Edited version of private advice

Authorisation Number: 1052015936408

Date of advice: 8 August 2022

Ruling

Subject: CGT - disposal of goodwill

Question 1

Will any capital gain that might arise to the Company from the disposal of the goodwill on the sale of its businesses be disregarded pursuant to paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will any capital gain that might arise to the Trust from the disposal of shares in the Company be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20WW

Relevant facts and circumstances

1.    The Company trading as X operates two distinct businesses (the Businesses). Business One includes complimentary activities.

2.    The Business currently operates throughout a certain geographical area.

3.    Business One and Business Two both commenced prior to 20 September 1985. The Businesses have grown significantly over the years, including growth in assets, workforce and annual turnover.

Business structure and management

Pre 20 September 1985

4.    Business One was started by the Individual as sole trader from one location.

5.    The business structure later changed to a partnership (the Partnership) between the Individual and their spouse.

6.    The business assets were later transferred to a company as trustee for the Trust. The Trust is a family trust under the Individual's control.

7.    Later, Business Two commenced.

Post 20 September 1985

8.    The Company was incorporated and the Trust transferred the Businesses to the Company, which it wholly owned. The rollover relief under former section 160ZZN of the Income Tax Assessment Act 1936 (ITAA 1936) was applied to the transfer. Minutes evidencing this asset transfer and roll-over election were executed and have been retained on file.

9.    The trustee had elected in writing for the former subsection 160ZZN to apply in respect of the roll-over. A written notice was provided to the Commissioner regarding this election. Despite best efforts, a copy of this election cannot be located. A statutory declaration by the adviser at the time attesting to this fact has been provided.

10.  There have been no changes in shareholding in the Company since the roll-over.

11.  Since the rollover, the Businesses have expanded through the acquisition of additional assets and into surrounding locations.

12.  Also the Businesses ceased to contract with one third party supplier and began contracting with another third party supplier. The product and essential nature or character of the supply arrangement did not change.

13.  Throughout the years, the Businesses has continually been ultimately managed and controlled by the Individual. When the business commenced, the Individual was the owner, manager, and worker. The staff employed in the Businesses have grown as the businesses grew. The Individual's child also started working in the business. The Individual is now the general manager along with their child and both are involved in the day to day operating of the business especially key financial decisions.

Business activities

14.  Prior to 1985, the business operations consisted of 2 core business activities (the Businesses):

15.  The Businesses have increased in size and scale but essential the same product has been sold since September 1985.

Business name

16.  The business name has been used since prior to 20 September 1985.

Branding

17.  The Businesses did not have their own logo until about 20 years ago. Prior to that, the business had used a supplier logo. After the Businesses adopted their own logo the only change that occurred was the change of supplier logo. The use of a supplier logo is a contractual requirement of the supplier but there are no practical restrictions to their own branding of the Businesses.

Financial reporting, record keeping and banking

18.  The internal accounting system reports by site or department (bulk/retail). For external reporting, the Company prepares consolidated financials. This is common for these types of businesses.

19.  The banks have always been provided with consolidated financials. The banks have not requested separate financial reporting or distinguished between the different segments of the businesses for lending purposes.

Physical assets of the business

20.  The Trust owns certain sites from which the Businesses are conducted and the Company pays rent for the use of sites in its businesses.

21.  The Company owns the operating equipment.

Geographical trading locations

22.  Over the years, the Businesses have expanded its geographical trading locations.

Customers

23.  Over the years since 1985, the Businesses has had a substantial and diverse customer base and has not been heavily reliant on any particular major clients.

24.  Over the years, when the Businesses has expanded into a new location, new customers were obtained mostly through word of mouth. As the customer base grew, the Businesses also grew. These changes were a result of organic growth.

25.  The general profile of customers has always been the same There has been no significant change to the type of the customers.

Business sale and /or share sale now being contemplated

26.  The Individual is nearing retirement and in considering a business sale. This may take the form of the sale one or both of the businesses, or alternately a sale of shares owned by the Trust in the Company.

The Trust

27.  The Trust was established by deed prior to 20 September 1985.

28.  The Trust is a discretionary trust allowing for the appointment of the income and capital of the trust by the Trustee in their discretion to a class of persons described in the deed as the Discretionary Beneficiaries.

