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Edited version of your private ruling
Authorisation Number: 1012442228179
Ruling
Subject: Capital gains tax
Question
Will the entire purchase price be included in your capital gains tax (CGT) calculation for the relevant financial year?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You sold your business in the relevant financial year.
The purchase price of X consisted entirely of goodwill. The purchase price was calculated with reference to the turnover of the business for the last few years.
X was payable on completion of the contract and you have received this amount.
The remaining amount is to be paid to you in the subsequent financial year as per the contract.
This amount is subject to adjustment and will depend on the number of clients the purchaser bills.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 104-10(1),
Income Tax Assessment Act 1997 subsection 104-10(3), and
Income Tax Assessment Act 1997 subsection 116-20(1).
Reasons for decision
Under subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) capital gains tax (CGT) event A1 happens if an entity disposes of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(3) of the ITAA 1997, the time of an event is when the entity enters into the contract for the disposal.
As per subsection 116-20(1) of the ITAA 1997 the capital proceeds from a CGT event are the total of the money the entity has received, or are entitled to receive, in respect of the event happening. An entity will make a capital gain if the capital proceeds from the disposal are more than the assets cost base. An entity will make a capital loss if those capital proceeds are less than the asset's reduced cost base.
Application to your circumstances
In this case, you entered into a contract to sell the goodwill of your business in the relevant financial year. The entire purchase price was for the goodwill of the business. CGT event A1 occurred in the relevant financial year when you entered into a contract to dispose of the goodwill.
As per the contract, you were entitled to receive part of the payment in the relevant financial year and the remainder in the subsequent financial year. The remainder of the payment is subject to adjustment and will depend on the number of clients the purchaser invoices. The capital proceeds from a CGT event are the total of the money you have received or are entitled to receive. Therefore, as you have received X and are entitled to receive a further X under the contract of sale, the total of these amounts should be used to calculate your capital gain/loss from the CGT event in the relevant financial year.