Edited version of private advice

Authorisation Number: 1051916169453

Date of advice: 9 November 2021

Ruling

Subject: CGT - change in majority underlying interests

Question 1

If there was a change in the majority underlying ownership of the company, will the resulting deeming of the goodwill to be post-CGT be disregarded for capital gains tax purposes?

Answer

Yes.

Question 2

Will CGT event K6 occur from the proposed sale of shares in the company?

Answer

No.

Question 3

Will any capital gain or loss arising from CGT event A1 occurring from the proposed disposal of the shares in the company be disregarded?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company Pty Ltd (the company) was incorporated in 19XX with D and M holding one class-A and one class-B share respectively. The share classes have identical rights other than their ability to receive differential dividends. These rights have remained unchanged since incorporation.

In 20XX, C was issued a number of redeemable preference shares (RPS). Since then, the majority of any dividends have been paid to C. There have been no changes to shareholdings since the RPS were issued.

The rights attaching to the RPS include preferential dividends declared out of current year, but not prior year, profits to the exclusion of A and B class shares; rights to capital on wind-up in priority to other shares but no other capital rights; and voting rights. A and B class shares maintain rights to prior year profits and voting rights.

D's original business commenced in 19XX specialising in a particular industry. In 19XX the business was transferred to the company. In 19XX the company opened a second store that was later sold, and then later reacquired by the company. The reacquisition included business assets such as a lease and trading stock, but not goodwill because that business had not been making much money between ownerships by the company.

In 19XX the company expanded its business by acquiring Business A. The company acquired trading stock, the trading name and goodwill. The company's Business A store has always identified itself as part of the original business as part of its branding and advertising to the public.

In 20XX the company registered a trading name for Business B and expanded its product range. Since then, the company further expanded its business by opening five stores under Business B's trading name. Business B has always identified itself as part of the original business as part of its branding and advertising to the public.

In 20XX the company acquired the trademark name from Business C through a liquidation sale but no other assets. The company further expanded its business by opening two stores under Business C's trading name. Business C's original business had been closed for a long time prior the company's acquisition of the trading name.

In 20XX, the company acquired the trademark name Business D through a liquidation sale, plus items of plant and trading stock but no other assets. The company further expanded its business and opened another store. The acquisitions of Businesses C and D were acquisitions of trading names, not businesses nor goodwill.

The overall business is conducted by the one company, through a single ledger. The same accounting methods, including the use of a single ledger for the whole company, bank accounts, finance teams and administrative support are utilised for all aspects of the business.

Administrative and management activities are conducted centrally. The business website illustrates that Businesses A, B, C, D and the original business are all part of the same business. The company's business goodwill is its only pre-CGT asset and the value of the goodwill exceeds 75% of the company's net value.

It is proposed that D and M each sell their respective class-A and class-B share in the company to the trustee of a new trust controlled by C.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 109-10

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

If there was a change in the majority underlying ownership of the company, will the resulting deeming of the goodwill to be post-CGT be disregarded for capital gains tax purposes?

Summary

There was a change in the majority underlying ownership of the company, however the resulting deeming of the goodwill to be post-CGT will be disregarded for capital gains tax purposes.

Detailed reasoning

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that pre-CGT assets will be deemed to be post-CGT where there has been a change in the majority underlying ownership of the assets.

The Commissioner's views on changes in the majority underlying ownership of a company, where a new shareholder is issued shares, are further discussed in ATO Interpretive Decision ATO ID 2011/107 Capital Gains Tax: Division 149 majority underlying interests - new shareholder.

The issuing of redeemable preference shares in the company in 20XX resulted in a change to the majority underlying ownership of the interests in the company, due to the discretionary elements of the rights attaching to the shares.

The Commissioner's views on share issues in relation to pre-CGT goodwill of a business are discussed in Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business. Paragraph 90 of TR 1999/16 provides that if the pre-CGT goodwill no longer has the same majority underlying ownership, it is treated by Division 149 of the ITAA 1997 as being post-CGT goodwill. Therefore, when the company issued the redeemable preference shares, consequently the company's goodwill in its business is deemed to have become a post-CGT asset from that date.

However, as discussed below, this deeming of the goodwill to be post-CGT is disregarded for capital gains tax purposes.

Question 2

Will CGT event K6 occur from the proposed sale of shares in the company?

Summary

CGT event K6 will not occur upon the disposal of shares in the company. The goodwill of the company's business is considered to have been acquired before 20 September 1985 such that any capital gain or loss made on disposal of the goodwill is disregarded, per paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

Discussion of CGT event K6

Section 104-230 of the ITAA 1997 provides that, broadly, CGT event K6 occurs if you have interests in a company or trust that were acquired before 20 September 1985, and one of a particular set of CGT events (the other event - in your case, CGT event A1) occur in relation to the interests; there is no roll-over available; and just before the other event happened, the market value of property of the company or trust (other than trading stock) that was acquired after 20 September 1985 is at least 75% of the net value of the company or trust.

