of at least 7½ years commencing from when you acquired it and ending at the time when you disposed of it.

Application to your circumstance

For the purposes of section 152-40 we accept that the goodwill attached to your business would have satisfied the meaning of active asset for the whole of the period during which your business exists.

You state that you have been operating your business for more than 15 years and will be disposing of it in the year ended 30 June 2012. As your goodwill will have been in existence for a total of more than 15 years it is the 7½ year requirement that must be satisfied.

Regardless of whether you were considered to be carrying on a business from the time when you became disabled it remains that the 7½ year requirement under section 152-35 will have been already been satisfied in an earlier year.

Therefore, for the purposes of the basic conditions for CGT small business relief the goodwill passes the active asset test.