Edited version of private advice

Authorisation Number: 1052356673679

Date of advice: 05 February 2025

Ruling

Subject: CGT - assets

Question 1

Is the goodwill of the business of the Family Trust an asset acquired before 20 September 1985 for the purposes of section 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes>

Question 2

If the goodwill of the business of the Family Trust is acquired before 20 September 1985, is the goodwill of the Z Division (which commenced in 20XX) an accretion to the pre-CGT goodwill?

Answer 2

Yes

Question 3

If the goodwill of the business of the Family Trust is acquired before 20 September 1985, is the goodwill a pre-CGT asset on the basis that it meets the requirements under section 149-10 of the ITAA 1997?

Answer 3

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

Establishment of the business before 20 september 1985

In the 19XX, Person A and Person B commenced a partnership operating a manufacturing business (the Business). In the 1960s, their child, Person C, commenced working with Person A and Person B and soon after was admitted as a third partner.

In the 19XX, Person C sought to expand the Business and opened new divisions in the Business producing new products.

During 19XX the Business, including goodwill, plant, equipment, work in progress and stock, was sold to the Family Trust. The Family Trust has continuously operated the Business since 19XX with Person C acting as Managing Director for the whole period. Other family members also started working in the Business as employees.

The Business continued to develop its own products and to sell the products to a particular industry. The Business also offered services to support the sale of their products, including on-site services for their clients. The majority of the Family Trust's clients are from the particular industry, which includes contract work for their projects.

Just before 20 September 1985

At 19 September 1985 the Family Trust continued to operate the Business including each division out of the original premises. Each business line is shown as a separate division in the 31 July 1984 management accounts of the Family Trust.

Post 20 September 1985

The Business has grown substantially between 19XX and 20XX:

•                In 1994 the business shifted operations to larger premises (and in 20XX expanded to part of another premises).

•                In 19XX, the business expanded an existing division in another state, also primarily for customers from the particular industry.

•                In 20XX the business began sourcing materials and product from overseas for use in its manufacturing operations. This is not a separate business, but involves the purchase of materials and components for the various manufacturing divisions more cost effectively than in Australia, to remain competitive against similar products manufactured by competitors entirely overseas.

•                In about 20XX one of the divisions, at the request of its clients, commenced manufacturing certain products under that division. The sales from this product has never exceeded X% of that division's production.

The main growth in business in recent times (since 20XX) has been the evolution into providing on-site services regarding particular products (Z Division). As the Business grew, it was approached to service and supply larger clients and commenced obtaining contracts through a tender process.

The Z Division turnover as a percentage of total Family Trust turnover from 20XX to 20XX was XX%, but its gross profit margin was less than XX% of gross profits for that period.

The Z Division is carried out at the same premises as the other divisions, has been treated as another division of the existing Business, and is managed by the same management team (headed by Person C). It's management and accounting are fully integrated in the Family Trust and management and accounting systems.

The Z Division and other divisions have always sought to offer an integrated service. Internal transfers between divisions have generally not been separately shown in the accounts.

The Z Division shares significant common clients with other divisions. The Z Division relies on the Family Trust's balance sheet, good name and reputation to secure contracts.

Current status of the family trust's business

The Business remains principally a local factory based manufacturing business, with some ancillary site installation and maintenance of equipment. The Z Division component of the Business continues to provide specific services, as part of broader fully integrated service offered by all divisions of the Business.

Recent management accounts show that the business has maintained the same divisions since prior to 20 September 1985.

The family trust

The original Appointer of the PFT was Person A. Upon Person A's passing, Person B and Person C became the Appointers of the Family Trust, appointed by Person A's Will. Since the passing of Person B, Person C is the sole Appointer of the Family Trust.

The Beneficiaries under the Family Trust are defined in clause 1 of the Trust Deed to mean any of the General Beneficiaries.

The Primary Beneficiaries under the Family Trust are identified in the Schedule to the Trust Deed as the children of Person A and Person B and the children of Person C.