29.  The Primary Beneficiaries (who are also Discretionary Beneficiaries) of the trust are the Individual and their spouse and their children. The other Discretionary Beneficiaries of the Trust relevantly are:

(a)  the Primary Beneficiaries spouses while spouses, and widows and widowers while unmarried;

(b)  children of the Primary Beneficiaries and their spouses while spouses, and widows and widowers while unmarried and children and grandchildren and remoter issue of those children; and

(c)   any of the following natural persons or other entities wherever formed which the Trustee may nominate in writing as a Discretionary Beneficiary at any time and from time to time, in conformity with clause X (which requires the consent of the Guardian unless they declare that it does not require such consent), namely -

(i)            Parents, brothers and sisters of that Primary Beneficiary and their spouses while spouses, and widows and widowers while unmarried and children and grandchildren of those parents, brothers and sisters;

(ii)           The trustee of another trust or settlement under which a Primary Beneficiary or other Discretionary Beneficiary referred to in (a), (b) or (c)(i) has an interest;

(iii)          A corporation at least one share in which is beneficially owned by a Primary Beneficiary or another Discretionary Beneficiary referred to in (a), (b) or (c)(i) has an interest

(iv)          Any other legal entity in which at least one share or other interest (whether vested or contingent) is beneficially owner or held by a Primary Beneficiary or another Discretionary Beneficiary referred to in (a), (b) or (c)(i) or by the trustee of an eligible trust or by an eligible corporation;

(v)           Any additional beneficiaries named or described in the Schedule (there are none);

(vi)          Charities nominated in conformity with clause X.

30.  No additional beneficiaries (person or entities) have been nominated as Discretionary Beneficiaries in accordance with clause X.

31.  The settlor (and entities in which they have an interest) and trustees other than in their capacity as detailed in the above paragraph are excluded from being a beneficiary. Further, the trustee may determine to exclude any person from the class of Discretionary Beneficiaries.

32.  The Primary Beneficiaries are the default beneficiaries under the income and capital distribution clauses in the Deed, or if there are no Primary Beneficiaries, the statutory next of kin, or if there are no statutory next of kin living, the income or capital as is the case is held for such charitable purposes as the Trustee shall determine.

33.  The Trustee may from time to time (and with the consent of the Guardian unless they declare does not require such consent) add to or vary or revoke all or any of the trusts and declare any new or other trusts powers or discretions for the trust fund but so that the law against perpetuities is not infringed and so that any variation or revocation shall otherwise be for the benefit of all or any one or more of the Discretionary Beneficiaries or statutory next of kin of the last surviving Primary Beneficiary and shall not affect any entitlement already set aside.

34.  The Individual is the Guardian and Appointor under the Deed.

35.  No amendments have been made to the Deed to vary the beneficiaries.

36.  Only the Individual and their spouse have received distributions from the Trust.

Assumption(s)

There will be no material changes to the nature or character of the business activities from the date this ruling is issued until the businesses are sold.

There will be no changes to the majority underlying interests in the goodwill of the Businesses until sold.

Reasons for Decision

Question 1

Summary

Any capital gain that might arise to the Company from the disposal of the goodwill on the sale of its businesses will be disregarded pursuant to paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

1.    Goodwill, or an interest in it, is a CGT asset under paragraph 108-5(2)(b) of the ITAA 1997.

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

3.    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.

The meaning of goodwill

4.    The Commissioner's views on the meaning of goodwill are set out in Taxation Ruling TR 1999/16 (TR 1999/16) Income tax: capital gains: goodwill of a business, which reflects the decision of the High Court in Federal Commissioner of Taxation v Murry [1998] HCA 42; 98 ATC 4585 (Murry). It is the legal definition of goodwill, rather than its accounting and business definition, which applies according to the High Court in Murry.

5.    Paragraph 12 of TR 1999/16 explains what goodwill of a business is:

...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 the 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 the business. It cannot be dealt with separately from the business with which it is associated.

