Edited version of your written advice

Authorisation Number: 1051432563048

Date of advice: 24 September 2018

Ruling

Subject: Pre-CGT assets

Question 1

Is the goodwill attached to the services business carried on by the Business Company taken to have been acquired by the Business Company before 20 September 1985?

Answer

Yes

Question 2

If the answer to question 1 is ‘yes’, will the Commissioner confirm that he will exercise his discretion pursuant to subsection 149-30(2) of the Income Assessment Act 1997 (ITAA 1997) so that the goodwill of the business and other business assets remain a pre-CGT asset of the Business Company?

Answer

Yes

Question 3

Will the Commissioner confirm that he will exercise his discretion pursuant to subsection 149-30(2) of the ITAA 1997 so that certain intellectual property (IP) held by the Holding Company remains a pre-CGT asset of the Holding Company?

Answer

Yes

This ruling applies for the following period

1 July 20XX to 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

1. All legislative references in this document are to the ITAA 1997 unless otherwise specified.

2. The taxpayer, personally or through their controlled entities, has operated a services business since prior to 20 September 1985.

The Family Trust

3. The Family Trust was established prior to 20 September 1985. Around the same time, the Trustee Company was incorporated to act as the trustee of the Family Trust.

4. The Trust has always been administered for the benefit of the family.

5. The beneficiaries of the Trust include the ‘general beneficiaries’.

6. The term ‘general beneficiaries’ is very widely defined in the Trust deed and includes:

a. the primary beneficiary or the primary beneficiaries (as the case may be)

b. the parents, brothers, sisters, spouses, children, cousins, aunts, uncles, nephews and nieces of the primary beneficiaries and the spouses and children of such brothers and sisters and the spouses and children of children of the primary beneficiaries

c. … etc.

7. The ‘primary beneficiaries’ are all the children born or to be born of the taxpayer.

8. Additional members of the class of general beneficiaries include the taxpayer and their spouse.

9. The Family Trust has made distributions to the taxpayer, their immediate family and companies and trusts in which the taxpayer and their immediate family have a relevant interest.

10. No amendments have been made to the Trust Deed since 19 September 1985 to:

(a) alter the identity or rights of the beneficiaries of the Trust; or

(b) vary the beneficiaries or the trustees discretionary power to distribute income and capital.

The Trustee Company

11. The Trustee Company was incorporated prior to 20 September 1985 and the sole director and shareholder was the taxpayer.

The Business Company

12. The Business Company was incorporated after 20 September 1985 and the taxpayer was appointed as a director at that time.

13. The current shareholders of the Business Company are as follows:

Ordinary shares

● The Trustee Company ATF the Family Trust

Other shares

● There are small shareholdings held by a number of other individuals.

14. All of the shares issued (ordinary and other shares) in the Business Company have had the same rights and entitlements attached.

15. None of the other shareholders fall within the class of beneficiaries of the Family Trust, and they are not related to the taxpayer.

16. The previous shareholders of the Business Company were as follows:

Ordinary shares

● The Trustee Company ATF the Family Trust

Other shares

● There were small shareholdings held by a number of other individuals.

17. None of the other shareholders fall within the class of beneficiaries of the Family Trust, and they are not related to the taxpayer.

18. There has been no other form of debt or equity interests on issue in the Business Company.

19. The dividends paid by the Business Company since incorporation were paid proportionately on all of the shares.

The Holding Company

20. The Holding Company was incorporated after 20 September 1985 and the taxpayer was appointed as a director at incorporation.

21. The current shareholder of the Holding Company is the Trustee Company ATF the Family Trust.

22. There were previously small shareholdings held by a number of other individuals.

23. All of the shares issued in the Holding Company are ordinary shares, are of the same class and the rights attached to each share are the same.

24. There has been no other form of debt or equity interests on issue in the Holding Company.

The Business

25. Prior to 20 September 1985, the taxpayer commenced carrying on a services business through the Family Trust.

26. The taxpayer has been a well-known figure in the services industry since that time and thus the business name is, was and at all relevant times has been critical to the success of the business.

Franchise IP

27. The Family Trust also held the right to franchise the business, including the ability to

provide potential franchisees with information, advice and instruction as to techniques and business methods relevant to run a successful services business.

Rollover of Business and Franchise IP

28. After 20 September 1985, as part of an internal restructure, the Family Trust entered into two separate agreements to transfer:

(a) The assets of the business, including goodwill to the Business Company under which the Business Company assumed certain liabilities referrable to the business assets; and

(b) The Franchise IP to the Holding Company.