The General Beneficiaries under the Family Trust are defined in clause 1 of the Trust Deed to mean:

... the Primary Beneficiaries, the brothers, sisters, spouses and children of the Primary Beneficiaries, the Spouses children and grandchildren of such brothers sisters and children and such additional persons named as such in the Schedule hereto and any company in which any of the foregoing persons hold shares and any trust in which any of the said foregoing persons are beneficiaries whether contingent, prospective or otherwise.

The additional persons referenced in the definition of General Beneficiaries are identified in the Schedule to the Trust Deed as Person A, Person B, Person C and the grandparents, uncles, aunts, cousins, nephews, nieces, spouses and children of the Primary Beneficiaries.

Clause 3 of the Trust Deed deals with the distribution of the net income of the Family Trust and states that the Trustee shall in each accounting period until the vesting day apply or set aside the whole or such part (if any) as the Trustee thinks fit the net income of the Trust Fund to or for the benefit of the General Beneficiaries or for any one or more in such shares as the Trustee shall in the Trustee's absolute discretion deem fit.

Clause 5 of the Trust Deed sets out the Trustee's discretion with respect to the distribution of the capital of the Family Trust and states that the Trustee may at its absolute discretion at any time before the vesting day out of the capital of the Trust Fund held on trust pay a sum to any person being one of the General Beneficiaries.

The Trust Deed was amended in 2021 pursuant to a Deed of Variation but there were no changes made to the definition of Beneficiaries, General Beneficiaries or Primary Beneficiaries, or to clauses 3 and 5 of the Trust Deed.

Based on the distributions of the Family Trust in the 19XX to 20XX income years, and the tracing of trust and company distributions to ultimate beneficiaries, it can be concluded that the Family Trust only distributed to Person C, his spouse, his children, other members of Person C's family and entities that were legally or beneficially owned by members of Person C's family.

Where the beneficiary was a company, the company was controlled by members of Person C's family and dividends from such companies were ultimately received by members of Person C's family.

Where the beneficiary was the trustee of another trust, the trust was controlled by members of Person C's family and distributions from such trusts were ultimately received by members of Person C's family.

Assumptions

1.              There will be no material change to the majority underlying interests in the Family Trust between the date of this ruling and just before the disposal of the business of the Family Trust.

2.              There will be no material change to the way the business of the Family Trust is carried on between the date this ruling and just before the disposal of the business of the Family Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 former subsection 160ZZRR(1)

Income Tax Assessment Act 1936 former section 160ZZS

Income Tax Assessment Act 1936 former subsection 160ZZS(1)

Income Tax Assessment Act 1936 Subdivision C of Division 20 of former Part III

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 paragraph 108-5(2)(b)

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 paragraph 149-10(a)

Income Tax Assessment Act 1997 paragraph 149-10(b)

Income Tax Assessment Act 1997 paragraph 149-10(c)

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-15(4)

Income Tax Assessment Act 1997 subsection 149-15(5)

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Income Tax Assessment Act 1997 subsection 149-50(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Taxation Administration Act 1953 section 357-85 of Schedule 1

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise specified.

Questions 1 and 2

Summary

The goodwill of the Business is considered to be an asset acquired before 20 September 1985 for the purposes of section 109-5.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1)). However, pursuant to paragraph 104-10(5)(a), any capital gain or capital loss you make on disposal of an asset acquired prior to 20 September 1985 (pre-CGT) is disregarded.

Goodwill, or an interest in it, is a CGT asset (paragraph 108-5(2)(b)).

Subsection 995-1(1) provides that you acquire a CGT asset in the circumstances and at the time worked out under Division 109. The table in subsection 109-5(2) sets out specific rules for the circumstances in which, and the time at which, you acquire a CGT asset as a result of a CGT event happening. It confirms that when an entity disposes of a CGT asset to you, you acquire the asset when the disposal contract is entered into or, if none, when the entity stops being the asset owner.

Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) considers the general meaning of goodwill as used in the context of the CGT provisions. TR 1999/16 reflects the decision of the High Court of Australia in FC of T v. Murry 98 ATC 4585; (1988) 39 ATR 129 (Murry).

Relevantly, paragraph 9 of TR 1999/16 explains that goodwill has the meaning it bears under the general law, rather than its accounting and business definitions. It is the legal definition of goodwill as explained by the High Court in Murry which is applicable.

