Edited version of your written advice

Authorisation Number: 1012899286105

Date of advice: 22 October 2015

Ruling

Subject: Goodwill attached to business

Issue 1

Question 1

Is the goodwill attached to the business carried on by the Applicant a pre-CGT asset of the Applicant?

Answer

Yes

Question 2

If the answer to the above question is yes, will the Commissioner confirm that he will exercise his discretion pursuant to section 149-30(2) of the Income Tax Assessment Act 1997 ('ITAA 1997') so that the goodwill remains a pre-CGT asset of the Applicant notwithstanding that the Applicant is owned by three discretionary trusts?

Answer

Yes

Issue 2

Question 1

Will the Commissioner confirm that he will not apply Part IVA of the Income Tax Assessment Act 1936 ('ITAA 1936') to the Applicant's sale of its business to a wholly-owned subsidiary of Company A (a related party of the Applicant)?

Answer

Yes

This ruling applies for the following periods:

From 1 July 2015 to the day the Applicant disposes its business.

The scheme commences on:

Before 20 September 1985

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 Applicant is a unit trust and was established by deed in the early 19X0s. The Applicant commenced carrying on its business before 20 September 1985.

Immediately before 20 September 1985, the Applicant's unitholders were two family discretionary trusts (Trust A and Trust B, controlled by Individual A and Individual B for their respective families).

Currently, the Applicant is owned by three family discretionary trusts (Trust A, Trust B and Trust C). Trust C is controlled by Individual C (who is the childof Individual A) for Individual C's family.

Prior to 20 September 1985, Individual A and Individual B have been directors of the Applicant's trustee company. Currently both their children (Individual C and Individual D) are also directors.

The trustees of Trust A and Trust B family trusts do not have records of distributions of income and capital from the relevant discretionary trusts for years prior to the 2000 income year.

The only beneficiaries who were entitled to distributions of income or capital under the relevant trust deeds were members of the relevant families or companies or trusts in which those family members had an interest.

The Proposed Transaction

The Applicant is proposing to sell all assets of the business including goodwill to a wholly owned subsidiary company of Company A for cash at full market value. The Applicant will not sell the land on which the business is carried on; rather it will lease the land to the purchaser, so the business continues to be conducted from the same premises.

The directors of Company A are Individual A, Individual B, Individual C and Individual D.

The Applicant's business operations

Pre 20 September 1985

The Applicant carried on the business, and derived the majority of its revenue from route services and charter services. The primary customers of the charter services were schools, tourists, seniors, psychiatric care providers and the general public. These services were provided by a fleet of buses and coaches that progressively increased in number. The business was focused on the provision of school and public transport route services.

The Applicant's route services were contracted with the Department of Education (DoE), and the State Transport Authority (STA).

The assets of the business included buses, coaches, customer contracts and all relevant tangible and intangible assets necessary for the operation of the business.

Post 20 September 1985

The Applicant's business expanded its services to cater for children attending schools in nearby suburbs.

The Applicant's route services continue to be contracted with STA, which also manages the school contracts on behalf of the DoE. The Applicant has continued to operate school and public transport route services, with additions over time.

The Applicant derived relatively modest revenue from leasing surplus buses and coaches to related parties. Further, the Applicant derived immaterial revenue (representing 1% of the total turnover of the business) from selling advertising space on its buses and coaches but this activity has since ceased.

The branding of the business (and logo) has remained substantially the same over time, but modernised slightly. The operating assets of the business have essentially remained the same with new buses and coaches being acquired to improve the size and quality of the fleet.

Individual A and Individual B have at all times controlled the Applicant and actively carried on the business from the operational, strategy and governance level.

The Applicant's business has always been carried out in the same suburb.

Relevant legislative provisions

Income Tax Assessment Act 1936

Income Tax Assessment Act 1936 former section 160ZZS

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

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

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 subsection 149-30(2).

Reasons for decision

Issue 1 Question 1

Summary

The essential nature and character of the business has remained the same since the business started operating in the early 19X0s. Therefore, the goodwill attached to the Applicant's business constitutes a pre-CGT asset.

Detailed reasoning

The meaning of 'goodwill'

Goodwill is an asset for CGT purposes as there is a specific reference to it in the definition of a CGT asset under paragraph 108-5(2)(b) of the Income Tax Assessment Act 1997 ('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 ('Murry').

Paragraph 12 of TR 1999/16 states that:

'goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it…it is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated.'

In Murry's case the High Court of Australia expressed the view that goodwill has three aspects - property, sources and value - which combine to give the legal concept of goodwill. What unites the aspects is the conduct of a business to which goodwill is attached.

Paragraph 25 of TR 1999/16 states that the whole of the goodwill of a business is either pre-CGT goodwill or post-CGT goodwill. The goodwill of a particular business cannot be characterised as partly pre-CGT goodwill and partly post-CGT goodwill.

The consequence of the goodwill of a business being one CGT asset is that the whole of the goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset provided the same business continues to be carried on (paragraph 17 of TR 1999/16). Paragraph 17 of TR 1999/16 states that this is so even though:

(a) the sources of the goodwill of a business may vary during the life of the business; or

(b) there are fluctuations in goodwill during the life of the business.

