Edited version of private advice

Authorisation Number: 1051930453318

Date of advice: 6 December 2021

Ruling

Subject: CGT - goodwill of a business

Question

Did you continuously own your interest in the goodwill of your business from the commencement of your business until the sale date?

Answer

Yes

This ruling applies for the following periods:

For a number of income years commencing in the year ended 30 June 20XX

The scheme commences on:

In the year ended 30 June 20XX

Relevant facts and circumstances

You were incorporated on a certain date with a number of shareholders and directors. The shareholders have not changed.

You were established with the purpose of providing a service-based business.

Soon after incorporating you commenced your business.

A key element of your business plan was to receive a government certification and obtain government funding to provide certain services. You considered that this approval would be essential for the growth of the business.

Shortly after establishment, and with the view of receiving the government certification you registered X names with ASIC in line with the proposed divisions/service lines of the Business:

You intended that should all divisions of the business prove successful, all would remain operational.

In order to provide the services of the business you hired a number of employees.

You commenced providing services under X of the divisions of the business while waiting for government certification to be able to provide services under the final division.

Once you received government certification, the final business division became fully operational.

X of the divisions were not successful on a stand-alone basis and those services were combined with those provided under X of the other divisions.

When you commenced your business you intended that all X divisions would remain operational if they were successful however, over time the proportion of your business represented by X of the divisions has steadily increased in line with general industry trends. The services provided under the other divisions have been declining due to industry specific reasons and in line with industry trend.

The focus of your business has remained the same and the services provided to the ultimate consumer are essentially the same across the different divisions.

As your business grew, the number of staff required and subsequently employed by you also increased with staff working across all divisions.

From an administration perspective you maintain accounting records for the entire business with different revenue streams separately identifiable through the use of sub-accounts. This allows comparisons for profitability of the different revenue streams within a single accounting system.

You entered into a contract to dispose of the business on XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(2)

Reasons for decision

Question 1

Summary

The essential nature or character of your business has not changed since its commencement and therefore the business remains the same business for the Capital Gains Tax (CGT) goodwill provisions and are considered to have continuously held your goodwill from the commencement of the business until XX 20XX..

Detailed reasoning

Goodwill

Subsection 108-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) confirms that goodwill is a CGT asset.

Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) discusses what the goodwill of a business means in the context of capital gains tax and states:

Meaning of 'goodwill'

9. 'Goodwill' for the purposes of the definition of 'CGT asset' in section 108-5 has the meaning it bears under the general law. It is the legal definition of goodwill as explained by the High Court in the Murry case, rather than its accounting and business definitions, which applies.

10. The legal meaning of 'goodwill' according to the majority of justices of the High Court in the Murry case, has three different aspects namely property, sources and value.

11. ...It is not appropriate to single out only one of the aspects of goodwill and to regard that aspect as being 'goodwill' for legal purposes. Rather, it is the overall concept described by the High Court majority which constitutes the legal meaning of 'goodwill'.

12. As explained more fully at paragraph 85 of this Ruling, 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 is emanates. It is something that attaches to a business and it is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated.

...

14. Goodwill is not a series of CGT assets that inhere in other identifiable assets of a business. Goodwill, being a composite thing, attaches to the whole business. It does not attach separately to each identifiable asset of the business. Nor is there an element of goodwill in each identifiable asset of a business.

Paragraph 16 of TR 1999/16 confirms that 'site goodwill', 'personal goodwill' and 'name goodwill' are not separate CGT assets - the goodwill of a business is a single CGT asset. TR 1999/16 goes on to discuss in paragraph 28 that the 'get-up' of a business, including its business or trade name, its logos, slogans, symbol, signs, colour schemes and visual images, are a source of goodwill and not goodwill in itself.

Paragraphs 50 to 52 of TR 1999/16 discuss when goodwill is acquired and confirm that if a taxpayer commences a business and starts to create goodwill, the goodwill of the business is acquired when the taxpayer starts the work that results in the creation of the goodwill. This is a question of fact dependant on the circumstances of each case. When goodwill is acquired on the acquisition of a business under a contract, the purchaser acquires it on the day the contract is entered into in accordance with CGT event A1.

You acquired the goodwill of your business when you commenced the business and started the work that resulted in the creation of the goodwill. You entered into a contract to dispose of your business on XX 20XX. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when you dispose of a CGT asset, which is confirmed by TR 1999/16 to occur in relation to goodwill when the contract for disposal is entered into.

Is the goodwill held by you at XX 20XX the same as the goodwill acquired by you when you commenced the business and started the work that resulted in the creation of the goodwill?

TR 1999/16 discusses the effects of business changes to the continuity of goodwill:

Can a business change to an extent that it is no longer the same business so that the goodwill of the old business ceases and goodwill of a new business is acquired?

