Edited version of private advice

Authorisation Number: 1051988558540

Date of advice: 3 June 2022

Ruling

Subject: Terminating value of goodwill from tax consolidated group

Question 1

At the time that Entity B exited the Entity A income tax consolidated group (TCG), was the goodwill of the business operations of Entity B an asset of Entity A, as head company of the TCG, for the purposes of section 711-20 of the Income Tax Assessment Act 1997 (ITAA 1997) because Entity B was taken by subsection 701-1(1) to be a part of Entity A?

Answer

Yes.

Question 2

Is the terminating value of Entity A's goodwill asset, in respect of the business operations of Entity B at the time that it exited the TCG for the purposes of section 711-20 of the ITAA 1997, equal to the cost allocated to the goodwill of Entity B's business at joining time under section 705-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences:

During the income year ended 20XX

Relevant facts and circumstances

Entity A is the head company of the Entity A TCG which acquired Entity B, including the Entity B business operations and goodwill.

The Entity B business operations were maintained as an independent business capable of autonomously undertaking its activities whilst part of the Entity A TCG.

The Entity B business operations were disposed of by the Entity A TCG.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 701-10

Income Tax Assessment Act 1997 section 701-15

Income Tax Assessment Act 1997 section 701-55

Income Tax Assessment Act 1997 section 701-60

Income Tax Assessment Act 1997 section 705-30

Income Tax Assessment Act 1997 section 705-35

Income Tax Assessment Act 1997 section 711-15

Income Tax Assessment Act 1997 section 711-20

Income Tax Assessment Act 1997 section 711-25

Income Tax Assessment Act 1997 section 711-30

Question 1

Summary

The goodwill of the Entity B business operations is an asset of Entity A, as head of the TCG, for the purposes of section 711-20 upon exit from the Entity A TCG.

Reasons for decision

Paragraph 108-5(2)(b) of the ITAA 1997 provides that goodwill is a CGT asset.

Taxation Ruling 1999/16 "Income Tax: capital gains tax: goodwill of a business" (TR 1999/16) says goodwill for the purposes of a 'CGT asset' in section 108-5 of the ITAA 1997 has the meaning it bears under the general law.

Goodwill has been considered by the High Court in numerous cases, including in Commissioner of Taxation v Murry (1998) 193 CLR 605, as referred to in TR 1999/16. Since the issuing of TR 1999/16, the definitions of goodwill for legal purposes, economic purposes and accounting purposes were considered in the High Court case, Commissioner of State Revenue v Placer Dome Inc [2018] HCA 59, which found that goodwill for legal purposes extends to sources which generate or add value to the business. TR 1999/16 specifically notes the separation of internally generated goodwill at [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. and purchased goodwill at [63]

If a taxpayer who founded or purchased a business adds to that business an additional business purchased as a going concern, it is a question of fact dependent on the circumstances of each particular case whether the additional business is subsumed into and forms part of the existing business or whether the two businesses remain as separate businesses. If two post-CGT businesses are subsumed in this way, the goodwill of the businesses coalesce and the cost base of the goodwill of the business purchased as a going concern becomes part of the cost base of the goodwill of the entire business.

The Entity B business operations, which include goodwill, continued to operate the same business independently from the rest of the TCG subsequent to its acquisition and consolidation into the Entity A TCG. Consequently, the Entity B business constitutes a discrete business whose goodwill was not subsumed into the goodwill of Entity A's existing business.

Consequently, for the purposes of determining the allocable cost amount (ACA) of the leaving entity (section 711-20 of the ITAA 1997), the goodwill of the Entity B business is an asset of the leaving entity.

Question 2

Summary

The terminating value of goodwill, for the purposes of section 711-20 of the ITAA 1997, associated with the

Entity B business operations will be determined under section 711-30 of the ITAA 1997 by applying section 705-30 of the ITAA 1997 in a corresponding way to how that section was applied to the Entity B business on entry to the TCG.

Detailed reasoning

For the purposes of the exit ACA calculations, a terminating value will need to be allocated to the goodwill of the Entity B business operations leaving the Entity A TCG.

Sections 711-20 and 711-25 provide the steps for working out the ACA for the leaving entity. Step 1 of section 711-20 requires working out the head company's terminating value of all assets held at leaving time. The "head company's terminating value" for an asset is worked out in accordance with section 711-30.

Upon leaving a TCG, subsection 711-30(2) of the ITAA 1997 provides that the terminating value is worked out by applying section 705-30 of the ITAA 1997 in a corresponding way for a joining entity at joining time. The goodwill attached to the Entity B business operations is a CGT asset not covered under subsections 705-30(1) to (3B) of the ITAA 1997. Consequently, the application of subsection 705-30(4) of the ITAA 1997 in a corresponding way provides the terminating value of a CGT asset of a leaving entity would be the cost base of the CGT asset just before the leaving time.

Taxation Determination 2006/19 "Income tax: consolidation: for the purposes of working out step 1 of a consolidated group's exit allocable cost amount in the leaving entity under section 711-25 of the Income Tax Assessment Act 1997, is the terminating value for a CGT asset determined under Division 110 for assets that have their tax cost set under subsection 701-10(4)?" confirms that a CGT asset's cost base or reduced cost base is worked out under Subdivisions 110-A and 110-B of the ITAA 1997 respectively.

As goodwill is a CGT asset, subsection 701-55(5) of the ITAA 1997 provides that the tax cost setting amount became its cost base or reduced cost base.

Section 701-60 of the ITAA 1997 provides the relevant provisions to work out the tax cost setting amount. Where the asset's tax cost is set by section 701-10 of the ITAA 1997, the tax cost setting amount will be worked out in accordance with Division 705 of the ITAA 1997 (Item 1 of the table in section 701-60 of the ITAA 1997).

The goodwill of the Entity B business operations was separately identifiable as the business was maintained in a sufficiently discrete manner from the rest of Entity A's operations. Further, the Entity A TCG did not incur any expenditure in relation to the Entity B business goodwill that would give rise to an adjustment to the cost base or reduced cost base under Subdivision 110-A or Subdivision 110-B.

Pursuant to subsection 711-25(2), it is also necessary to consider if the Entity A TCG had synergistic goodwill due to control and ownership of the Entity B business that needs to be factored into the terminating value of Entity B's goodwill.

Taxation Ruling 2005/17 "Income tax: goodwill: identification and tax cost setting for the purposes of Part 390 of the Income Tax Assessment Act 1997" (TR 2005/17) considers various scenarios, including when an entity leaves a group. Relevantly, it states:

Leaving case - synergistic goodwill and subsection 711-25(2)

[18] In addition to the cost of the goodwill of the leaving entity that is added to the ACA under subsection 711-25(1), subsection 711-25(2) adds an amount of the cost base of goodwill associated with businesses of the old group if it meets the following tests:

a)     the loss of control and ownership of the leaving entity by the head company, if it did occur, would reduce the market value of the goodwill associated with the businesses and assets of the old group, that is, other than those of the leaving entity;

b)     some or all of the goodwill asset associated with the businesses and assets that the old group holds at the leaving time exists because of its ownership and control of the leaving entity; and

c)     a tax cost was set for this goodwill at the joining time that would be its cost base at that time.

The Entity B business operations did not benefit other parts of the Entity A TCG. Applying the test at [18] of TR 2005/17, there is no additional amount that needs to be added at step 1 of section 711-20 pursuant to subsection 711-25(2).

Therefore the termination value of the goodwill of the Entity B business operations at leaving time was the tax cost setting amount determined upon entry to the Entity A TCG.