The Applicant commenced carrying on its business in the early 19X0s. Therefore, in order for the goodwill attached to the Applicant's business to be a pre-CGT asset, it must be determined whether the same business has continued to be carried on by the Applicant.

Essential nature or character of the business

According to paragraph 21 of TR 1999/16, the business would remain the same business as long as the essential nature or character of the business is not changed. Paragraph 21 further provides that:

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.

Paragraph 91 of TR 1999/16 provides the following important factors to consider when determining whether the same business is being carried on:

• nature or character of the business

• its location and size

• the extent of changes in the assets and resources of the business

• the activities of the business

• the way in which the business is structured, carried on, managed and controlled.

The following features of the business show that the essential nature or character of the business has remained the same since 20 September 1985:

• the business has always been providing route and charter services.

• the route and charter services provided by the business essentially have the same nature and character as offered before 20 September 1985.

• the Applicant continues to be contracted with STA in relation to route services. STA also manages the school contracts on behalf of the DoE.

• the applicant continues to operate school and public transport route services in the same suburbs, although the specific routes have varied from time to time. Further, the applicant has expanded its services to cater for children attending schools in nearby suburbs.

• the business has always been carried on by the Applicant. The Applicant has at all times been controlled by Individual A and Individual B who have been actively involved in carrying on the business from an operational, strategy and governance perspective.

• the business has always been based in and carried on from the same location, although the properties on which the business has been carried on have changed over the years due to the growth of the business and to accommodate the larger fleet of buses and coaches being used in the business.

• the operating assets of the business, including buses, coaches, customer contracts etc., have essentially remained the same, aside from new buses and coaches being acquired to improve the size and quality of the fleet.

• the same processes and techniques have been used to carry on the business.

• the branding of the business and logo have remained substantially the same over time, but modernised slightly.

After consideration of all the facts, the essential nature and character of the business appears to have remained the same over time. The changes made to the business since it began operating in the early 19X0s are considered to be as a result of the organic growth and expansion of the business and do not alter the underlying business activities. Therefore, the goodwill attached to the Applicant's business constitutes a pre-CGT asset.

Issue 1 Question 2

Summary

It is reasonable to assume that for all practical purposes the majority underlying interests in the goodwill of the Applicant has not changed. Therefore the Commissioner will exercise his discretion under subsection 149-30(2) of the ITAA 1997 and so the goodwill will remain a pre-CGT asset of the Applicant.

Detailed reasoning

The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset. Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

• the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and

• the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

Subsection 149-15(2) of ITAA 1997 provides that an 'underlying interest' means a beneficial interest that an ultimate owner may have in the asset or any ordinary income derived from the asset. An ultimate owner is defined to include an individual under subsection 149-15(3) of the ITAA 1997.

An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if they would receive for their own benefit any of the capital of the other entity if:

• the other entity were to distribute any of its capital; and

• the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner

Taxation Ruling No IT 2340 ('IT 2340') discusses the application of former section 160ZZS of the ITAA 1936, which is the predecessor provision to Division 149 of the ITAA 1997, in the context of discretionary trusts. Paragraph 2 of IT 2340 supports a 'look through' approach in relation to chains of companies, partnerships and trusts in order to determine whether there has been a change in the effective interests of natural persons in the assets.

Generally, a beneficiary of a discretionary trust does not have any legal or equitable interest in the assets or any income derived from the assets of the trust as their entitlement is subject to the trustee exercising their discretion. However, paragraph 6 of IT 2340 provides that:

Where a trustee continues to administer a trust for the benefit of members of a particular family…it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

Prior to 20 September 1985, the Applicant was established with 2 unit holders, being the Trust A and Trust B discretionary trusts. Therefore it needs to be determined whether the majority underlying beneficial interest in the Applicant's business has been maintained in relation to the discretionary trusts.

Paragraph 5 of IT 2340 indicates that:

…in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

The families and the trustees of Trust A and Trust B family trusts which have had (in)direct interests in the Applicant cannot supply records of distributions of income and capital from the relevant discretionary trusts for the 1985 income year.

However, it is accepted that according to the relevant trust deeds, only members of Individual A or Individual B's families (and related entities) were beneficiaries of the discretionary trusts and received distributions of income and capital from the discretionary trusts.

After 20 September 1985, Trust C acquired units in the Applicant, which is the family of IndividualA's child, Individual C. It can be argued that the beneficiaries of Trust C would fall within Individual A's family.

Although the Applicant is now owned by three discretionary trusts, the ultimate beneficial owners continue to be members of the Individual A and Individual B's family groups. Paragraph 7 of IT 2340 states that when the trust is continued to be administered for members of a particular family, the Commissioner would 'find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed'.

Therefore the Commissioner will exercise his discretion under subsection 149-30(2) of the ITAA 1997 and so the goodwill will remain a pre-CGT asset of the Applicant.

Issue 2 Question 1

In order for Part IVA to apply, the following requirements must be satisfied:

• there is a scheme to which Part IVA applies;

• a tax benefit was or would (but for subsection 177F(1)) have been obtained by a taxpayer;

• the identified tax benefit was or would have been obtained in connection with the identified scheme; and

• the person, or one of the persons, who entered into or carried out the identified scheme (or any part of the scheme) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit.

In light of the commercial objectives of the scheme, the Commissioner does not consider that a tax benefit is obtained in connection with the scheme.