29. As part of the transfers;

(a) The Business Company issued ordinary shares to the Family Trust as consideration for the acquisition of the Business, in particular the business assets. This was the only consideration for the business transfer.

(b) The Holding Company issued ordinary shares to the Family Trust as consideration for the acquisition of the Franchise IP. This was the only consideration for the IP transfer.

Transfers undertaken pursuant to capital gains tax rollover relief

30. The transfers were undertaken pursuant to the capital gains tax (CGT) rollover relief provided for in subsection 160ZZN(4) of the Income Tax Assessment Act 1936 (ITAA 1936), which was the predecessor provision to the CGT rollover relief now provided for in Subdivision 122-A.

31. The only consideration provided by the Business Company and the Holding Company in relation to the abovementioned acquisitions, were ordinary shares equal to the value of the assets acquired under the rollovers. That is, the issued shares reflected the market value of the respective assets transferred to the Business Company and the Holding Company.

32. Accordingly, the transfer of the business and the Franchise IP preserved the pre-CGT status of the Business Assets and the Franchise IP. Immediately after the transfers, the Business Company and the Holding Company were wholly owned by the Family Trust.

Derivation of revenue

33. Throughout the relevant period, the Business Company derived the majority of its revenue from carrying on the business acquired from the Family Trust, that is, the provision of services.

Member offices and customer base

34. During the relevant period, the Business Company set up or established new offices as a result of the organic growth of the business, all of which traded under the same business name, as one consolidated business.

35. During the relevant period, the Business Company also acquired some businesses providing services from unrelated third parties and rebranded those businesses.

36. As a result of the other offices, the customer base expanded.

Brand and Get-Up

37. The business has always operated under the Business Name or a slight variation thereof. The branding, marketing, correspondence, letterheads, signage has always had those words prominently displayed on them. The livery and colour scheme has also remained substantially the same.

38. The taxpayer has always operated and intended for the business to operate under the Business Name. This is, was and has been the intention since the services business began.

39. The fact that the Vendor IP is now held by the Holding Company has no bearing on the usage of the Business name in the business, or its pre-CGT status.

Business assets and sources

40. The primary assets which are the sources of the goodwill of the business include the following;

(a) The Business Name and brand;

(b) Reputation;

(c) Plant and equipment;

(d) Business premises; and

(e) Other relevant tangible and intangible assets.

41. Further, there have been changes in the technology used by the business to provide the services, however this has just been as a result of technological advances. This has not changed the essential nature and character of the business.

42. The taxpayer and the Business Company have always had a high-standing reputation in the market, and the name and reputation has been the attractive force that has drawn custom to the business.

Proposed Transactions

43. The taxpayer is contemplating the sale of the assets of the Business Company including the business (and goodwill) and the IP of the Holding Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision

Question 1

Summary

The goodwill attached to the business carried on by the Business Company was acquired before 20 September 1985.

Detailed reasoning

Goodwill, or an interest in it, is a CGT asset (paragraph 108-5(2)(b)).

CGT even A1 happens if you dispose of a CGT asset (subsection 104-10(1)).

Paragraph 104-10(5)(a) provides that a capital gain or capital loss you make from CGT event A1 is disregarded if you acquired the asset before 20 September 1985.

Taxation Ruling TR 1999/16 Income Tax: capital gains: goodwill of a business (TR 1999/16) deals with CGT issues relating to the goodwill of a business. TR 1999/16 reflects the decision of the High Court of Australia in FC of T v Murry 98 ATC 4585; (1998) 39 ATR 129 (the Murry case).

Meaning of goodwill

According to Taxation Ruling TR 1996/16 (TR 1999/16) goodwill has the legal definition which was established by the High Court in the Murry case. In this regard, paragraph 12 of TR 1999/16 states:

….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. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. 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.

When is the goodwill of a business acquired for CGT purposes?

Subsection 995-1(1) provides that you acquire the goodwill in the circumstances and at the time worked out under Division 109.

Section 109-10 sets out specific rules for the circumstances in which, and the time at which, you acquire a CGT asset otherwise than as a result of a CGT event happening. Item 1 of section 109-10 provides that if you create a CGT asset and you own it when the CGT asset is created, you acquire the CGT asset at the time the work that resulted in its creation started. If a taxpayer commences business and starts to create the goodwill, the goodwill of the business is acquired when the taxpayer starts work that results in the creation of the goodwill.

Same business test for CGT goodwill purposes

For the purposes of Part 3-1, goodwill acquired before 20 September 1985 remains a single pre-CGT asset (subject to the operation of Division 149, discussed below) if the same business continues to be carried on, ‘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 17 of TR 1999/16). Furthermore goodwill is one CGT asset that is separate and distinct from other assets such as plant, licenses and rights (paragraph 27 of TR 1999/16).