6.    The goodwill of a business is either created or purchased. For tax purposes, depending when either of these things happen, will determine if they are referred to as either pre-CGT goodwill or post-CGT goodwill. The goodwill of a particular business cannot be characterised as partly pre-CGT goodwill and partly post-CGT goodwill.[1] If, for instance, a taxpayer disposes of a business acquired before 20 September 1985 (a 'pre-CGT business'), the whole of the goodwill of the business is taken to have been acquired before that date.[2]

7.    TR 1999/16 takes the view that goodwill is a single asset for CGT purposes. Paragraph 14 states that 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.

When is goodwill acquired?

8.    The consequence of the goodwill of a business being one CGT asset is 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 - about when an asset stops being a pre-CGT asset), provided the same business continues to be carried on. This is so even though:

(a)  the sources of the goodwill of a business may vary during the life of a business, or

(b)  there are fluctuations in goodwill during the life of the business.[3]

9.    According to the Court in Murry, goodwill is identified as property and therefore an asset for CGT purposes, because it is a legal right or privilege to conduct a business in substantially the same manner and by the same means that have attracted custom to it. It follows that goodwill is acquired when a taxpayer acquires the legal right or privilege to conduct the business, generally this arises when the taxpayer commences or purchases a business.

Is the same business being carried on?

10.  In Murry it is stated that, in determining whether the same business is being carried on, the sources of the goodwill may have changed so much that, although the business is of the same kind as previously conducted, it cannot be said to be the same business.

11.  If the essential nature or character of the business has not changed, the business remains the same business for the purposes of the CGT goodwill provisions. The business may expand or contract activities or change the way in which its 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 constitute a new business as long as the essential character or nature of the business remains unchanged.[4]

12.  It is a question of fact and degree whether the goodwill of a business is the same asset as it was when it was acquired. For the CGT goodwill provisions, we consider that the same business is carried on and no new goodwill asset is created if the business retains its same essential nature or character.[5]

13.  A business may expand or contract activities such as offering improved product or services without ceasing to carry on the same business. Similarly, a business may change the way it operates over time due to the purchase of new equipment and the adoption of improved technologies which may attracts new customers, provided the same business continues to be carried on.

14.  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.[6]

15.  Where a business expands as a result of the introduction of a new business operation or activity by a taxpayer, any goodwill that relates to the expanded business is merely an expansion of the existing goodwill of the business. If a business that commenced prior to 20 September 1985 is expanded, goodwill generated by the expanded business operations or activities will be an accretion to the pre-CGT goodwill.[7]

16.  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.[8]

17.  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, is a question of fact dependent on the circumstances of each case. Factors that need to be considered in determining whether the business operation or activity is an expansion 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.[9]

18.  The question of whether a business has changed to such 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 is one of fact and degree. Factors to consider include:[10]

•   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.

Nature and character of the business

19.  Paragraph 93 of TR 1999/16 states that 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 and offers the following 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 and 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.

20.  Many businesses naturally evolve by serving different clients or clients in different markets and offering improved products or services. However, 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.[11]

21.  Therefore, as long as the business remains the 'same business', the goodwill created by a taxpayer will be the same goodwill disposed of when the business is sold.

Application to your circumstances

When was the goodwill acquired?

22.  The business assets of the Partnership were transferred to the Trust. Therefore, it is reasonable to conclude the goodwill in relation to Business One was acquired by the Trust at this time.

23.  The Trust commenced Business Two. Therefore, it is reasonable to conclude that it acquired the goodwill in relation to this business at this time.

24.  Post 20 September 1985, the Trust transferred the Businesses to the Company, a company that it wholly owned, and rollover relief under former section 160ZZN of the ITAA 1936 was applied to the transfer.

25.  In accordance with paragraph 160ZZN(4)(e) of the ITAA 1936, if the roll-over asset is acquired before 20 September 1985, the company is deemed, for CGT purposes, to have acquired it before that day.

26.  The goodwill of the Businesses is therefore, taken to have been acquired by the Company before 20 September 1985 and will remain a pre-CGT asset if the same business is continued to be carried on.

Is the same business being carried on?

27.  Based on the facts and circumstances, it is evident that the Businesses have developed and expanded since 1985. Both businesses have increased in size and scale. The locations from which the businesses have been conducted has increased since September 1985.

