Edited version of your written advice

Authorisation Number: 1012816190415

Ruling

Subject: Capital gains tax

Question 1

Is the date of acquisition of the relevant shares for the purposes of Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) the 21 February 1983?

Answer

Yes.

Question 2

Will any capital gain realised on the disposal of the relevant shares be disregarded under section 104-10(5)(a) of the ITAA 1997?

Answer

Yes.

Question 3

At the time of any disposal of the relevant shares can the value of the company's goodwill be determined using the residual value method as the market value of the Group as a whole at that time; less the sum of the net identifiable asset values of each of the members of the Group at that time?

Answer

Yes.

Question 4

Did the company acquire its goodwill prior to 20 September 1985?

Answer

Yes.

Question 5

Will the company's goodwill be taken into account in determining the net value of the company as defined in section 995-1 of the ITAA 1997, as affected by subsection 104-230(8) of the ITAA 1997?

Answer

Yes.

Question 6

Will capital gains tax (CGT) event K6 apply in relation to the disposal of the relevant shares in ABN provided that the value of ABN's goodwill is more than 25% of the net value of ABN?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• the application for private ruling, and

• the documents provided in response to the requests for further information.

You purchased shares in a company prior to 1985.

You intend to sell the shares to an unrelated entity.

The business carried on by the company has expanded significantly since 1985.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 subsection 104-230(1)

Income Tax Assessment Act 1997 subsection 104-230(2)

Income Tax Assessment Act 1997 Division 149

Reasons for decision

Question 1

Taxation Determination TD 2000/10 considers the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares. It states that:

If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporations Law ('C Law') in that:

a) the original shares are not cancelled or redeemed in terms of the C Law;

b) there is no change in the total amount allocated to the share capital account of the company; and

c) the proportion of equity owned by each shareholder in the share capital account is maintained;

no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership. The issue of roll-over relief under section 124-240 of the Income Tax Assessment Act 1997 ('the 1997 Act') does not arise because no CGT event happens to the shares.

It follows that the converted shares will have the same date of acquisition as the original shares to which they relate. For example, if the original shares were acquired before 20 September 1985 (pre-CGT shares), the converted shares have the same acquisition date.

Application to your circumstances

In this case, the share subdivision did not constitute a CGT event.

Question 2

CGT event A1 in subsection 104-10(1) happens if a CGT asset is disposed of. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.

Application to your circumstances

As discussed in question 1, the relevant shares were acquired prior to 20 September 1985. When the relevant shares are sold, CGT event A1 will occur. Any capital gain made on the sale of the relevant shares can be disregarded.

Question 3

Taxation Ruling TR 2005/17 explains how goodwill is identified and its tax cost setting amount calculated and set under the cost setting provisions of Part 3-90 of the ITAA 1997.

TR 2005/17 states that:

5. Consistent with the view expressed by the High Court in Murry v. Federal Commissioner of Taxation 193 CLR 605; 98 ATC 4585; (1998) 39 ATR 129 ( Murry's case ) and followed in Taxation Ruling TR 1999/16, Income tax: capital gains: goodwill of a business, goodwill can be valued for the purposes of Part 3-90 of the ITAA 1997 using a residual value approach except in situations where the law has recognised that a residual value approach will not identify goodwill, as legally defined.

6. Two exceptions identified in Murry's case were where goodwill is being worked out for a non-profitable business or where a business had less than industry average profitability. The Court noted that in these situations, goodwill may be present even though an excess of the value of the business over the value of the net assets will not be revealed by the accounting residual value calculation. See Murry at 193 CLR at 624-625. For entities in these situations, the amount of goodwill, if any, will need to be determined by a direct examination of their particular circumstances.

TR 2005/17 also provides the following information in relation to the residual value approach:

7. The residual value approach to identifying and valuing goodwill when a subsidiary member joins a consolidated group entails working out the sum of the differences between:

a) the market value of each business of the entity; and

b) the market value of the net identifiable assets of each business of the entity.

In identifying assets and liabilities for the purpose of working out the value of the net identifiable assets of each business of the entity, both the commercial notion of assets and liabilities and the commercial basis of working out their value are used. This is because assets in consolidation cost setting are the assets that would be identified for commercial or business purposes in an acquisition.

Application to your circumstances

We accept that the method outlined above can be utilised when determining the value of the company's goodwill.

Question 4

Taxation Ruling TR 1999/16 explains how the provisions of Part 3-1 of the ITAA 1997 apply to a taxpayer who conducts a business with goodwill and who makes a capital gain or loss if a CGT event happens to goodwill of a business.

Goodwill of a business is a single CGT asset for the purposes of Part 3-1 of the ITAA 1997. The whole of the goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset (subject to Division 149 of the ITAA 1997) provided the same business continues to be carried on. This is so even though the sources of the goodwill of a business may vary during the life of the business or there are fluctuations in goodwill during the life of the business.

Paragraph 18 of TR 1999/6 explains that a business or the sources of its goodwill may change so much it can no longer be said to be the same business as that previously conducted. In other words the old business ceases and a new business commences. If this happens the goodwill of the original business ceases to exist and a new CGT asset (being the goodwill of the new business) is acquired.

Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case.

Paragraph 21 of TR 1999/6 states that:

The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. A business owner may expand or contract activities, or change the way in which a business is carried on, without ceasing to carry on the same business provided the business retains its essential nature or character. Organic growth, expansion or diversification of a business by, for example:

a) adopting new compatible operations;

b) servicing different clients; or

c) offering improved products or services

does not of itself cause it to be a new business provided the business retains its essential nature or character .

Application to your circumstances

Based on the facts at hand, the goodwill of the company represents an organic expansion of its original pre-CGT business such that it retains its pre-CGT status for the purposes of the 75% CGT event K6 calculation under subsection 104-230(2) of the ITAA 1997.

Question 5

Taxation Ruling TR 2004/18 considers the application of CGT event K6 in section 104-230 of the ITAA 1997. CGT event K6 can result in capital gains (but not capital losses) if certain CGT events happen to pre-CGT shares in a private company where the market value of its post CGT property is at least 75% of its net value (the 75% test).

Paragraph 53 of TR 2004/18 explains that the term property covers most CGT assets, including pre-CGT assets. It can include such things as land and buildings, shares in a company, units in a unit trust, debts owed to the company, interest in assets and goodwill.

Application to your circumstances

The term property, for the purposes of the 75% test, includes goodwill. Therefore, the company's goodwill can be taken into account in determining the net value of the company as affected by subsection 104-230(8) of the ITAA 1997.

Question 6

Subsection 104-230(1) of the ITAA 1997 states that CGT event K6 will happen if:

a) you own shares in a company that you acquired before 20 September 1985; and

b) CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares or interest; and

c)  there is no roll-over for the other CGT event; and

d)  the applicable requirement in subsection (2) is satisfied.

Subsection 104-230(2) of the ITAA 1997 states that just before the other event happened:

a) the market value of property of the company or trust (that is not its trading stock) that was acquired on or after 20 September 1985; or

b) the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985;

must be at least 75% of the net value of the company or trust.

The time of CGT event K6 is when the other event happens.

Note that Division 149 of the ITAA 1997 will not apply for the purposes of determining whether ABN's property was acquired before or after 20 September 1985.

Application to your circumstances

In this case, the relevant shares were acquired prior to 20 September 1985. When you dispose of the shares, CGT event A1 will happen. As stated above, we consider the goodwill held by the company to be a pre CGT asset. Therefore, provided the value of the company's goodwill is more than 25% of the net value, CGT event K6 will not occur when you dispose of your shares.