Edited version of your private ruling

Authorisation Number: 1012596605506

Ruling

Subject: CGT small business concessions

Question

Does the company satisfy the requirements of paragraph 152-110(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) having regard to the licence agreement?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The company commenced a business more than 15 years ago

The company has 'internally' generated goodwill as it developed a recurring customer base.

After a period of time, the company entered into a licence agreement with a related entity.

The licence agreement provided that the licensee would have the exclusive use of the business name, office equipment, vehicle and intellectual property during the term of the agreement but stipulated that no transfer of ownership, including that of the goodwill, would be transferred under the agreement.

All licence fees were paid in accordance with the licence agreement.

At the expiry of the licence agreement the company resumed operating the business.

The company may sell the business, including goodwill, to an unrelated party at some point in the future.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Paragraph 152-110(1)(b)

Reasons for decision

The eligibility requirements for the small business 15 year exemption are contained in subdivision 152-B of the ITAA 1997. If you qualify for the small business 15 year exemption, you can entirely disregard the capital gain and do not need to apply any other concessions.

Paragraph 152-110(1)(b) of the ITAA 1997 requires that the entity claiming the exemption continuously owned the relevant capital gains tax (CGT) asset for the 15 year period ending just before the CGT event.

Goodwill

Goodwill is an asset for CGT purposes as there is a specific reference to it in the definition of a CGT asset at paragraph 108-5(2)(b) of the ITAA 1997.

The Commissioner's views on the meaning of goodwill are set out in Taxation Ruling TR 1999/16, which reflects the decision of the High Court in Federal Commissioner of Taxation v Murry 89 ATC 4585.

TR 1999/16 defines the goodwill of a business as follows:

Goodwill is not a series of CGT assets that inhere in other identifiable assets of a business. Goodwill, being a composite thing, attaches to the whole business. It does not attach separately to each identifiable asset of the business.

Effect of licencing agreement

The Tasmanian Supreme Court decision in Roussos v The Commissioner of Stamp Duties [1992] TASSC 97 (Roussos case) would seem to stand for the proposition that where the business assets necessary to conduct the business are licensed, the goodwill attaching to the business is also licensed with the effect that it is not sold or conveyed, it remains property of the licensor. In Roussos case it was accepted that an agreement to licence another to operate and conduct the Business' did not involve any dutiable sale or disposition of property. After briefly stating the facts Cox J in the Supreme Court of Tasmania said:

It is quite obvious that no property in the plant and equipment passes. Roussos are obliged to keep and use it and replace any which becomes defective (fair wear and tear excepted) by equipment of comparable age and condition. The option to purchase includes the option to purchase plant and equipment at its then written down value, a clear indication that the parties regard the plant and equipment as remaining the property of Kamari. The same comment can be made of the goodwill for that likewise is subject to the option to purchase. The mere fact that use and periodic replacement of the plant and equipment by Roussos may result in an inability of return to Kamari, the subject matter of the Business Licence Agreement in identical form at its termination , does not, in my view, demonstrate a disposition of the plant and equipment. Nor does the fact that the goodwill may as a result of the manner in which Roussos conduct the business increase or decrease in value by the time the licence is terminated.

…The goodwill does not pass to Roussos under the agreement, merely the right to avail themselves temporarily of the benefits attaching to it.

In this case the effect of the licence agreement is to allow the licensee the benefit of the goodwill built up by the licensor in conducting their business but it does not become the goodwill of the licensee - this is not possible as the goodwill cannot be separated from the business which generated it. Further, this would be contrary to the licence agreement. Under the licence agreement, the licensee can, for the duration of the agreement, avail themselves of the benefits of the licensor's goodwill.

Thus, as in Roussos case, it can be accepted that the company did not dispose of its goodwill as a result of entering into the licence agreement. Taking into account the period of time the licence agreement was in effect and the fact that the company has since recommenced operating the business, we accept that the original goodwill of the company has not disappeared and as such was resurrected upon the recommencement of the business.

Accordingly, the continuous ownership period of the company's goodwill has not been affected by the licencing agreement and the requirement contained in paragraph 152-110(1)(b) of the ITAA 1997 will be met.