Edited version of private advice

Authorisation Number: 1052172528333

Date of advice: 29 September 2023

Ruling

Subject: Goodwill

Question 1

Will the proposal to licence the sources of goodwill of the Taxpayer to NewCo give rise to CGT event A1 in relation to the disposal of the Taxpayer's goodwill to NewCo?

Answer

No.

Question 2

In the event that the Commissioner determines that CGT event A1 does not happen, will the proposal result in CGT events B1, C1, C2, D1 or H2 happening in relation to the Taxpayer's goodwill (or will a capital gain arise in relation to the goodwill from any of these events)?

Answer

No.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

Current structure

The Taxpayer is an Australian resident company for income tax purposes.

The Taxpayer is the main trading entity and operates a business.

The Taxpayer owns the brand name and all intellectual property (IP) to be licenced (the Licenced IP), inclusive of:

• the Taxpayer's unregistered trademark;
• the Taxpayer's domain name; and
• the following business names;

o   XXX;

o   XXX; and

o   XXX.

Proposed restructure

To affect the proposed restructure and facilitate the licensing arrangement between the Taxpayer and the New Group / NewCo, the following agreements will be entered into:

• Master Licence Agreement (the Licence Agreement):

• Schedule 1 - Asset Lease Agreement;
• Schedule 2 - Intellectual Property Licence Agreement (the IP Agreement);
• Schedule 3 - Licence to Occupy; and
• Schedule 4 - Labour Hire Agreement.

(collectively referred to as the Scheduled Agreements).

Market valuation report

The Taxpayer has obtained an independent market valuation.

The Licence Agreement

The Licence Agreement provides NewCo with an exclusive right to use the Licenced IP and Assets, access to the Premises (non-exclusive right) as well as Personnel needed for it to conduct its Business.

The following definitions apply across the Licence Agreement and the Scheduled Agreements:

• Business means the business as defined in the Licence Agreement.
• Licenced IP has the same meaning as in the IP Agreement;
• Assets refers to the Taxpayer's assets as set out in Schedule 1 of the Asset Lease Agreement.
• Premises means the office premises at X.
• Personnel includes the individuals listed in Schedule 1 of the Labour Hire Agreement.

Clause X provides an annual true-up mechanism permitting the Taxpayer to audit monthly invoices to address any administrative errors and relevantly make good any errors determined.

Pursuant to Clause X, the Licence Fee is defined as all fees payable under the Scheduled Agreements by way of monthly payments on issue of a tax invoice by the Taxpayer to NewCo. The Licence Fee relates to the use of the Business Assets in enabling NewCo to enter into contracts with new customers.

Pursuant to Clause X, the Licence Agreement or any of the Scheduled Agreements may be terminated at any time by mutual agreement between the parties. Under Clause X there will be an immediate termination where there is a material breach not capable of remedy or a failure to remedy the material breach within the requisite time, or there is an insolvency event for the purposes of the Licence agreement.

Clause X provides that the parties are not, and are not to be taken to be, in a partnership, joint venture, employment or fiduciary relationship (including agency).

Asset Lease Agreement

Pursuant to Clause X, the Taxpayer will exclusively lease Assets to NewCo for the business of supplying radiators and other vehicle parts to wholesalers and such other business activities as NewCo (the Hirer) may conduct from time to time during the term of the agreement.

The asset listing is provided in Schedule 1 and includes the Depreciation Schedule at Annexure A of the agreement.

Per Clause X, rent is to be paid by NewCo to the Taxpayer at an annual fee of $X. This has been determined as the market value in accordance with the valuation. For completeness, there is no premium or mark-up included as part of the licence for the right to use the Assets.

Under Clause X, title to the Assets is to always remain with the Taxpayer with no interest created in the Assets for NewCo unless by way of prior consent.

Under Clause X, the risk in, and responsibility for, the Assets, reverts back to Taxpayer when the Taxpayer collects the Assets from NewCo upon the termination or expiration of the Asset Lease Agreement.

Under Clause X Newco will only use assets licenced to it under the agreement for the conduct of the business as defined under the Licence Agreement. NewCo will be responsible for the maintenance of the assets.

Under Clause X, the relationship of the parties is that of independent contractors. No employment, partnership, agency or joint venture relationship is to be presumed or implied.

