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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012893627708

Date of advice: 27 October 2015

Ruling

Subject: CGT- active asset test and goodwill

Questions and answers

Is goodwill an active asset as defined in section 152-40 of the Income Tax Assessment Act 1997 for the purpose of the small business Capital Gains Tax concessions?

Yes.

This ruling applies for the following period

1 July 2015 to 30 June 2016

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 Trust has owned and operated the business for more than 15 years.

The business is regulated by and must comply with fair trading laws.

Each year the local council issues the Trust with a notice of approval to operate the business.

The business premises houses clients' property not owned by the Trust.

The owners of this property are long term clients.

The Trust employs a full time manager and that person is on call 24 hours a day, seven days a week.

The manager's duties are:

    • Weekly cleaning or more frequently if required.

    • Maintaining the front office.

    • Mowing and maintaining the grounds.

    • Assist clients.

    • Weekly collecting of waste and taking it to the waste management centre (the Trust pays the tip fees).

The Trust is in the process of entering into a contract to sell the business.

The purchaser is an unrelated third party.

The assets that would be sold include:

    • Land (including buildings, but not property owned by the clients)

    • Permits

    • Plant and equipment

    • Records

    • Intellectual Property Rights

    • Goodwill

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Paragraph 152-40(1)(b)

Reasons for decision

The active asset test is contained in section 152-35 of the Income Tax Assessment Act (ITAA 1997). 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.

The test period is from when the asset is acquired until the Capital Gains Tax (CGT) event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Section 152-40 of the ITAA 1997 states a CGT asset is an active asset at a time if, at that time:

    a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

    i. you; or

    ii. your affiliate; or

    iii. another entity that is connected with you; or

    b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Application to your circumstances

When the Trust sells the business, the Trust will have owned the business for more than 15 years and it will have been an active asset of the Trust for a total of at least 7.5 years during the test period. Therefore the active asset test under section 152-35 of the ITAA 1997 has been satisfied.

When the Trust sells the business, the Trust intends to dispose of the goodwill of the business. As the goodwill is inherently connected with the business the active asset test under paragraph 152-40(1)(b) will be satisfied.

Therefore, based on the facts provided, the goodwill will be an active asset as defined in section 152-40 of the ITAA 1997 for the purpose of the small business CGT concessions.


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