Edited version of private advice

Authorisation Number: 1052368255232

Date of advice: 14 March 2025

Ruling

Subject: CGT - small business concession

Question 1

Does the entity continuously own the CGT asset for the 15-year period ending just before the CGT event under section 152-110(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a privately owned company that was incorporated on a specified date. At the time of incorporation Person A was sole shareholder. No changes have been made to the shareholdings since incorporation.

You commenced business operations on a specified date.

You traded under the Brand A business names:

You registered the Brand A trademark on a specified date.

On a specified date, you entered into a contract for sale of business (Sale Contract) to sell your business to Company A for a specified amount with the sale being finalised on a specified date.

Your sale price included the majority amount for goodwill and a specified amount for equipment.

The goodwill included in the business purchase was created from years of customer relations, promotions and industry contacts. The goodwill is related to brand, intellectual property, process know how in the construction and installation of mouldings.

You provided vendor finance to facilitate the purchase of the business.

You have provided payment schedule for the sale contract.

The decision to sell your business was in connection with Person A's retirement.

At the time of entering the contract of sale, Person A was more than XX years old.

The Sale Contract included a training period for both pre-completion and post-completion.

You entered into a consultancy agreement for specified months with Company A on a specified date from the date of the agreement.

Your estimated aggregated turnover in the year of sale is over $XX. You provided a copy of your draft financial report for this year.

Your aggregated turnover in the previous year was less than $XX.

Business activities

Person A was a significant shareholder and director of Company B. Under the direction of Person A, Company B manufactured and supplied architectural mouldings.

You were established in a specified year due to the success of the supply of mouldings through Company B.

In a specified year, you commenced the manufacturing of bagged render, which was managed by Person A. The mouldings were then supplied through Company B under Brand A.

You ceased the manufacturing of bagged render in a specified year. At this point, you took over the supply and installation of mouldings from Company B. Whilst Person A and the business partner, Person B, were the controlling minds of both you and Company B, the supply and installation of mouldings was retained and reported by Company B until a specified date.

To facilitate the sale of its other business activities, Company B separated its mouldings business and subsequently deregistered on a specified date. Person B, Person A's business partner in Company B, decided to step away from the supply and installation of mouldings without any consideration, enabling Person A to solely take over this business activity through you. Company B, trading as Brand B, continued to report the relatively minor sales for the supply and installation of mouldings to reduce bookkeeping costs, based on the negligible financial impact and the significant practical intertwinement of the business activities. The Brand A brand became well-established with the customer base, intellectual property was developed, operational expertise grew, and revenue/profit followed. You continued selling mouldings until the business was sold in a specified year.

During the two specified income years you had no sales.

During this period, you expanded into the supply and installation of mouldings for building facades. However, manufacturing activities continued under the name of Company B during these years leveraging Company B's reputation and existing customer base for building coverings.

You operated your business activities from various factory units located at a specified address. These premises were kept during the two inactive income years. Company B also operated their business from the same address. Throughout this period, you and Company B operated from the same factory space at a different unit, with Person A as the common lead director, maintaining a continuous operation with an evolving business focus. You have provided sample invoices issued by Company B trading as Brand B during a specified year and sample invoices issued by you during the year of the sale contract, as well as the year prior.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-110 (1) (b)

Income Tax Assessment Act 1997 subsection 328-110(1)

Reasons for decision

Subdivision 152-B outlines the small business 15-year exemption. Under this subdivision, a CGT small business entity can choose to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Section 152-110 provides that a company can disregard any gain arising from a CGT event if all of the following conditions are satisfied:

a. the basic conditions of Subdivision 152-A are satisfied;

b. the company continuously owned the CGT asset for the 15-year period ending just before the CGT event;

c. the company had a significant individual for a total of at least 15 years during which the company owned the CGT asset;

d. the significant individual of the company just before the CGT event either:

i. was 55 or over at the time of the CGT event and the event happens in connection with the significant individual's retirement; or

ii. the significant individual is permanently incapacitated at the time of the CGT event.

Goodwill

Paragraph 108-5(2)(b) of the ITAA 1997 states that goodwill (or an interest in it) is a CGT asset.

As stated in paragraph 9 of Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) the term 'goodwill' has a legal, accounting and business definitions. For our purposes, goodwill as a CGT asset relies on a legal definition as explained by the High Court of Australia in Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605; (1998) 72 ALJR 1065; 98 ATC 4585.

Paragraph 12 of TR 1999/16 states:

...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.

Goodwill will depend on the character and nature of the business. Goodwill will differ in its composition in different industries and in different businesses within the industry. Paragraph 15 states "Goodwill is a species of intangible property. It can only exist in connection with the conduct of a business, even though it may not necessarily appear in the books of account and financial statements of the business."

Goodwill ownership: You registered and started operating Brand A on a specified date. Since then, you've consistently developed and maintained the business. The activities under Brand A, such as supplying mouldings and manufacturing, were closely related to the operations initially conducted by Company B, which had built a reputation and customer base in the same industry.

Paragraph 21 of TR 1999/16 states that

21. 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.

Continuous operation: Although there were changes over the years, such as the cessation of bagged render manufacturing in a specified year, and the shift of mouldings supply from Company B to Brand A, the core business activities continued seamlessly. Brand A benefited from the goodwill developed by Company B, ensuring continuity and consistent ownership of business goodwill. Section 152-110(1)(b) of the ITAA 1997 requires continuous ownership of goodwill for 15 years. Even with the operational pause, the goodwill was preserved and retained its value, supporting the claim of continuous ownership. Additionally, the integration of Company B's activities into Brand A and the continuous development of goodwill confirm that you meet this requirement.

Sale and goodwill valuation: When you sold the business to Company A in a specified year, the sale price included a significant amount attributed to goodwill. This goodwill is the result of years of customer relations, brand building, and operational know-how in mouldings. On a specified date, you entered into a contract to sell Brand A to Company A for a specified amount including the majority amount for goodwill and a specified amount for equipment. The sale contract also includes a consultancy period by Person A with the purchaser for a specified months following the completion date on a specified date.

15-year goodwill period: From the registration of Brand A in a specified year to its sale in a specified year, there is a period of continuous ownership and development of goodwill over 15 years. This aligns with the requirement of paragraph 152-110(1)(b) of the ITAA 1997, which specifies a 15-year period for continuous ownership of goodwill.

In summary, that you have continuously owned the goodwill of the business Brand A for a XX-year period. This ownership includes the reputation, customer base, intellectual property, and operational expertise that have been consistently maintained and developed since the business's registration in a specified year. Given that the sale of the business was finalised in a specified year, the ownership period aligns with the 15-year requirement within the meaning of paragraph 152-110(1)(b) of the ITAA 1997, you have continuously owned the goodwill of the business for 15 years.