Edited version of private advice

Authorisation Number: 1052053756653

Date of advice: 3 November 2022

Ruling

Subject: No goodwill partnership guidelines

Question 1

Does the Commissioner accept that, the "Administrative treatment: acquisitions and disposals of interests in 'no goodwill' professional partnerships, trusts and incorporated practices" (the Guidelines) applies to the arrangement such that the capital proceeds received by an exiting shareholder is equal to the amount received for their shares (fixed at $0.01 per share) for the purposes of section 116-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does the Commissioner accept that, the Guidelines applies to the arrangement such that the cost base of the shares in XXXXXX Lawyers Pty Ltd held by the Shareholders is equal to the amount paid by the shareholder for the shares (fixed at $0.01 per share) for the purposes of section 112-20 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

The Entity is an Australian resident company that performs professional services.

The entity previously underwent a restructure from a partnership to company.

New shareholders are admitted through the acquisition of shares at a fixed nominal price.

All share transactions must be done at this nominal price.

New shareholders are required to loan an amount to the entity under a formal loan agreement. Under the loan and shareholders agreement, the shareholders are entitled to interest payments while they hold the shares with the principle being repaid when they dispose of their shares in the entity.

Pursuant to the governing documents no dividends will be able to offset the required loan repayments.

All transactions are done at arm's length.

The arrangement included a Deed of Accession for new shareholders. The Deed of Accession is the agreement for a new shareholder to acquire shares in the company and become a party and be bound by the Shareholder Agreement.

Relevant legislative provisions

Section 112-20 of the Income Tax Assessment Act 1997

Section 116-30 of the Income Tax Assessment Act 1997

Question 1

Reasons for decision

Administrative treatment: acquisitions and disposals of interests in 'no goodwill' professional partnerships, trusts and incorporated practices (Guidelines) provide for the following treatment of practice interests:

Cost base of interests at the time of acquisition

Under the guidelines, the cost base and reduced cost base under section 112-20 of the ITAA 1997 are modified such that the market value of the practice interest at the time of acquisition is treated as being equal to the amount the taxpayer pays (including nil) in respect of the acquisition.

Market value of practice interests at the time of disposal

Under the guidelines, the capital proceeds received under section 116-30 of the ITAA 1997 are modified such that the market value of the practice interest at the time of disposal is treated as being equal to the amount the taxpayer receives (including nil) in respect of the disposal.

Requirements to access concessional treatment

The Guidelines provide the requirements that an entity must fulfil in order to be able to use the ATO's administrative treatment for the acquisition and disposal of practice interests in 'no goodwill' professional partnerships, trusts and incorporated practices.

The first requirement under the guidelines is that the taxpayer must carry on or participate in carrying on of a professional practice, and be one of the following

- a:

• partner in a partnership carrying on that practice
• shareholder in a company carrying on that practice
• beneficiary of a trust (including a unit holder) carrying on that practice.

For the purposes of these guidelines:

• an entity is also a practitioner entity where they will start to satisfy the above conditions upon acquiring a practice interest; or cease to satisfy them upon disposing of such an interest (see further below); and
• the practitioner entity can be an individual, trustee or company.

For the purposes of these guidelines, a practice is a professional practice if:

• practice income is derived mainly from the provision of services involving the exercise of specialised knowledge and skill of members, excluding services that are commonly considered to be provided by tradespersons (such as plumbers, mechanics, electricians, etc.); and
• the conduct of its members would normally be regulated by legislation, regulations or other professional standards of conduct and ethical behaviour administered by a professional body or association or regulatory authority.

The second requirement is that the dealings and relationships between the parties satisfy all of the following conditions:

1. The governing documents of the practice provide
   1. in the case of a partnership - that consideration payable and receivable by a practitioner entity for the acquisition and disposal of a practice interest in goodwill will be nil or a nominal amount; or
   2. in any other case - that consideration payable and receivable by a practitioner entity for the acquisition and disposal of a practice interest will be determined on the assumption that the value of goodwill is nil or a nominal amount; and
2. The governing documents have no further provision relating to consideration for practice interests; or such documents provide
   1. in the case of a partnership - that consideration payable and receivable by a practitioner entity for the acquisition and disposal of a practice interest in assets other than goodwill will be nil or a particular amount; or
   2. in any other case - that consideration payable and receivable by a practitioner entity for the acquisition and disposal of a practice interest will be determined on the assumption that the value of certain assets other than goodwill will be nil or a particular amount; and
3. An acquisition and/or disposal occurs in the circumstances covered above
4. The following parties have an arm's length relationship with one another immediately before the acquisition or disposal
   1. the acquiring entity (if any); and
   2. each practitioner entity (if any) who disposes of a practice interest which the acquired interest represents or is reasonably attributable to
5. The evidence reasonably supports the conclusion that the following represent arm's length dealings
   1. the governing documents; and
   2. the acquisition and/or disposal transaction
6. The practitioner entity applies the treatment in these guidelines to all acquisitions or disposals covered above.

Pursuant to the Guidelines, the Entity is a professional practice that derives its income from the provision of professional services. Its' governing documents stipulate that acquisitions and disposals of practice interests must be done at the fixed nominal price per interest.

The Commissioner considers that setting such a nominal value and a value that will not change (either between shareholders over time) is within the concept of setting a nominal amount that is arms length.

The facts reasonably support the conclusion that the governing documents represent arm's length dealings and that future transactions will have the same treatment applied to new and exiting partners. Therefore, the guidelines will apply.

The Commissioner makes this ruling based on the current documentation and intention between the parties. If the documentation were to change then you may wish to clarify the situation with the Commission as to whether the future arrangement meets the requirements to satisfy the no goodwill concession.

Question 2

Reasons for decision

As per the reasoning in question 1 and pursuant to the Guidelines, the Entity is a professional practice that derives its income from the provision of professional services. Its' governing documents stipulate that acquisitions and disposals of practice interests must be done at the fixed nominal price per interest.

The Commissioner considers that setting such a nominal value and a value that will not change (either between shareholders over time) is within the concept of setting a nominal amount that is arms length.

The facts reasonably support the conclusion that the governing documents represent arm's length dealings and that future transactions will have the same treatment applied to new and exiting partners. Therefore, the guidelines will apply.

The Commissioner makes this ruling based on the current documentation and intention between the parties. If the documentation were to change then you may wish to clarify the situation with the Commission as to whether the future arrangement meets the requirements to satisfy the no goodwill concession.