Edited version of your written advice

Authorisation Number: 1012675101390

Ruling

Subject: Goodwill

Question 1

Does the goodwill of the acquired business coalesce with the goodwill of the original business?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, is the goodwill of the acquired business taken to have been acquired for the purposes of section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997) at the date the goodwill of the original business was acquired in the 1980's?

Answer

Yes.

Question 3

Will the coalesced goodwill be considered to be an active asset for the purposes of the small business capital gains tax (CGT) concessions?

Answer

Yes.

Question 4

Does the establishment of a business another location result in the accretion to the existing goodwill of the business?

Answer

Yes.

Question 5

If the answer to Question 4 is yes, is the new establishment taken to have been acquired for the purposes of section 152-35 of the ITAA 1997 at the date the goodwill of the original business was acquired in the 1980's?

Answer

Yes.

Question 6

Is the goodwill of the new establishment owned by the company?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The company purchased a business with operations in two locations in the 1980's.

During the late 19XX's/early 20XX's, a business was purchased in a new location (Location 3).

The company maintained central management and control, sales and financial records were amalgamated and no divisional reporting existed.

The business was carried on with the support of a related service trust until the early 20XX's.

In the early 20XX's, a license agreement was established between the company and the related services trust that allowed the trust to operate the business. However, ownership of the goodwill remained with the company.

The license agreement did not amount to a disposal of the business by the company.

In the 20XX's a new owner was admitted to the business, taking the number of owners X.

In the 20XX's, a business in a new location was established.

Another owner was admitted.

An annual licence fee has been paid to the company since the inception of the agreement.

All new owners have paid for goodwill via shares in the company and not for units in the unit trust.

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 1997Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision

Summary

The goodwill from the acquired business (X) and the established business (Y) coalesces with the goodwill from the purchase of the original businesses. The acquisition date of the total goodwill is the date the business commenced in the late 1980's.

The goodwill is an active asset because it is an intangible asset that is inherently connected with that business.

Detailed reasoning

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.

Location X - acquired business

Paragraph 63 of TR 1999/16 states:

If a taxpayer who founded or purchased a business adds to that business an additional business purchased as a going concern, it is a question of fact dependent on the circumstances of each particular case whether the additional business is subsumed into and forms part of the existing business or whether the two businesses remain as separate businesses. If two post-CGT businesses are subsumed in this way, the goodwill of the businesses coalesce and the cost base of the goodwill of the business purchased as a going concern becomes part of the cost base of the goodwill of the entire business.

In your case, the business in the new location was purchased during the 19XX's/early 20XX's. The goodwill of the new business location coalesces with the existing goodwill of the original businesses. The acquisition date of the new business goodwill is taken to be the same as the goodwill from the purchase of the original businesses.

Location Y - newly established business

Paragraph 60 of TR 1999/16 states:

If a new business operation or activity introduced by a taxpayer is an expansion of an existing business (whether it commenced before or after 20 September 1985), any goodwill built up in conducting the expanded business is merely an expansion of the existing goodwill of the business.

The newly established business was set up in location Y during the mid 20XX's. Location Y is an expansion of the existing business. Therefore the goodwill associated with the newly established business is coalesced with the existing goodwill of the business. The start date of the newly established business goodwill is taken to be the same as the goodwill from the original businesses purchase.

Active asset

Under paragraph 152-40(1)(b) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is an intangible asset such as goodwill that is inherently connected with a business that a taxpayer carries on. As discussed above, the active asset test is satisfied if:

• you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or

• you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the test period.

In this case, you purchased the original business in the late 1980's. You have owned the business for more than 15 years and the goodwill has been active for the entire period of ownership. As the goodwill was inherently connected with a business you carried on, it will satisfy the active asset test.