IP Agreement

Pursuant to Clause X, the Taxpayer agrees to provide an exclusive licence to use, exploit and commercialise the Licenced IP to NewCo at an annual licence fee of $X (market value), payable to the Taxpayer in accordance with Clause 1 of Schedule 2. This has been determined as the market value in accordance with the valuation. For completeness, there is no premium or mark-up included as part of the licence for the right to use the Licenced IP.

The contents of the Licenced IP are provided in Schedule 1 and includes the Taxpayer's unregistered trademark, domain name and the business names it operates under.

Under Clause X of Schedule X, on each anniversary of the IP agreement for its term, the Taxpayer may vary the Licence Fee in its sole discretion.

Per Clause X, NewCo is solely and independently responsible for conducting its business being at its own cost, risk, and expense.

Pursuant to Clause X, all goodwill arising from NewCo's use of the Licenced IP vests in, and is for the exclusive benefit of the Taxpayer. Further, Clause X stipulates that any goodwill generated in NewCo's business remains under its exclusive ownership.

Under Clause X, the parties agree that any new IP developed or created by NewCo during its exercise of the Licence will be exclusively owned by NewCo, with the Taxpayer having no claim to such IP. Clause X provides that the goodwill of the Taxpayer remains under its exclusive ownership, with NewCo having no ownership claim to such goodwill.

Under Clause X, upon termination of IP Agreement, the Newco must immediately stop using the Intellectual Property, and return the ASIC Key for the Business Names, and any copies of documentation, materials and other property relating to the Trademarks to the Taxpayer.

Under Clause X, no employment, partnership, agency or joint venture relationship is to be presumed or implied.

Licence to Occupy

Under the Licence to Occupy, the Taxpayer provides a right to NewCo to occupy its business premises, for the purposes of operating its business.

Pursuant to Clause X the Licence provided is personal to NewCo with its interest resting in contract only (i.e. no ownership interest is granted and neither is there any intention for a relationship of landlord and tenant to be created).

Further, a commercial lease agreement presently exists between Individual A and the Taxpayer, for use of the business premises with a market value rental fee charged of $X (inclusive of GST) per annum.

No mark-up or premium is charged on the aforementioned rental fee.

Pursuant to Clause 7, with the ending of the Lease, NewCo must comply with directions relating to the yielding of the premises, the repair to any damage to the premises, and the removal of property from the premises.

Labour Hire Agreement

Under the Labour Hire Agreement, the Taxpayer agrees to provide personnel to NewCo in carrying out its business.

Pursuant to Clause X., a (commercial) mark-up of X% on the total employee costs as at 30 June X constitutes the fee payable by NewCo to the Taxpayer. Total employee costs are defined to include:

• Total monthly wages;
• Total monthly superannuation; and
• Statutory employment entitlement accruals.

Pursuant to Clause X, NewCo may enter into arrangements or agreements with third parties for the provision of labour hire and independent contractor staff equivalent or similar to personnel hired out from the Taxpayer.

Per Clause X, the legal relationship to be created by the Taxpayer and NewCo is that of principal and labour hire provider. No employment, partnership, agency or joint venture relationship is to be presumed or implied.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104-10

Income Tax Assessment Act 1997 section 104-15

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-155

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Detailed reasoning

Question 1 and Question 2

Summary

CGT event A1 in section 104-10, CGT event B1 in section 104-15 of the ITAA 1997, CGT event C1 in 104-20 of the ITAA 1997, CGT event C2 in 104-25 of the ITAA 1997 do not happen to the CGT asset goodwill because there is no change in ownership of the asset from Taxpayer to NewCo. While CGT event D1 in 104-35 of the ITAA 1997 happens in relation to goodwill as a result of the Licence Agreement, there are no capital proceeds and therefore no capital gain arises. CGT event H2 in 104-155 of the ITAA 1997 does not happen as event H2 will only happen if no other CGT event applies and in this case CGT event D1 happens. Therefore, there is no capital gain as a result of these CGT events in relation to the goodwill.

Detailed reasoning

What is the nature of the Licence Agreement?

To determine whether a capital gains tax event happens in relation to the goodwill of the business we need to consider whether the arrangement is a lease or a licence of the business.