28.  Also the Businesses ceased to contract with one third party supplier and began contracting with another third party supplier. However, the product and essential nature or character of the supply arrangement did not change.

29.  Although there has been a change in the supplier, when considering all of the facts and circumstances, we consider this will not result in the Businesses changing their essential nature or character, as demonstrated by the following features:

•         Although the supplier changed the essential character and nature of the Businesses since they were commenced have been the same, as follows:

o   the acquisition and sale of the same type of product and the same incidental activities;

o   essentially the same business operations.

•         The sites and locations from which the Businesses are conducted have expanded but are generally in a geographical area.

•         The Company has continued to service the same types of customers in all those locations.

•         The assets used in the Businesses have increased in quantity but remain consistent in terms of their nature.

•         The business name has remained constant throughout the relevant period although the supplier change necessitated a change in some branding.

•         Although the structure of the Businesses changed when the Company acquired the Business from the Trust, the control and underlying ownership of the Businesses has remained with the Individual and their close family, and

•         The Individual has since commencement ultimately managed and controlled the Businesses and has been actively involved in the day to day running of the Businesses.

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

Did the goodwill stop being a pre CGT asset due to a change in majority underlying interests?

31.  If the goodwill is a pre-CGT asset, former section 160ZZS of the ITAA 1936 and Division 149 (about when an asset stops being a pre-CGT asset) of the ITAA 1997 need to be considered in respect of that pre-CGT goodwill. If the pre-CGT goodwill no longer has the same majority underlying ownership under those provisions it is treated as being post-CGT goodwill.

Former section 160ZZS of the ITAA 1936

32.  Before being re-written into Subdivision 149-B, former section 160ZZS of the ITAA 1936, which applied before the commencement of the 1999 income year, contained rules which governed when an asset acquired before 20 September 1985 stopped being a 'pre-CGT asset', as follows:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Division 149 - When an asset stops being a pre-CGT asset

33.  Division 149 contains rules, applicable to the 1999 and later income years, which govern when an asset acquired before 20 September 1985 stops being a 'pre-CGT asset'. Section 149-10 provides:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

34.  In relation to paragraph 149-10(c), and pursuant to subsection 149-30(1), an asset of a non-public entity stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Where a change in the ultimate owners who had the majority underlying interests occurs, the CGT asset is deemed to be acquired after 19 September 1985.

35.  'Majority underlying interests' in a CGT asset is defined in subsection 149-15(1) to consist of more than 50% of:

(a)  the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

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

36.  An 'underlying interest' in a CGT asset is defined in subsection 149-15(2) as 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.

37.  An 'ultimate owner' is defined in subsection 149-15(3) to include an individual or a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members.

38.  Subsection 149-15(4) states:

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.

39.  Subsection 149-15(5) states:

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.

40.  The expression 'beneficial interest' as used in the definition of 'majority underlying interests' (as well as the definition of 'underlying interest') is not defined. Under ordinary legal concepts, where there is a discretionary trust, 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. As 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).

41.  Under subsection 149-30(2), if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsection 149-30(1) applies as if that were in fact the case (and the asset continues to be a pre-CGT asset).

42.  Taxation Ruling IT 2340[12] (IT 2340) reflects on an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of former section 160ZZS of the ITAA 1936.

43.  Among other issues, the ruling deals with questions regarding the application of former 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'.

44.  Under this approach the Commissioner can 'look through' an entity to determine the natural persons who hold beneficial interests in assets, as stated in paragraph 2 of IT 2340:

The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

45.  IT 2340 reflects the position that former section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of former section 160ZZS of the ITAA 1936, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets.

46.  IT 2340, at paragraph 5, states that it will be relevant to take into account the way in which the discretionary powers of the trustee are exercised when considering the question whether majority underlying interests have been maintained in the assets of the trust. IT 2340 continues at paragraphs 6 and 7:

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 family 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 sub-section 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

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

47.  Section 357-85 of Schedule 1 of the Taxation Administration Act 1953 (TAA) provides that if the Commissioner has made a ruling about a relevant provision and that provision is re-enacted or remade, the ruling is taken to be about the re-enacted or remade provision, insofar as the new law expresses the same ideas as the old law. Section 357-85 of Schedule 1 to the TAA applies to all rulings, including public rulings (paragraphs 49 to 50 of Taxation Ruling TR 2006/10[13]). As former section 160ZZS of the ITAA 1936 expresses the same ideas as

48.  Division 149, IT 2340 equally applies to Division 149.

Application to the current circumstances

49.  In the current circumstances, the goodwill of the Businesses will a remain pre-CGT assets if the Commissioner is satisfied or thinks it is reasonable to assume that at all times on and after 20 September 1985, the majority underlying interests in the CGT assets were had by the same ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.