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. 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. It is not sufficient, however, if just a similar kind of business is carried on. Paragraph 91 of TR 1999/16 provides various factors to consider in determining whether the same business is being carried on. These include:

● the nature and 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 - whether the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, divisions or undertakings; and

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

A business or the sources of its goodwill may change to such an extent that it is no longer the same business, resulting in the goodwill of the old business ceasing when the goodwill of the new business is established. Paragraph 21 of TR 1999/16 provides guidance on the growth of a business:

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.

Paragraph 23 of TR 1999/16 further provides that where the types of customers a business attracts change as the business evolves over the years, this will not necessarily mean that the business is no longer the same business that was originally carried on.

However, in accordance with paragraph 24 of TR 1999/16, the same business is not carried on if:

(a) through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character, or

(b) there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale.

The CGT status of the goodwill of the business

Prior to 20 September 1985, the Family Trust commenced carrying on a services business. Therefore, pursuant to item 1 of section 109-10, the Family Trust is taken to have acquired the goodwill of the business from when it started its business and consequently on face value, this goodwill will be taken to be a pre-CGT asset.

It is noted that after 20 September 1985, the business assets of the Family Trust (including the goodwill) were transferred to the Business Company with these assets subject to CGT rollover relief under subsection 160ZZN(4) of the ITAA 1936 (which was the predecessor provision to Subdivision 122-A). In accordance with paragraph 160ZZN(2)(e) of the ITAA 1936, if an asset is acquired before 20 September 1985, the company, in this case the Business Company, is also taken to have acquired it before that day.

Since it commenced, there have been various changes to the nature of the business conducted and therefore it is necessary to consider whether the ‘same business’ is being carried on such that the goodwill of the business retains its pre-CGT status.

As previously noted, TR 1999/16 outlines a number of factors that are considered relevant when assessing whether the business carried on prior to 20 September 1985 is the same as that just prior to the divestment. In the current circumstances an analysis of these factors is as follows:

(a) The nature or character of the business

In the current circumstances, the nature of the business has, from a broad perspective, remained consistent as it core activities have continued to be carrying on a services business.

(b) Customers

While the business has grown, the types of customers have largely remained unchanged.

(c) location and size

The head office and flagship store of the business has remained in the same location.

The business has expanded through the establishment of new member offices. However, all of the new offices have traded under the same business name, as one consolidated business.

(d) The extent of changes in assets and resources of the business

Although the asset base has increased since the business commenced, generally, the nature of the assets held has remained consistent including business premises, plant and equipment and other intangible assets including the business name and brand and reputation.

(e) The activities of the business

Since it commenced, the core activities of the business have remained unchanged primarily focussing on the services provided.

There have also been some acquisitions of similar businesses as part of its expansion.

Brand-wise, the business has continued to operate under the same business name or a slight variation thereof. The branding, marketing, correspondence, letterheads, signage has always had those words prominently displayed on them. The livery and colour scheme has also remained substantially the same throughout the relevant period.

There have been changes in technology used in the business as a result of technological advancements of the years.

(f) Do the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, divisions or undertakings.

There does not appear to be any change in the operation of the Business over the relevant period from the perspective of the business owners. Although a number of existing businesses have been acquired, these businesses have been rebranded under the same business name and subsumed into the business’ operations.

(g) The way in which the business is structured, carried on, managed and controlled.

A fairly significant change to the structure occurred when the Family Trust transferred:

● the assets of the Business Assets to the Business Company in exchange for shares; and

● the Franchise IP to the Holding Company in exchange for shares.

It is evident from the ownership of these entities, that despite this change, the underlying ownership of the business still remained with the Family Trust (and the taxpayer’s family).

Over time, some shares in the company were issued to entities unrelated to the taxpayer however as noted in the analysis detailed below, the majority underlying ownership of the business have remaining in the taxpayer’s family.

Administratively, the taxpayer remained a director of the Business Company and the Holding Company from their incorporation to the present and is actively involved in the business.

Conclusion

Based on the information provided, it is evident that the business has developed and expanded since it commenced as it has:

● increased its customer base;

● established new member offices;

● acquired a number of existing businesses;

● has increased the number of staff employed in its business;

● has increased its business asset base;

● changes in technology used in the business;

● undertaken a fairly significant structural change with the Business subsequently being conducted by the Business Company as opposed to the Family Trust.