In the High Court case of Radaich v. Smith (1959) 101 CLR Windeyer J. described the difference between a licence and a lease in the following terms:

Whether the transaction creates a lease or a licence depends upon intention, only in the sense that it depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation to the land. When they have put their transaction in writing this intention is to be ascertained by seeing what, in accordance with ordinary principles of interpretation, are the rights the instrument creates. If those rights be the rights of a tenant, it doesn't not avail either party to say that a tenancy was not intended. And conversely if a man be given only the rights of a licensee, it does not matter that he be called a tenant; he is a licensee. What then is the fundamental right which a tenant has that distinguishes his position from that of a licensee? It is that interest in land as distinct from a personal permission to enter the land and use it for some stipulated purpose or purposes. And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession of the land for a term ...If he was, he is a tenant. And cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise.

In this case the agreement is documented in the Licence Agreement (encompassing the Scheduled Agreements).

Taxation Ruling TR 1996/16 Income tax: capital gains: goodwill of a business sets out the Commissioner's view of the operation of the capital gains tax provisions in relation to the goodwill of a business. Goodwill is a CGT asset for the purposes of Division 108 of ITAA 1997 (refer to paragraph 108-5(2)(b) of the ITAA 1997). While goodwill is a composite asset derived from combining and using tangible, intangible and human assets it is a single asset which attaches to the business that uses the assets, knowledge or information (refer to paragraph 97 of TR 1999/16).

The business of the Taxpayer is, in broad terms, the wholesale and distribution of automotive cooling components business (the business). The assets employed in the business are the trading name, business assets, business premises, current contracts, employees and confidential information. The goodwill attaches to the transport business and the ownership of that business resides with the Taxpayer.

Under the proposedLicence Agreement, The Taxpayer will provide its trading name, business assets, business premises, employees (provision of their services through the labour hire arrangement) and confidential information to NewCo to commence carrying on the business.

TheLicence Agreement provides that all the assets from which the goodwill of the business is derived are licensed to NewCo and that these assets, including goodwill, are able to be applied in the conduct of the business by NewCo.

The Licence Agreement throughout the agreement shows that the intention of the parties is that no ownership interest is created or passes to NewCo as a result of the execution of the Licence Agreement.

As a result, the asset goodwill remains that of the Taxpayer.

Further, if the Taxpayer's business is the same business to be conducted under the Licence Agreement by Newco, the goodwill will also be licensed to NewCo under the Business Licence Agreement(refer to paragraph 30 of TR 1999/16).

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. The business does not need to be identical. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. It is not sufficient that just a similar kind of business is carried on. Factors to consider include the nature and character of the business, its location and size, the extent of changes in the assets and resources of the business, the activities of business and whether the activities constitute, or are treated by the business, as constituting separate or distinct activities, enterprise, division or undertakings and the way in which the business is structured, carried on, managed and controlled.

In this case, all the business assets and resources of the Taxpayer's business (that is, broadly, X business) are to be employed by NewCo in conducting a business (that is, broadly, X business) pursuant to the Licence Agreement. The business will be conducted under the terms and conditions imposed by the licensor.

Consequently, the goodwill asset associated with Taxpayer's business will also be licensed to NewCo under the Licence Agreement.

CGT consequences of the transport business goodwill being licensed to Nominee Company.

CGT event A1

Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. However, paragraph 104-10(2)(a) of the ITAA 1997 states that a change of ownership does not occur if you stop being the asset's legal owner but continue to be its beneficial owner. In this case, the goodwill asset is licensed to NewCo to conduct the business. As the Licence Agreement does not provide an interest in the goodwill to NewCo there is no change in ownership of the goodwill and CGT event A1 in section 104-10 of the ITAA 1997 has no application.

Other CGT consequences

The issue then becomes whether CGT events B1, C1, C2, D1 or H2 happen in relation to the Taxpayer's goodwill (or will a capital gain arise in relation to the goodwill from any of these events).

CGT event B1

Subsection 104-15(1) of ITAA 1997 provides that CGT event B1 happens if you enter into an agreement with another entity under which:

a)    the right to the use and enjoyment of a CGT asset you own passes to the other entity; and

b)    title in the asset will or may pass to the other entity at or before the end of the agreement.

CGT event B1 will not happen in this case. While the first limb of subsection 104-15(1) of the ITAA 1997 is satisfied, as the use and enjoyment of the goodwill passes to NewCo in accordance with the Licence Agreement, title in the asset will not pass to NewCo before the end of the licence agreement.