50.  As the goodwill of the Businesses was directly owned by the trustee of a discretionary trust before it was transferred to the Company, and indirectly as 100% shareholder in the Company after this transfer, it would not be possible under ordinary legal concepts for the Trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1).

51.  Nevertheless, per subsection 149-30(2), if the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on after 20 September 1985 and before a particular time, ultimate owners who had majority underlying interests in the shares held by the Trust and the goodwill of the Businesses also had majority underlying interests in each asset immediately before that date, then subsection 149-30(1) will apply as if that were the case.

52.  Adopting the 'look through' approach outlined in IT 2340, we will consider who held beneficial interests in the goodwill at all times by taking into account the way in which the trustee administered the Trust.

53.  According to the Deed, the Discretionary Beneficiaries of the Trust can be described as the Individual and their spouse and close family members (e.g. children and grandchildren).

54.  The Deed allows for certain persons and entities to be nominated as beneficiaries but no such nominations have been made.

55.  The Deed has not been amended to alter or vary the beneficiaries under the Deed.

56.  Having regard to who are the beneficiaries under the Deed it is evident that the Trust has at all times been administered and continues to be administered for the benefit of the Individual and their spouse and their close family since it acquired the goodwill of the Businesses prior to 20 September 1985.

57.  Therefore, the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying ownership interests have been maintained in the goodwill CGT asset since immediately before 20 September 1985.

58.  Therefore, any capital gain or capital loss from CGT event A1 happening as a result of the proposed disposal of the goodwill on the sale of the Businesses will be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

Question 2

Summary

Any capital gain that arise to the Trust from the disposal of shares in the Company will be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

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

60.  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.

61.  The Trust transferred the Businesses to the Company, a company that it then wholly owned, and rollover relief under former section 160ZZN of the ITAA 1936 was applied to the transfer.

62.  Subsection 160ZZN(7)(a) provides that the shares that constituted the consideration for the disposal of the roll-over assets to the Company shall be deemed to be acquired before 20 September 1985 if the roll-over asset was acquired before 20 September 1985.

63.  Therefore, the Trust is deemed to have acquired their shares in the Company before 20 September 1985 provided that former section 160ZZS of the ITAA 1936 and Division 149 of the ITAA 1997 do not have the effect of stopping the shares from being pre CGT assets. The shares owned by the Trust will only remain a pre-CGT asset if the majority underlying interests in the goodwill (roll-over asset) and shares in the Company is held by the same ultimate owners who had the majority underlying interests in the goodwill immediately before 20 September 1985.

64.  For the reasons given earlier, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on or after 20 September 1985, ultimate owners who had majority underlying interests in the goodwill of the Businesses and shares held by the Trust also had majority underlying interests in goodwill and thus shares before that date. Therefore, subsection 149-30(1) will apply as if that were the case. That is, the shares, which are pre-CGT assets, will not stop being pre-CGT assets pursuant to subsection 149-30(1).

65.  Therefore, any capital gain or capital loss from CGT event A1 happening as a result of the proposed sale of the shares will be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

[1] TR 1999/16, Paragraph 25.

[2] TR 1999/16, Paragraph 96.

[3] TR 1999/16, Paragraph 17.

[4] TR 1999/16, Paragraphs 21 - 24.

[5] TR 1999/16, Paragraph 93.

[6] TR 1999/16, Paragraph 24.

[7] TR 1999/16, Paragraph 60.

[8] TR 1999/16, Paragraph 61.

[9] TR 1999/16, Paragraph 62.

[10] TR 1999/16, Paragraph 91.

[11] TR 1999/16, Paragraph 94 - 95.

[12] Income tax : capital gains : deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date.

[13] Public Rulings.