It is however considered that these changes represent organic growth and expansion of the business because none of the above activities change the essential nature or character of the business, being a provider of services and continues to carry on the same business as demonstrated by the following features:

● The business has maintained its primary focus on being a provider of services;

● It has continued to service the same types of customers being individuals;

● The business has been headquartered continuously in the same location and any expansion (by opening new offices or acquiring existing businesses) has been rebranded and subsumed under the same business name;

● The nature of assets used in the business has remained consistent;

● The business’ brand (including its livery and colour-scheme) has remained substantially the same throughout the relevant period;

● Although the structure of the business has changed, the control and underlying ownership of the business has remained with the taxpayer (and his family); and

● The taxpayer has throughout the relevant period remained the figure head of the business, a director of the business and has been actively involved in the business.

Accordingly, despite the developments and expansion of the business over the years, the goodwill of the business is taken to have been acquired before 20 September 1985, and therefore is a pre-CGT asset.

Conclusion - Goodwill as a pre-CGT asset

Based on the above circumstances, it is considered that the business being carried on now is essentially the same as the business carried on prior to 20 September 1985. Therefore, the goodwill attached to the services business carried on by the Business Company is a pre-CGT asset.

Question 2

Summary

The Commissioner will exercise his discretion pursuant to subsection 149-30(2) so that the goodwill of the business and other business assets remain a pre-CGT asset of the Business Company.

Detailed reasoning

Change in majority underlying interests

Although the goodwill of the business was acquired before 20 September 1985, in accordance with Division 149, the pre-CGT status of a CGT asset (including goodwill) owned by a company or trust can be lost if the ‘majority underlying interests’ in a CGT asset are not held by the same ‘ultimate owners’ who held the majority underlying interests in the CGT asset immediately before 20 September 1985 (subsection 149-30(1)).

Majority underlying interests is defined in subsection 149-15(1) as more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in:

● the asset; and

● any ordinary income that may be derived from the asset.

Subsection 149-15(2) 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).

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.

Section 149-15 provides:

(1) Majority underlying interests in a *CGT asset consist of:

(a) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and

(b) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in any *ordinary income that may be *derived from the asset.

(2) An underlying interest in a *CGT asset is a beneficial interest that an ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset.

(3) An ultimate owner is:

(a) an individual; or

(b) a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or

(c)...;

(4) An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an *ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a) the other entity were to distribute any of its capital; and

(b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

(5) An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an *ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if:

(a) the other entity were to pay that dividend, or otherwise distribute that income; and

(b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

Discretionary trusts and majority underlying interests

Relevant to the current circumstances, Taxation Ruling IT 2340 (IT 2340) discusses the terms underlying interest and majority underlying interest, and former section 160ZZS of the Income Tax Assessment Act 1936 (since replaced by section 149-30). Paragraph 2 of IT 2340, advocates 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.

Where a CGT asset is held by the trustee of a discretionary trust, the CGT asset is not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained.

IT 2340 however sets out the Commissioner’s approach in respect of ‘looking through’ discretionary family trusts to determine whether majority underlying interests have been maintained in the assets of the trust, as follows:

5. In relation to what are generally referred to as discretionary trusts, i.e. family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, 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.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to 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.

7. In such a case the Commissioner would, in terms of subsection 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. At general law, a shareholder does not have any legal or equitable interest in the asset of a company. Similarly, beneficiaries in a discretionary trust do not have an interest, either individually or collectively, in the assets or the income of a trust. This situation is addressed in ATO Interpretive Decision 2003/778:

'Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997.

Taxation Ruling IT 2340 reflects on an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997….. Among other issues, IT 2340 deals with questions regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.'

Application to the current circumstances

In the current circumstances, the goodwill of the business will remain a pre-CGT asset (acquired before 20 September 1985) if the majority underlying interests in the goodwill are held by the same ultimate owners who held the majority underlying interests in the goodwill immediately before 20 September 1985

Just prior to 20 September 1985

In this case, the owner of the goodwill of the business immediately before 20 September 1985 was the Trustee of the Family Trust. Accordingly, as noted above, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1). However, in accordance with the approach outlined in IT 2340 as detailed above, where a trustee continues to administer a trust for the benefit of members of a particular family, the Commissioner may find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.

From 20 September 1985 to the disposal date

It is initially noted that, based on the information provided, it is accepted that since 20 September 1985, the Trustee of the Trust has continued to administer the trust for the benefit of the taxpayer, their immediate family and companies and trusts in which the taxpayer and their immediate family have a relevant interest. It is noted that the family group meets the definition of a particular family as provided in paragraph 6 of IT 2340, and the trustee has not exercised discretionary powers to appoint beneficiaries not of the same family as the existing beneficiaries. Therefore, in accordance with paragraph 7 of IT 2340, the Commissioner considers, for the purposes of section 149-30, it reasonable to assume that for all practical purposes the majority underlying interests in this trust’s assets have not changed.