Paragraph 53 of Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 provides that the term "property" for the purposes of CGT event K6 includes goodwill.

Paragraph 64 of TR 2004/18 provides that, for the purposes of CGT event K6, the property is taken to have been acquired at the time a provision of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 - in your case, Division 149 of the ITAA 1997 - deems the property to have been acquired.

Paragraph 65 of TR 2004/18 provides that an exception applies where the CGT asset is treated as having been acquired post-CGT because of the operation of Division 149 of the ITAA 1997. In your case, the item of property continues to be treated as having been acquired pre-CGT for the purposes of CGT event K6.

Goodwill as a single CGT asset

Paragraph 17 of TR 1999/16 provides that 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.

Acquisition or expansion of goodwill

Paragraph 27 of TR 1999/16 provides that goodwill is one CGT asset separate and distinct from other assets of the business such as...items of intellectual property (for example, a trade mark, a patent, copyright or registered design.)

Paragraph 60 of TR 1999/16 provides that if a new business operation or activity introduced by a taxpayer is an expansion of an existing business (whether it commenced before or after 20 September 1985), any goodwill built up in conducting the expanded business is merely an expansion of the existing goodwill of the business. If a business which commenced before 20 September 1985 (a 'pre-CGT business') is expanded, goodwill generated in conducting the expanded business is merely an accretion to the pre-CGT goodwill.

Paragraph 64 of TR 1999/16 provides that if a pre-CGT business is combined with another business acquired post-CGT and they are conducted as one business without the pre-CGT business losing its essential nature or character, the goodwill of the post-CGT business is subsumed into the goodwill of the pre-CGT business and all of the goodwill of the business is taken to have been acquired before 20 September 1985.

Application to your circumstances and discussion of "same business"

Paragraph 89 of TR 1999/16 provides that the goodwill of a business that commenced before 20 September 1985 remains a pre-CGT asset provided the same business continues to be carried on...For a business that commenced before 20 September 1985, any accretion to its goodwill since 20 September 1985 is not a post-CGT asset.

When Business A was acquired by the company, its business activities were subsumed into the existing business. The acquisition of the trading name of Business A was the acquisition of a distinct CGT asset. The use of this asset enhanced the company's existing goodwill. The trading name, trading stock and goodwill acquired by the company were subsumed into the existing business and were rebadged to include trading name of the original business. The same integrated management and control was applied to the use of these assets as the existing business. The acquired assets were treated for banking and accounting purposes as an extension of the existing business. The same accounting methods, including the use of a single ledger for the whole company, bank accounts, finance teams and administrative support were utilised for Business A's store as were operating for the rest of the business. Business A's store was integrated into the existing business. The acquisition of the trading name, trading stock and goodwill relating to Business A was not the commencement of a separate and distinct business but rather an expansion of the existing business.

The rollout of Business B's stores was similarly an expansion of the company's original business. The company's use of the different brand and trading name did not result in the commencement of a separate and distinct business. Each Business B store is subject to the same integrated management and control; is accounted for under a single ledger; is centrally administered from the head office; relies on the existing business structure; and all stores are identified as being part of the original business to the public.

There is no material difference to the company's use of the brand and trading names of Businesses C and D, to that of the use of the trading names of Businesses A and B. Similarly, those assets were subsumed into the company's existing business.

As with Businesses A and B, each store of Businesses C and D are subject to the same integrated management and control; is accounted for under a single ledger; is centrally administered from the company's head office; and relies on the existing business structure. These stores are part of the original and overall business group.

The nature of the business conducted by the company has remained consistent since inception. The core activity of the business is and has always been the sale of certain and associated products. The expansion of the business has occurred under various brand and trading names, but each trading name maintains a clear connection to the founding brand. Since 20 September 1985 and before, the core activities of the business have remained unchanged.

Although the company's business expanded and it acquired similar businesses over time, the core activities of the company's business remained the same and it is considered that there was no further acquisition of goodwill, merely an accretion of pre-existing goodwill, and therefore the goodwill of the company's business is considered to have retained its pre-CGT status.

Question 3

Will any capital gain or loss arising from CGT event A1 occurring from the proposed disposal of the shares in the company be disregarded?

Summary

Any capital gain or loss arising from CGT event A1 occurring from the proposed disposal of the shares in the company will be disregarded.

Detailed reasoning

Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when you dispose of a CGT asset. Section 108-5 of the ITAA 1997 provides that shares in a company are CGT assets. However, subsection 104-10(5) of the ITAA 1997 provides that a capital gain or loss you make from CGT event A1 is disregarded if you acquired the asset before 20 September 1985.

As discussed above, although there was a change in the majority underlying ownership of the company, it is disregarded for capital gains tax purposes, meaning that the shares in the company are considered to have retained their pre-CGT status.