18. A business or the sources of its goodwill may change so much it can no longer be said to be the same business as that previously conducted. In other words the old business ceases and a new business commences. If this happens the goodwill of the original business ceases to exist and a new CGT asset - being the goodwill of the new business - is acquired.

...

20. 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. ...

21. 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.

22. Nor would it be a different business if all that happens is that portions of the operations of a business are discarded in an ordinary commercial way but the business retains its essential nature or character.

23. If the types of customers a business attracts change as the business evolves over the years, this does not necessarily mean the business is no longer the same business as was originally carried on.

24. It is not sufficient, however, if just a similar kind of business is carried on. It must be a business of the same essential nature or character that is carried on. 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.

...

91. It is a question of fact and degree whether the same business is being carried on. Factors to consider include the 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 - 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.

...

93. For the CGT goodwill provisions, the same business is carried on and no new goodwill asset is created if the business retains its same essential nature or character. To illustrate this same business test with an example, a business of a printer may have changed over time due to the purchase of new equipment and the adoption of improved technologies. The printer may now attract a different type of client such as large corporate clients (due to the capacity to produce high quality public relations material, annual reports, etc). Formerly, the printer may only have provided services to small local businesses (e.g., business cards, calendars, invoice books, stationery). No new business has been commenced. It is not a different business and the goodwill remains the same CGT asset. The printer is still conducting a printing business of the same essential nature or character, albeit one serving different clients.

94. ... The question whether a change of business occurs remains one of fact and degree, however, and a change in the nature of the clients of a business does not of itself mean the business is a new business with new goodwill. Many businesses naturally evolve by serving different clients or clients in different markets and offering improved products or services.

95. Unless the facts are such that it can be established that a new business has commenced - rather than an existing business continued - the goodwill of the business is not different from that existing when the business was originally acquired or commenced. ...

Specifically, in relation to the expansion of an existing business TR 1999/16 states:

Internally generated goodwill

60. 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...

61. If an introduced business activity is a new business, the goodwill attaching to that business is a new asset separate from the goodwill of the existing business.

62. Whether an increase in business operations or in the scale of activity constitutes an expansion of an existing business, or a new and separate business in its own right, is a question of fact dependent on the circumstances of each particular case. Factors that need to be considered in determining whether the business operation or activity is part of the existing business or is a new business include the nature of the new business operation or activity, the types of customers that the business operation or activity attracts and the extent to which the business operation or activity:

(a) is subject to the same integrated management and control as the existing business;

(b) is treated for banking and accounting purposes as an extension of the existing business or as a separate business;

(c) uses one or more different trading names; and

(d) is related to or dependent on the existing business in a practical, economic or commercial sense.

...

You commenced your business with the intention of providing a service-based business to clients. The provision of these services represents the essential nature and character of your business. When you commenced the business, you intended that the business would have X service lines/divisions, with the intention that, all being successful, they would all continue to operate. The services provided to the ultimate consumer are essentially the same across the different divisions with the difference being the type and mix of funding for the services. The separation of the business into the different service lines was mostly to assist with administrative matters.

Certain changes were made to the different divisions where X of the divisions were merged. This decision was made as a business decision where you adapted your business in line with market demand. As emphasised in paragraph 22 of TR 1999/16, a business is not considered to become a new business if portions of the business are discarded in an ordinary commercial way where the business retains its essential nature. As previously discussed, your business was initially structured with X business lines and in a response to commercial demand for the different services offered by those lines you made a business decision to continue to offer all of the same services but to merge X of the services into the X lines. We do not consider that this is the creation of a new business.

Due to the length of time required to obtain government certification to offer certain services, X business lines were not immediately operational from the commencement of your business, however it was always intended to be a key element of the overall business. Again, these services are essentially the same services that are provided through the other business lines but for administrative purposes and the associated government funding, are provided under a separate line.

When you commenced the business, you intended that all X divisions of the business would remain operational should they be successful. Over time the proportion of services provided by each division has changed due to you receiving government certification as well as industry-trends affecting how your competitors run their business. As such certain divisions have grown proportionally compared to the other divisions. This is representative of the commercial reality and demands of the industry and was anticipated from the commencement of the business. All of the divisions have the same integrated management and control and are integrated for accounting purposes and staff perform services across all divisions.

Considering this history of the business, we consider that the essential nature or character of the business has not changed and therefore the business remains the same business for the CGT goodwill provisions. The changes that have occurred over time where activities and divisions have been expanded and contracted represent organic growth and expansion of the business responding to industry competition and market demand for services. Therefore, you are considered to have continuously held your goodwill from the commencement of the business until XX Month 20XX.