Since 20 September 1985, the most notable change occurring to the direct ownership of the business goodwill happened when, as a result of an internal restructure, the Trustee of the Family Trust transferred the assets of the business (including the goodwill) to the Business Company.

In this regard, it is noted that when the Business Company was incorporated, 100% of the shareholding in the Business Company was held by the Trustee of the Family Trust and therefore this transfer did not result in a change in the ultimate ownership of the assets of the business, including the goodwill.

The Business Company still currently owns the goodwill, however as detailed in the facts, there have been a number of changes to the shareholders of the Business Company and the type and number of shares on issue. However, based on the information provided, it is considered that, despite these changes, the majority underlying interests in the goodwill did not change because the Trustee of the Family Trust, which was at all times administered for the benefit of the taxpayer’s family, directly through its shareholding in the Business Company, held the majority of the rights to the income and capital of the assets of the Business Company (including the goodwill).

On the basis that the ultimate beneficial owners of the underlying assets of the Family Trust have been held by the same family, the Commissioner considers it reasonable to assume for the purposes of subsection 149-30(2), that the majority underlying interests in the Goodwill have been held at all times on and after 20 September 1985, by the same ultimate owners who held such interests before 20 September 1985. Accordingly, the goodwill of the business held by the Business Company will remain a pre-CGT asset that was acquired before 20 September 1985.

Question 3

Summary

The Commissioner will exercise his discretion pursuant to subsection 149-30(2) so that certain IP held by the Holding Company remains a pre-CGT asset of the Holding Company.

Detailed reasoning

The applicant has also advised that the Holding Company holds certain IP, which was acquired prior to 20 September 1985, which may be disposed of and accordingly has sought confirmation that Division 149 will not cause the pre-CGT status of this CGT asset to be lost.

As explained in Question 2, the IP of the business will remain a pre-CGT asset (acquired before 20 September 1985) of the Holding Company if the majority underlying interests in this CGT asset are held by the same ultimate owners who held the majority underlying interests in the goodwill immediately before 20 September 1985.

Just prior to 20 September 1985

In this case, the owner of the IP of the business immediately before 20 September 1985 was the Trustee of the Family Trust. Accordingly, as noted above, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1). However, in accordance with the approach outlined in IT 2340 as detailed above, where a trustee continues to administer a trust for the benefit of members of a particular family, the Commissioner may find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.

From 20 September 1985 to the disposal date

As previously noted, based on the information provided, it is accepted that since 20 September 1985, the Trustee of the Family Trust has continued to administer the trust for the benefit of the taxpayer, their family and companies and trusts in which the taxpayer and their immediate family have a relevant interest. It is noted that the family group meets the definition of a particular family as provided in paragraph 6 of IT 2340, and the trustee has not exercised discretionary powers to appoint beneficiaries not of the same family as the existing beneficiaries. Therefore, in accordance with paragraph 7 of IT 2340, the Commissioner considers, for the purposes of section 149-30, it reasonable to assume that for all practical purposes the majority underlying interests in this trust’s assets have not changed.

Since 20 September 1985, the most notable change occurring to the direct ownership of the IP happened when, as a result of an internal restructure, the Trustee of the Family Trust transferred the IP to the Holding Company.

In this regard, it is noted that when the Holding Company was incorporated, 100% of the shareholding in the Holding Company was held by the Trustee of the Family Trust and therefore this transfer did not result in a change in the ultimate ownership of the assets of the business, including the IP.

The Holding Company still currently owns the IP, however as detailed in the facts, since its incorporation, there have been a number of changes to the shareholders of the Holding Company. However, based on the information provided, it is considered that, despite these changes, the majority underlying interests in the IP did not change because the Trustee of the Family Trust, which was at all times administered for the benefit of the taxpayer’s family, directly through its shareholding in the Holding Company, held the majority of the rights to the income and capital of the assets of the Holding Company (including the IP).

On the basis that the ultimate beneficial owners of the underlying assets of the Family Trust have been held by the same family, the Commissioner considers it reasonable to assume for the purposes of subsection 149-30(2), that the majority underlying interests in the IP have been held at all times on and after 20 September 1985, by the same ultimate owners who held such interests before 20 September 1985. Accordingly, the IP of the business held by the Holding Company will remain a pre-CGT asset that was acquired before 20 September 1985.