Edited version of private advice

Authorisation Number: 1051741313427

Date of advice: 18 August 2020

Ruling

Subject: Small business concessions

Question: Will the payment you receive from the Company on the disposal of the goodwill be excluded from your assessable income under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes. Based on the information provided:

·         the Company would have been eligible to disregard the capital gain made on the sale of the goodwill under the 15-year exemption. Therefore, the capital gain is viewed as being an exempt amount under section 152-125 of the ITAA 1997

·         You each equally held the shares in the Company since it was incorporated prior to 20 September 1985, and were CGT concession stakeholders of the Company just prior to the sale of the goodwill

·         the Company will make payments in relation to the disposal of the goodwill to you which will not exceed an amount determined by multiplying each of your shareholding by the exempt amount; and

·         the Company will make the payments within two years of the date when the goodwill is sold.

This ruling applies for the following periods

Income year ending 30 June 2021

Income year ending 30 June 2022

The scheme commences on

1 July 2020.

Relevant facts and circumstances

You, being Persons A and B, are the sole shareholders of the Company which was incorporated prior to 20 September 1985.

You have an equal shareholding in the Company that you have held since the Company was incorporated, entitling you to voting rights and distributions from the Company in accordance with your shareholding.

The Company has operated a business (the Business) since its incorporation.

Your relative, Person X, works for the Business and it anticipated that they will transition into owning the Business. As a result, you are considering restructuring the Business to provide:

·         a suitable structure for the transition of the ownership of the Business to Person X; and

·         ensuring that you and Person X are protected for asset protection purposes.

Additionally, the restructuring of the Business is being considered to enable a long-term employee of the Business to acquire a part ownership in the Business.

It is proposed that the restructure of the Business will be undertaken as follows:

·         you will establish a new trust (the Trust) with yourselves, and your children and grandchildren, as the principal beneficiaries

·         the Trust will be the sole shareholder of a newly created company (New Company)

·         the establishing of the New Company is consistent with your succession planning to provide more asset protection for Person X. Additionally, it is anticipated that the New Company will be a more attractive structure for an external purchaser

·         the Company will sell its business assets, including all elements that make up the goodwill of the Company, such as the business name, customer list, supplier references, to the New Company at market value

·         the Company will provide vendor finance in relation to the sale of the goodwill and its other assets to the New Company

·         New Company will own all assets and goodwill of the Company necessary for the operation of the Business on completion of the restructure; and

·         you will retire from the Business and will eventually liquidate the Company.

It is anticipated that a capital gain will be made as a result of the restructuring of the Business as outlined above and the disposal of the goodwill.

The Company would have been eligible to the small business concessions 15-year exemption but for the fact the goodwill was a pre-capital gains tax asset in accordance with paragraph 152-125(1)(a)(iii) of the ITAA 1997.

It is anticipated that the Company will either distribute cash and/or assignment of the loan owed by the New Company as a result of the sale of goodwill and will make a payment to you within two years after the disposal of the goodwill occurs.

Assumptions:

For the purpose of this ruling, assumptions have been made that the following will occur during the period covered by this ruling:

·         the restructure of the Company will occur as outlined above; and

·         the Company will make a payment to you in relation to the disposal of the goodwill.

Relevant legislative provisions

Income Tax Assessment Act Part 3-1

Income Tax Assessment Act Part 3-3

Income Tax Assessment Act Subdivision 152-B