In paragraph 15 of TR 1999/16, the Commissioner recognises that goodwill is a species of intangible property.

Paragraph 12 of TR 1999/16 explains goodwill in the following terms:

....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 it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated.

The passage above reiterates the comments by the High Court in Murry at [22], that goodwill has 3 different aspects, namely property, sources and value, which combine to give definition to the legal concept of goodwill.

Further, what unites these aspects is the conduct of a business. Murry at [23] also described goodwill as 'the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it.'

Goodwill remains a single CGT asset if the same business continues

As noted above, goodwill is a composite thing and therefore a single item of property and CGT asset. One consequence of this is that the whole goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset (subject to Division 149), provided the same business continues to be carried on. This is so even though the sources of the goodwill of a business may vary during the life of the business (paragraph 17 of TR 1999/16).

However, it is possible for a business or the sources of its goodwill to change to such an extent that it is no longer the same business as that previously conducted (paragraph 18 of TR 1999/16).

Goodwill remains the same if essential nature or character maintained

Whether the same business is carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case. In this regard, paragraph 21 of TR 1999/16 provides that:

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.

In determining whether the same business is being carried on, paragraph 91 of TR 1999/16 sets out a number of factors to consider, including 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 a business is structured, carried on, managed and controlled.

Therefore, if the essential nature or characterof the business is not changed, the business remains the same business for CGT purposes.

Goodwill should be assessed on a continual basis, rather than just comparing the taxpayer's business at 2 points in time. If the original business changes to an extent that it is no longer the same business, 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 (paragraph 18 of TR 1999/16).

According to paragraph 24 of TR 1999/16, the same business would not be carried on if a business changes its essential nature or character through a planned or systematic process of change within a reasonable period of time, or if 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.

Generally, where a new business operation or activity is introduced as an expansion of an existing business, any goodwill built up in conducting the expanded business is merely an expansion of the existing goodwill of the business. Therefore, if a business which commenced before 20 September 1985 is expanded, goodwill generated in conducting the expanded business is merely an accretion to the pre-CGT goodwill (paragraph 60 of TR 1999/16). However, where 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 (paragraph 61 of TR 1999/16).

Paragraph 62 of TR 1999/16 provides further guidance by stating:

Whether an increase in business operations or in the scale of activities 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.

Application to the family trust's circumstances

The Family Trust acquired the Business from the partnership in 1981. Pursuant to subsection 109-5(2), upon the partners' disposal of their interest in the goodwill of that business to the Family Trust, the Family Trust is taken to have acquired the goodwill either when the disposal contract was entered into or, if none, when the partners stopped being the owner of the goodwill. Accordingly, the goodwill of the business was acquired by the Family Trust prior to 20 September 1985.

Therefore, it is critical to determine the essential nature or character of the Family Trust's business just prior to 20 September 1985 and then to assess whether this has changed since that time. If the essential nature of the Family Trust's business has not changed since 19 September 1985, then the Family Trust's business remains the same business for CGT purposes and the goodwill of the Family Trust at the date of this ruling will be the same that existed on 19 September 1985 - i.e. the goodwill will be considered to have been acquired before 20 September 1985.

The essential character of the Family Trust's business, and therefore its goodwill, is the same as the one that existed on 19 September 1985 on the following basis:

•                The activities of the divisions which existed at that time are unchanged and the essential nature of those divisions has remained the production of the same products.

•                Expansion and growth has been organic and evolved over time through improvements and the adoption of a new compatible operation - the Z Division - which (together with the other divisions) seeks to offer integrated services to clients (the majority of which remain in the same industry), and the offering of improved products and services; the activities that existed on 19 September 1985 continue and remain core or essential activities of the Family Trust.

•                There has been no sudden or dramatic change in the Business brought about by either the acquisition or the shredding of activities on a considerable scale.

The Z Division commenced in 20XX is considered an expansion of the existing business, rather than a new business, on the following basis:

•                The Z Division allows the Family Trust to access contracts from which it was previously excluded because it didn't offer specific services integrated with existing contracts.

•                The Family Trust has (since before 20 September 1985) provided on site services in relation to their products and the provision of more services via the Z Division is merely a natural evolution and extension of that capability.