CGT event C1

Subsection 104-20(1) of the ITAA 1997 provides that CGT event C1 happens if a CGT asset you own is lost or destroyed.

The goodwill of the business is not lost or destroyed as a result of the licencing agreement.

The goodwill is attached to the business owned by the Taxpayer, which is licensed to NewCo as a result of the Licence Agreement. It therefore remains an asset of the Taxpayer.

CGT event C2

Paragraph 104-25(1)(b) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible asset ends by the asset:

(a)  being redeemed or cancelled; or

(b)  being released, discharged or satisfied; or

(c)   expiring; or

(d)  being abandoned, surrendered or forfeited; or

(e)  if the asset is an option - being exercised; or

(f)    if the asset is a convertible interest - being converted.

On the facts of the case the intangible asset, goodwill, does not end within the meaning of that term as set out in items (a) to (f). CGT event C2 will not happen to the goodwill.

CGT events D1 and H2

CGT events D1 and H2 will be considered together as, on the facts of this case, the outcome for both of these events will be the same.

Subsection 104-35(1) of the ITAA 1997 provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.

In the present case, CGT event D1 happens when the Licensors enter into the Licence Agreement with NewCo. The Licensors create a right to use the business in NewCo.

A capital gain will arise on CGT event D1 happening if the capital proceeds from creating the right are more than the incidental costs the taxpayer incurred that relate to the event. The taxpayer can make a capital loss if those capital proceeds are less (subsection 104-35(3) of the ITAA 1997).

Similarly, section 104-155 of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset owned by an entity, and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. An act, transaction or event occurs in relation to a CGT asset, the Taxpayer's business goodwill, in the form of the Licence Agreement. The execution of the Licence Agreement does not result in any adjustment to the cost base of the goodwill. None of the exceptions listed in subsection 104-155(5) of the ITAA 1997 to CGT event H2 applying have application. Therefore, the execution of the Licence Agreement is a CGT event H2. Hence a capital gain under CGT event H2 will arise if the capital proceeds because of this event are more than the incidental costs incurred in relation to it (section 104-155 of the ITAA 1997).

However, subsection 102-25(3) of the ITAA 1997 provides that event H2 does not apply if any other CGT event applies. In this case, it has been established that CGT event D1 applies and therefore H2 would have no application. Nevertheless, we provide an explanation of how CGT event H2 would operate in the discussion below.

Capital proceeds

Generally, the capital proceeds from a CGT event are the total of:

• the money you have received, or are entitled to receive, in respect of the event happening; and
• the market value of any other property you have received, or are entitled to receive, in respect of the event happening worked out as at the time of the event (subsection 116-20(1) of the ITAA 1997).

The Licensor (i.e. the Taxpayer), does not receive, nor is it entitled to receive, any money as a result of CGT event D1 or H2 happening. As a result of granting NewCo the right to use the business, the Licensor is entitled to future income (the Licence Fee) for the term of the Licence Agreement. A right to income is generally assignable and is, therefore, 'property' for the purposes of paragraph 116-20(1)(b) of the ITAA 1997. However, even though the right to payment is property, the issue in this case is whether this property is received in respect of the D1 or H2 CGT eventhappening.

It is considered in the circumstances of this case that it is reasonable to conclude that NewCo's undertaking to pay relates to the use of the business, rather than the grant of the licence.

NewCo does not pay a premium for entering into the Licence Agreement, and the Licence Fee does not contain an embedded premium. Therefore, whilst the right to the Licence Fee is 'property' for the purposes of paragraph 116-20(1)(b) of the ITAA 1997, it is not property received 'in respect of the CGT event D1 happening', and is therefore not capital proceeds in accordance with subsection 116-20(1) of the ITAA 1997. If the CGT event D1 did not happen, the same conclusion would be drawn in regard to CGT event H2.

In a number of CGT events where no capital proceeds are received, subsection 116-30(1) operates to treat the capital proceeds from the CGT event to be equal to the market value of the asset. However, where CGT event D1 happens and there is no capital proceeds, subsection 116-30(3) of the ITAA 1997 provides that the market value substitution rule does not apply.

The general rules in section 116-25 of the ITAA 1997 exclude the market value substitution rule from applying to CGT event H2.

Therefore, no capital gain can result in the absence of capital proceeds.