•                Significant clients of the Family Trust are common to all divisions, including the Z Division.

•                The Z Division has been managed by Person C (as General Manager) in conjunction with the other divisions.

•                The Z Division is dependent on the existing business in a practical, economic or commercial sense to the extent that it relies on the Family Trust's balance sheet to meet guarantees and completion obligations, and it relies on the Family Trust's long-standing good reputation and brand name.

Accordingly, the goodwill generated in conducting the Z Division is merely an accretion to the pre-CGT goodwill.

Question 3

Summary

The goodwill of the business of the Family Trust is a pre-CGT asset on the basis that it meets the requirements under subsection 149-10.

Detailed reasoning

Division 149 contains provisions, applicable to the 1999 and later income years, which govern when an asset acquired by an entity 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.

Former subsection 160ZZS(1) of the Income Tax Assessment Act 1936

Former subsection 160ZZS(1) of the ITAA 1936 contains the rules for non-public entities to determine if an asset is a pre-CGT asset.

A public entity was defined under former subsection 160ZZRR(1) of the ITAA 1936 as a public company, mutual insurance organisation or publicly traded unit trust.

The Family Trust was not a 'public entity' as defined in former subsection 160ZZRR(1) of the ITAA 1936 since it was a trust that was not a publicly traded unit trust.

Former subsection 160ZZS(1) of the ITAA 1936 states:

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.

The effect of former subsection 160ZZS(1) of the ITAA 1936 was to deem an asset that was acquired on or before 19 September 1985 to be acquired after that date unless the Commissioner was satisfied, or found it reasonable to assume, that majority underlying interests in the asset were maintained, at all times after 19 September 1985, by persons who had majority underlying interests in the asset immediately before 20 September 1985.

Paragraph 149-10(b) represents a specific testing point, requiring the Commissioner to be satisfied that there has been a continuation of majority underlying interests in the asset at all times from 19 September 1985 to immediately before the start of the 1999 income year.

Subdivision C of Division 20 of the former Part III of the ITAA 1936 contains rules for public entities and is therefore not applicable to the Family Trust.

Subdivision 149-B

Subdivision 149-B provides for when assets of a non-public entity stop being a pre-CGT asset. Entities that are regarded as a 'public entity' are listed in subsection 149-50(1) and (like former subsection 160ZZRR(1) of the ITAA 1936) includes a publicly traded unit trust. The Family Trust does not fall within the definition of a 'public entity' for the purposes of Division 149.

Subsection 149-30(1) is therefore applicable to PFT and provides:

[An] asset 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.

Subsection 149-30(1) applies subject to subsection 149-30(2) which states:

If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case.

Therefore, although paragraphs 149-10(b) and (c) are separate requirements, the effect of both provisions is similar; an asset of a non-public entity that was acquired on or before 19 September 1985 is a pre-CGT asset at a particular time only if:

•                the Commissioner is satisfied, or thinks it is reasonable to assume, that majority underlying interests in the asset have been maintained at all times since 20 September 1985 to the beginning of the 1999 income year (as reflected by the requirements in paragraph 149-10(b)); and

•                majority underlying interests in the asset have been maintained since 20 September 1985 or the Commissioner is satisfied, or thinks it is reasonable to assume, that majority underlying interests in the asset have been maintained at all times since 20 September 1985 and before a particular time (as reflected by the requirements in paragraph 149-10(c)).

Majority underlying interests in a CGT asset

Subsection 149-15(1) provides that 'majority underlying interests' consist of:

(a)           more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)           more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

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".

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.

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.

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.

In Taxation Ruling IT 2340 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 (IT 2340) the Commissioner adopts a pragmatic approach of looking through interposed entities to determine whether natural persons hold the beneficial interests for the purposes of former section 160ZZS of the ITAA 1936, which preceded Division 149.

Paragraph 2 of IT 2340 states:

... underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. 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.

Section 357-85 of Schedule 1 of the Taxation Administration Act 1953 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. As former section 160ZZS of the TAA 1936expresses the same ideas as Division 149, IT 2340 equally applies to Division 149.

Application to discretionary trusts

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 deed, 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 a 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).

However, IT 2340 sets out the Commissioner's view on the application of the 'underlying interest' and 'majority underlying interest' requirement when assets are held by the trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.

Paragraphs 5 to 8 of IT 2340 state as follows:

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

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.

Therefore, where the trustee of a family trust continues to administer a trust for the benefit of members of a particular family, it would be reasonable for the Commissioner to assume that majority underlying interests in the trust assets have not changed.

ATO Interpretative Decision 2003/778 Income Tax: CGT: majority underlying ownership and deceased estate - discretionary trust - beneficiary a 'new owner' explains that:

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

Application to the family trust's circumstances

The Family Trust last acquired the goodwill before 20 September 1985 - paragraph 149-10(a)

The Family Trust acquired the goodwill in 19XX, so paragraph 149-10(a) is satisfied.

The Family Trust was not, immediately before the start of the 1999 income year, taken under former subsection 160ZZS(1) of the ITAA 1936 to have acquired the goodwill on or after 20 September 1985 - paragraph 149-10(b)

The goodwill has not stopped being a pre-CGT asset of the Family Trust because of Division 149 - paragraph 149-10(c)

As mentioned, although paragraphs 149-10(b) and (c) are separate requirements to be met, both provisions are similar and the effect of both provisions is that an asset of a non-public entity that was acquired on or before 19 September 1985 is a pre-CGT asset at any particular time only if:

•                majority underlying interests in the asset were maintained at all times after 19 September 1985 by persons who immediately before 20 September 1985 held majority underlying interests in the asset; or

•                the Commissioner is satisfied or thinks it is reasonable to assume that this is the case.

Immediately before 20 September 1985

The Family Trust held the goodwill immediately prior to 20 September 1985. A trustee of a trust is not an 'ultimate owner' who can have an underlying interest in the asset. Establishing underlying interest requires the adoption of a 'look through' approach to trace the beneficial interest in an asset to an ultimate owner which is usually a natural person.

The Family Trust is a discretionary trust. As mentioned, the beneficiaries of a discretionary trust that are natural persons are treated, for the purposes of former subsection 160ZZS(1) of the ITAA 1936 and Division 149, as having beneficial interest in the trust's assets.

The Family Trust was established for the benefit of Person C and his family (including his parents, siblings, children and the spouses of such persons); all members of a 'particular family' as is referred to in paragraph 6 of IT 2340.

The natural persons and ultimate owners who indirectly held beneficial interests in the assets of the Family Trust, and in the ordinary income that may be derived from the assets of the Family Trust, were members of Person C's family.

On this basis, immediately before 20 September 1985, the majority underlying interests in the goodwill were held by members of Person C's family as beneficiaries of the Family Trust (and/or as shareholders of corporate

beneficiaries of the Family Trust and/or as beneficiaries of other trusts which are a beneficiary of the Family Trust).

After 19 September 1985

It is reasonable for the Commissioner to assume, that the members of Person C's family have been the ultimate owners of the goodwill and have maintained majority underlying ownership interests in the goodwill since 19 September 1985, having regard to the following factors:

•                The goodwill has continuously been held by the Family Trust.

•                No new persons have been introduced as beneficiaries of the Family Trust that are not members of Person C's family.

•                The trustee for the Family Trust has administered the trust for the benefit of members of Person C's family as evidenced by the history of distributions by the Family Trust, as well as the history of distributions by the corporate and trust beneficiaries of the Family Trust.

•                The affairs of each of the corporate and trust beneficiaries of the Family Trust continue to be controlled by members of Person C's family.

Under these circumstances, pursuant to former subsection 160ZZS(1) of the ITAA 1936 and subsection 149-30(2) (and consistent with IT 2340), the Commissioner thinks it reasonable to assume that at all times on and after 20 September 1985 and until the date of this ruling[1], majority underlying interests in the goodwill have been held by ultimate owners (the members of Person C's family) who had such interests immediately before 20 September 1985.

The goodwill is therefore not taken to have stopped being a pre-CGT asset of the Family Trust pursuant to former subsection 160ZZS(1) of the ITAA 1936 or subsection 149-30(1).

[1] It is assumed for the purposes of this ruling that this outcome will not change prior to the sale of the business.